A few months ago I took a look at the high turnover rate and short tenure of hospital CEOs in, CEO Turnover Drives New Competency Questions. That article got some great feedback from members, including something I hadn’t thought of before. An OPEN MINDS Circle reader wrote:
Might another contributing factor to high turnover be the high pay-outs for a CEO when they leave, voluntarily or not? The more times a CEO can jump from organization to organization, he/she usually is given a huge severance package. If it is not voluntary, that fact doesn’t seem to impact getting the next C-suite position and of course, the next employer does not know why they left the previous organization. I have been in health care all my career and have seen the transformation of management to business from administrators who at least understood patient care, and I keep shaking my head at the dollars these folks are making. It reminds me of professional athlete salaries, signing bonuses, and severance packages. I think it is out of proportion to what the person does or knows. He/she has their honeymoon period and then moves on. The system supports and rewards the turn over.
I haven’t thought of this “turnover cycle” as something deliberate to collect severance packages (or at least, something encouraged by severance packages) and to get a new, higher compensation package. It seems there are a few issues here – is the compensation package and severance packages that health care executives are being paid “reasonable”? And, do those severance packages contribute to the high turnover rate of CEOs?
Anyone who has paid attention to the popular media can’t help but notice that this topic always gets attention – and the headlines show that: Payouts To Former Cape Cod Healthcare CEO Continued For 4 Years, Despite Stock Plunge, Former Valeant CEO To Collect $9 Million In Severance Pay, and Former Wellmont CEO Received $1.7 Million Severance Package. But finding numbers to make a judgment on these questions has proven difficult – as recently as late 2013 and according to a severance survey from Mercer, Witt/Kieffer and Hunton & Williams, 83% of hospitals and health care organizations have a written severance agreement with their CEO; 49% of severance packages last 24 months, 73% said severance pay only included base salary, 18% said severance pay included salary and annual incentives, and 9% said severance pay included salary, annual incentives, and long-term incentives (see 14 Statistics On Healthcare CEO Severance Packages).
What do those salaries look like? Last summer, a story from Modern Healthcare noted that the pay for the 20 top-paid health care executives increased 29.6% year over year (see CEO Pay Soars At Top Not-For-Profits). And according to data calculated by the Associated Press last year and reported on in FierceHealth Payer, the health care industry had the highest level of median pay for CEOs in 2014 at $13.6 million (see How Healthcare CEO Salaries Hurt Consumers) – Dori Zweig writes:
When it comes to the industry as a whole, payer CEOs bring home the most bacon, averaging $584,000 a year, IBT said. Hospital CEOs are next on the list, earning an average of $386,000, while hospital administrators earn $267,000. Hospital physicians earn an average of $306,000 despite being the most highly trained professionals in the health care industry.
But those are base salaries. For many executives, the final annual compensation is much higher. There are a wide range of benefits and perks. And, more recently in health care, compensation that is linked to performance bonuses for improved quality and financial performance. According to ModernHealthcare, the average compensation for CEOs at 270 systems in a recent survey grew to $1.2 million in 2015, an 8.2% increase over the previous year – all largely due to performance bonuses (see Going Up: Surge In Exec Comp Driven By Pay-For-Performance Bonuses).
For perspective from the field, I reached out to my colleague George Braunstein, who writes:
As most of us know, health care in general and behavioral health care specifically, has adopted the same cultural standards and approaches to C-suite leadership that any other business has adopted. Leaders are chosen for the experience, skill set, and personality that they bring to a given set of challenges that an organization is facing. Because external and internal business environments change, sometimes rather rapidly, a CEO that was a great fit for certain conditions might not be as much of a great fit for other conditions. Turnover in these rapidly changing environments is much more likely.
In larger health care organizations, especially for-profit, it is likely that C-suite talent will negotiate a severance as part of their entry contract, knowing that conditions could change. And I think all of us who have worked in multiple organizations in C-suite roles know that we truly “work at the pleasure” of the board. While I cannot state that there are not some irrational severance packages for CEOs in health care, I can say that it is part of the environment that many of us have experienced when entering a highly demanding and risk laden role. Many C-suite job changes may have more to do with changing needs of the organization than with CEOs seeking extra money.
So, while I don’t know that there are a lot of executives out there are that skipping out on jobs solely for the severance package, I think we should get used to growing executive compensation packages. For more on how to keep the best executive on the job at your organization, check out these resources from the OPEN MINDS Industry Library:
- Defining Your Executives’ Critical Competencies
- Strategic Talent Management In A New Era
- Succession Planning: The Key To Long-Term Leadership Success
- Two Key Questions – Retirement & Succession Planning Advice From Executives Who’ve Been There
- The Art & Science Of Replacing Key Executives
And be sure to mark your calendar for two great keynote presentations at The 2016 OPEN MINDS Executive Leadership Retreat, September 20-22, 2016 in Gettysburg, Pennsylvania. Our agenda features: Peter Anderson, M.D., President, Team Care Medicine & Co-Author of Lost and Found: A Consumer’s Guide to Healthcare; and Suzanne Clifford, Senior Vice President, Integrated Primary Care, Community Health Network – focused on the challenges for leaders in today’s value-based market.