Hospital CEO Compensation: Getting Beyond the Bottom Line

It is, perhaps, the last remaining taboo question in the business world: How much do you earn? Few of us would ask someone, even a close colleague, about his or her salary. But as a policy matter, executive pay has been the subject of increasing public interest for some time.

Much of that scrutiny has been fueled by the federal bailouts of the auto and banking industries in the early part of the recession. But the issue has expanded to other industries, including hospitals-not surprisingly, considering the contentious debates on health care reform. The question of hospital executive compensation (especially nonprofit hospitals, which are exempt from state and federal taxes) sits squarely at the intersection of budget, health care and regulatory policy.

The NH Center for Public Policy recently spent several months reviewing compensation practices among the state's 23 nonprofit hospital systems in an effort to provide a foundation of reliable data and to move the debate beyond bottom-line numbers. Our findings should hopefully spur discussion among nonprofit hospital boards, which are responsible for setting compensation levels for top executives, and which are often populated with business executives.

We found that most NH nonprofit hospitals follow appropriate process as laid out by the Internal Revenue Service (IRS). In practical terms, the IRS standards require that hospital boards assign a specific Compensation Committee (or task the board as a whole) to look at data on how much other nonprofits pay their executives and keep written minutes of those discussions.

If hospital boards follow these steps, they are generally presumed to be paying their CEOs a reasonable compensation package. But these apparently simple guidelines raise tricky questions for hospital board members-and for board members at any nonprofit organization, for that matter.

We found that the level of hospital CEO wages in NH is roughly in line with other New England states. We also found that since 2006, CEO compensation levels at NH nonprofit hospitals rose faster than wages in the rest of the economy. Between 2006 and 2009, average hospital CEO compensation increased slightly more than 18 percent in NH, while private sector wages rose 4.8 percent over that same period.

One major question raised by our analysis is: Against what benchmarks should hospital CEO compensation be assessed? What organizational goals and supporting data should boards consider when setting executive pay? The most common source of data is an annual survey of nonprofit hospitals across New England. This survey collects compensation information-including wage and bonus data, and information about retirement packages and other perks-and segregates it by hospital operating budget size and by state.

But while such data is valuable-it shows where executive compensation ranks relative to potential competitors-it also has limits. Using the hospital's operating budget as the primary benchmark minimizes other factors that should be considered when setting executive compensation.

Consider quality of care. Should CEOs at hospitals that rank better in patient surveys and other measures of quality (lower infection rates and better management of common ailments) be paid more than similarly sized institutions that don't rank as high? Our analysis did not find a statistical relationship between executive pay and a hospital's quality of care.

What about charitable care? As tax-exempt organizations-and often the single largest charitable trust in their service areas-nonprofit hospitals are expected to provide community benefit, including care to those who can't afford it. The question we asked was: Are CEOs at hospitals that provide a greater share of charitable care rewarded for that? Again, our analysis found no strong correlation between executive compensation and the amount of charitable care.

Hospital boards often set other annual goals for their chief executives, usually related to financial performance, employee retention and recruitment of top physicians. Such accomplishments certainly belong in a discussion about CEO performance and value. But these other measures-quality of care and community benefit, among others-provide different and helpful gauges of a hospital's value to the public.

Finally, should hospital boards consider weighing CEO compensation against other industries, perhaps higher education or other major nonprofits in NH and across the region? If nothing else, this would broaden the set of data available. It would also give regulators, policymakers and the public a better sense of the trends driving compensation in other parts of the nonprofit sector.

Steven Norton is executive director of the NH Center for Public Policy Studies, an independent, nonprofit, non-partisan organization that pursues data-driven research on public policy. Its work includes research on the state budget and health care finance. Daniel Barrick is the Center's deputy director. Norton may be reached at snorton at nhpolicy dot org. For more information, visit www.nhpolicy.org.