Pay for performance evolves for healthcare execs

Gone are the days when revenue alone was the basis for executive pay incentives in the healthcare industry. With the move from a fee-for-service system to one of value-based purchasing and quality of care, executive pay programs will have to adapt. Measures of efficiency, positive patient outcomes, cost containment, and operating margin will be the drivers of hospital growth and productivity—and hence, the drivers of executive compensation packages.

Pay shift: Most organizations now base a portion of executive compensation on performance, according to a new report, Executive Compensation: New Metrics and Skill Sets, from HealthLeaders Media. Overall, 80% of compensation is base salary, 10% is an incentive payment, and the remainder is retirement and noncash compensation.

Four items are mentioned most frequently as being the basis for incentives. Two of them are traditional measures: operating margin and financial efficiency. The other two measures are related to patient care: clinical quality and patient satisfaction. What is interesting here is that not only are executives with clinical responsibilities subject to clinical performance measures, but these measures are also being used for executives with administrative, operations, and finance responsibilities. Bottom line: More of a focus on tying compensation to the clinical risk of caring for patients.

Nearly all respondents (95%) agree completely or agree somewhat that their organizations need more incentives based on clinical quality performance.

Cost containment is top skill: For the healthcare CFO, CIO, and COO, the number-one skill needed for success in the new healthcare industry landscape is cost containment, say the majority (60%) of survey respondents. Ability at achieving performance metrics is the second-most-needed skill for a non-CEO executive to succeed both today and over the next five years.

“Whether it is a big system or a small system or a stand-alone hospital, we are going to have to be good at tracking performance measures, and tracking how we are performing, and providing incentives for people to achieve the levels that we want to achieve,” says Jeffrey M. Fried, president and CEO of Beebe Medical Center, a nonprofit health system in Sussex County, Del., who was an advisor on the survey. “Everybody is going to have to be good at that, or they are not going to survive.”