Doctor and business person
HealthJune 07, 2021

Tying healthcare CEO compensation to clinical performance

By: Sarah Handzel, BSN, RN
According to a recent article in Healthcare Finance, chief executive officer (CEO) compensation in hospitals ranged from $274,300 to over $1.4 million in 2018.

These figures include both base salary and bonuses, which, at the largest hospitals, made up as much as 9.2% of total earnings. But as earnings for healthcare executives continues to climb, similar positions in other industries have lagged — and compensation for the average healthcare worker falls far short of these numbers.

The Centers for Medicare & Medicaid Services estimate that healthcare spending accounts for roughly 17.7% of the nation’s gross domestic product. As such, there is increased scrutiny from policymakers, the media, and average American citizens on CEO compensation. But much of this focus is directed toward CEOs in for-profit healthcare centers, not nonprofit organizations such as community health centers (CHC).

CHCs must meet a variety of goals; increasing access to healthcare, improving quality of care, and controlling costs while also remaining a sustainable business. A new study in Health Care Management Review explores the predictors of CEO compensation at CHCs while also examining the relationship between CHC clinical performance and CEO compensation.

Examining the issue of CEO compensation in healthcare

CEOs are often viewed as incredibly influential to a CHC’s culture and tone — they usually set priorities for the organization, participates in the hiring of clinical leadership, and makes major investment decisions. CEO compensation is tied to fixed payment and past and current performance measures.

But CEOs may ultimately act in their own best interests against the wishes and direction of the owner of the CHC, usually the board. To avoid this problem, CEO compensation packages may be tied to organizational goals, such as clinical performance indicators. For the purposes of this new study, Davlyatov, et al. hypothesized that:

  • CHCs reporting higher levels of clinical performance are positively associated with higher CEO compensation.
  • Salaries of the next highest paid employees are positively associated with higher CEO compensation.
  • CEOs with dual position — for example, serving also as the chairman of the CHC’s board—have higher compensation compared to CEOs without dual position.

Data from the Uniform Data System (UDS) and the Internal Revenue Service (IRS) Form 990 were extracted from a national sample of 984 CHCs from 2011 to 2016. UDS data included patient demographics, insurance information, staffing, scope, and volume of the CHC’s services, quality of care, health outcomes and disparities, number of delivery sites, finances, and electronic health record information. IRS Form 990 provided financial performance data, and CEO characteristics were gathered from publicly available sources, such as LinkedIn.com.

An average of 984 CHCs were examined for each year included in the study period. The average CEO compensation was $207,555 and the average salary of the next highest employee was $106,421. Additionally, only 3% of CEOs held dual position.

Results suggest complex relationships

After analyzing the data, the study authors determined there was no relationship linking CEO compensation and clinical performance in CHCs. Also, CEO dual position was not shown to relate to CEO compensation. However, the data did show that the highest paid employee’s compensation was significantly associated with CEO compensation — perhaps because CEOs use these employees’ salaries as justification for their own.

Several factors, such as CEO characteristics and grant size for the CHC, were determined to influence compensation packages. Policy makers and others may use this information regarding funding allocation for CHCs, restructuring CEO compensation packages to meet financial and predetermined quality care goals. Already, some hospitals tied CEO compensation to financial and nonfinancial performance indicators, but nonhospital organizations such as CHCs have been slower to adopt this practice.

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Sarah Handzel, BSN, RN
Freelance Health and Medical Content Writer, Wolters Kluwer Health
Sarah has over nine years’ experience in various clinical areas, including surgery, endocrinology, family practice, and pharmaceuticals. She began writing professionally in 2016 as a way to use her medical knowledge beyond the bedside to help educate and inform healthcare consumers and providers.
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