The compensation of healthcare CEOs is always an attention getter, partly because what goes into a compensation package often seems murky from the outside looking in. Those on the inside know, however, that CEO compensation is all about business strategy.
CEO compensation varies greatly by region and hospital size. A study published in JAMA Internal Medicine last fall examining CEO compensation at nearly 2,700 nonprofit hospitals nationwide found that the average compensation is around $600,000. Least-paid CEOs (with a median compensation of $117,933) were from small, nonteaching hospitals in rural areas and the highest paid (with a median compensation of more than $1.6 million) were from larger, urban hospitals that were usually teaching institutions.
Another study, by the American College of Physician Executives and Cejka Executive Search, found that while the median total compensation of physician executives is on the rise, growing 7 percent, from $305,000 two years ago to $325,000 in 2013, the growth rate of physician CEO compensation is lagging behind other clinical department chairs and division chiefs. For instance, physician CEOs reported a rise of 4 percent in median compensation since 2011, as compared to chief medical officers, who reported a rise of 6 percent.
The biggest issue for boards – which set the compensation of CEOs – isn’t how much compensation to offer, it’s how much is necessary to recruit and retain the talent that will address the unprecedented business challenges these organizations are facing now and in the future, said Larry Reissman, a senior compensation expert in human resources and compensation consulting firm, Buck Consultants.
“Retention and recruitment of talent is seen as mission critical by boards to address the business challenges,” he said.
“Hospitals are incredibly complex organizations to run and you need to pay the position what it deserves to get the right kind of talent because whatever you’re paying the CEOs isn’t nearly as costly as a failed hospital,” pointed out Eddie Phillips, CPA, a principal in the tax practice of Atlanta-based healthcare accounting firm Draffin & Tucker.
While boards are sensitive to how their compensation decisions look to the community, their peers and to legal entities, said Ron Seifert, vice president and executive compensation group leader for global management consulting firm the Hay Group’s healthcare practice, at the end of the day, they’ve got to implement a pay strategy that will enable the organization to meet its needs.
“These next few years in healthcare are going to be incredibly tumultuous and stability and continuity of leadership during this period is quite critical so whatever that means to an organization for their compensation level … that is the debate and struggle for these organizations as they try to balance this out with the concerns of the public, the challenges that they feel financially and the need to have strong leadership teams in place for a sustained period of time,” he said.