Executive Compensation in Health Care

It's a topic that has repeatedly received attention from the press, the public, and politicians: executive compensation in health care.  Just in the past month, Modern Healthcare published results of its annual executive compensation survey, noting the criticism some hospital and healthcare system executives face for falling under the top 1 percent of wage earners in this country (Landen, 2014).  In the face of such criticism, hospitals and health care systems have continually worked to justify the levels of compensation determined for their leaders, prompting health care management scholars to examine what factors ultimately determine an executive's compensation in health care organizations.

A recent article published in the July-September issue of Health Care Management Review addresses this "hot-button" issue, examining the empirical evidence to date for health care executive pay determinants.  The study's authors, Patrick D. Shay (Trinity University) and Kenneth R. White (University of Virginia), conducted a systematic review of the health care management literature, finding 21 studies spanning 1991 to 2012 that have provided empirical results through regression-based analysis of what factors are directly related to health care executive compensation.  The results of their review reveal that studies have produced inconsistent and, at times, conflicting findings regarding what factors are most closely associated with CEO pay in health care.  No single determinant was consistently identified across each of the studies as a significant determinant of health care executive compensation.  However, of the factors that were more commonly highlighted as key determinants, the most frequently identified and predominant determinant of healthcare executive pay was organizational size.  Firm financial performance was also a statistically significant determinant in seven studies, but in eight other studies financial performance either produced mixed or insignificant results as a determinant.  Other factors identified in some of the studies as significant determinants included job difficulty, market characteristics, organizational ownership, hospital type, and human capital attributes.  Executive demographics, board attributes, and nonfinancial performance measures were identified as the determinants that, for the most part, yielded either mixed or insignificant relationships to executive pay.

Shay and White point to the inconsistent methods and findings across the review's studies as evidence that "the question of what factors determine health care executive compensation remains unsettled according to the extant empirical literature" (p. 264).  They acknowledge that the professional literature on health care executive compensation has identified organizational performance as a "relatively small consideration for boards when compensating executives" (p. 266; Bjork, 2012), perhaps in contrast to public expectations or assumptions.  In an age in which the public increasingly expects executive pay to be tied to firm performance, and as the industry increasingly embraces a "pay for performance" mentality, the study authors suggest health care organizations would benefit to more clearly incorporate performance measures - including financial as well as nonfinancial measures - as a contributing determinant of executive compensation.  They also call for "critical consideration as to what factors comprise the truly necessary and concrete determinants of pay," particularly in the event of declining organizational performance, as well as how to effectively communicate the varied determinants of pay to stakeholders and community members.  Shay and White note that, given the consistent public interest as well as continued media attention (e.g., Bartlett, 2014; Evans, 2014; Rosenthal, 2014), this subject is not likely to fade away soon, and further empirically-based studies are needed to shed light on the determinants of health care executive compensation.

What do you think about this subject?  Do you have any related questions or perspectives to share?  We'd love to hear your thoughts in the comments section.

Article Citation
Shay, P.D., & White, K.R. (2014). "Executive compensation in health care: A systematic review." Health Care Management Review, 39 (3), 255-267.

Works Cited
Bartlett, J. (2014, August 18). "Partners HealthCare, Lahey, Tufts executives see double-digit pay raises." Boston Business Journal.  Retrieved from: http://www.bizjournals.com/boston/blog/health-care/2014/08/partners-healthcare-executives-see-double-digit.html?page=all

Bjork, D.A. (2012). Healthcare executive compensation: A guide for leaders and trustees. Chicago, IL: Health Administration Press.

Evans, M. (2014, April 26). "Bonuses still tied to better financials: Use of CEO pay incentives for quality is uneven across for-profit hospital systems." Modern Healthcare.  Retrieved from: http://www.modernhealthcare.com/article/20140426/MAGAZINE/304269985

Landen, R. (2014, August 9). "Hospital executives see slower growth in compensation." Modern Healthcare. Retrieved from: http://www.modernhealthcare.com/article/20140809/MAGAZINE/308099980

Rosenthal, E. (2014, May 17). "Medicine's top earners are not the M.D.s." The New York Times. Retrieved from: http://www.nytimes.com/2014/05/18/sunday-review/doctors-salaries-are-not-the-big-cost.html?_r=0