Executive compensation may not come to mind as a major driver of healthcare transformation, nor does it seem naturally connected to critical issues such as healthcare equity, patient safety, or quality of care—just a few of the areas where significant changes can be made transform healthcare. But in fact, leaders leading nonprofit health systems today are tasked with delivering measurable outcomes that improve the health status of their patients and their communities. And to ensure these new performance metrics are met, we need to change the way we think about — and deliver — compensation.
Defining a new model
While CEO compensation has always been tied to specific goals, in the past it has been heavily driven by financial performance, volume and margins, with a modest portion of compensation aligned to quality of care and patient outcomes. But transformative approaches like population health, value-based care, patient wellness and health outcomes are changing the brand.
Healthcare leaders must now strike a delicate balance that requires managing financial and growth metrics, increasing the speed of transformation and building the healthcare systems of tomorrow. So how do we redefine compensation models to reward all these behaviors?
Some might say the answer lies in adjusting incentive plans. While health care incentive plans have not changed significantly over the past decade, the complexity of the plans there is changes that reflect a greater focus on providing a better patient experience. But delivering a better experience does not mean that healthcare systems have been transformed from the top down. In my view, adjusting the incentive plans only solves part of the problem.
If we want to truly transform healthcare—and we must to best serve patients and communities—health systems must reevaluate outcomes for each stakeholder and create incentives for leadership development across the board. We need to rethink executive compensation models to align them with value-based care, patient experience and resulting outcomes, along with traditional performance measures.
Driving through a long outage
But rethinking executive compensation models will not be an easy task, especially given the external challenges and changes imposed on the health care system over the past few years.
As with almost every other aspect of health care, pay for performance was disrupted during the pandemic. Demand for healthcare services has changed dramatically, manpower and attrition issues have intensified, and supply chain issues and operational costs have increased. These new pressures required executives to navigate long periods of uncertainty when meeting operational pay-for-performance targets was nearly impossible. Fast forward to today, the market for executive talent remains extremely competitive. Demand is outpacing supply due to higher-than-usual retirements, the effects of the Great Resignation, the need for new skill sets, and overall burnout.
As a result, there is upward pressure on compensation to address and meet unexpected but immediate needs, such as rewarding executives for managing in a unique and challenging performance environment, increasing recruitment and retention efforts, and recognizing leaders for their hard-earned achievements.
Considerations and changes
When considering adjusting models for 2023 and beyond, CEOs and compensation committees should consider these pressures and disruptions. They should take a hard look at their own reward data from the past two years – not as a beacon for future rewards, but as data that may need to be set aside due to the volume of performance targets and achievements that have been blown out of proportion by the pandemic. When relying on external industry data, the same rules apply; smaller data sets or those that do not account for the last two years may be misleading, so review carefully before using limited data sets to inform adjusted models.
Equally important, CEOs and compensation committees should consider new performance measurements related to both financial and qualitative or value-based transformation metrics. We don’t need to do away with traditional financial and operational goals because viability is still a business mandate. But how can we articulate reimbursement-focused KPIs to manage patient and community health, improved outcomes, and reduced costs of care? Too many measures is like having no measures at all.
The compensation mix should take into account a more targeted approach to long-term measures. The old paradigm of 12-month stimulus cycles is insufficient to address the time needed for true healthcare transformation. Another consideration should be performance-based funding of deferred compensation based on achievement of transformation goals and greater use of retention programs to support maintaining a stable executive team during the transformation period. Covid-19 proved how crisis can be a catalyst for change. True transformation must combine the skills gained from crisis management with planned, deliberate and deliberate change.
In addition, some metrics may need to include a discretionary component given ongoing workforce disruptions, supply chain constraints and increases in energy, equipment and labor costs. More organizations are also involved health equityDE&I and ESG goals in incentive programs to more closely align with mission-critical goals assigned by the board.
There are four elements that are vital in the journey to transform healthcare from the “heads in beds” to the public service-oriented organizations it should have been—and can be again. With increasing pressure from patients, communities and payers on boards and employees, CEOs and compensation committees must become key drivers of change by setting the right goals and incentives from the top down.
- Affordability: Can patients afford the care they need?
- Quality: Are you providing the highest quality care?
- Usability: how can we reduce barriers to care plan implementation?
- Access: do all members of the community have access to the care they need?
Addressing each of these elements is one of the biggest challenges we face, and as we begin to emerge from the pandemic disruption, leaders will be closely watched to ensure they deliver – and can clearly point the way to the performance.
Ideally, the bottom line would include patients spending less to achieve better health; payers control costs and reduce risk; providers realizing efficiency and greater patient satisfaction; and aligning medical provider pricing with patient outcomes. And when you zoom out to reveal the bigger picture, all of these pieces come together to achieve a healthier population and lower overall health care costs while meeting the organization’s financial goals.
We ask many already overworked healthcare executives. Stakeholders need to demonstrate that we value leaders with the right mindset and skills to attract leaders who can lead organizations through the path of transformation. This requires an environment where there is supportive leadership, a compelling mission, and opportunity for personal growth and development. It won’t be easy, but without rethinking the way we design compensation models from the top down, it will be an unnecessary challenge.
Photo: claudenakagawa, Getty Images