The shift of healthcare services to a value-based model has put pressure on hospital managers to do more than they previously would. Therefore, finding and training executives that can meet the demands hasn’t been an easy job. That has seen the scrapping off of old compensation models that didn’t value healthcare management. Consequently, now they are given better payments. Payment for the most senior executives in healthcare systems such as CFOs, CEOs, and COOs usually ranges between $274,300 and $1,409,500. The gross income includes both yearly bonuses and salaries. This piece looks into the factors that have led to such high figures for hospital managers.
Why does this matter?
Revenues for healthcare systems executives have been under the watch for a long time because they seem to be significantly higher than for their counterparts in other industries. They seem to have had over ninety percent increments over ten years, while other health professionals had between ten and twenty percent boosts. It is among the several trends in healthcare, including that of adult day care software. As more baby boomers leave the workforce, they require being taken care of in fantastic facilities. That is why there has been an upsurge in need of adult daycare facilities.
1. Medical background
A closer look into the executive’s education background reveals that those with medical degrees earn more than those without. Leading healthcare organizations offer physicians more opportunities to gain experience in several areas, such as clinical integration, financial management, service line growth, and technology advancement. Getting an MBA puts a medical doctor in a better position of learning business-relevant matters. That way, they can work comfortably along with their non-physician workmates. Therefore, there has been an increase in the number of physicians that enroll for MBA degrees, especially those they are considering an executive position.
2. Hospital revenue
As it’s expected, hospital revenue plays an essential role in determining how much the executives will take home. Besides, there is no way a healthcare institution can afford to pay more than its worth. If the organization doesn’t make much revenue in a year, the CEO ought to sacrifice end-year bonuses that are now a trend in many corporations. There is an emerging trend that seems to incline executives’ salaries on the hospital’s profit.
3. Community type
According to the IRS’s exception act, top management personnel in non-profit hospitals are to be compensated based on the surroundings of the hospital. That saw the management officials earning average salaries based on the nature of their communities. Those in high population areas earned an average of $650,200. Executives in critical access hospitals made $152,699, while those in rural and non-critical access hospitals made $289,500.
4. Attainment of predetermined goals
Many hospitals from around the globe have incentive plans. A few decades ago, this was a strange term in the healthcare industry. So, they have come a long way. On the brighter side, well-performing individuals are assured of a good income at the end of the month once they meet the required figures. Most of the incentive plans are based on a percentage of the base income. For instance, a CEO earning $100,000 per year has the chance of taking home $130,000 if they meet the annual goals.
Types of Executive Compensation
Executive remuneration comes in a number of formats and offers a range of tax advantages and performance incentives. These are the most typical types:
Cash compensation
This represents the executive’s entire yearly traditional cash compensation. Each major member of the management team, including the CEO, CFO, legal counsel, director of sales, and other divisional heads, will have their base salary disclosed by the business in the proxy statement.
Option grants
All of the executive’s options are included here, along with their strike prices and expiration dates. Stock options are a terrific way to encourage management to boost shareholder value if they are used appropriately. The negative of options compensation is that. For example, if management is granted a significant number of options that are just barely in the money, they will be able to exercise the options, convert them to common stock, and then sell the shares to reap a sizable profit if the stock price improves marginally.
Deferred compensation
For tax reasons, this payout is postponed until a later date. However, due to regulatory revisions, this mode of payment is now less commonly accepted.
Long-term incentive plans (LTIPs)
For tax reasons, any remuneration that is based on performance is included in long-term incentive programs. The existing tax code supports pay for performance compensation.
Retirement benefits
After they leave the firm, executives receive these rewards. Some CEOs frequently receive health benefits upon retirement or other appropriate awards for years of service. These should be closely scrutinized since they may include so-called “golden parachutes” for dishonest executives or be paid whether or not the firm achieves its financial goals or even turns a profit.
Executive benefits
Other benefits offered to executives include the use of a private plane, payment for travel expenses, and other benefits. The footnotes contain these. Benefits offered to CEOs of small businesses need to be evaluated much more carefully since this sort of greed is more likely to damage smaller businesses or increase annual deficits.
Executive Compensation Evaluation
For the individual investor, evaluating CEO remuneration may be a challenging undertaking. Fortunately, there are many of tools out there to make the process simpler. These programs automatically analyze SEC filings to extract the data and conduct comparisons that are intended to provide context to the data’s raw form.
Pay vs. Performance
Compared to other methods, comparing pay and performance is one of the most used approaches to assessing CEO salary. Unfortunately, even when their firms are struggling, many CEOs still receive raises and bonuses. If you compare executive compensation to stock performance, you can tell if they are being overpaid.
The particular indicator that is most frequently employed is comparing the annual change in CEO pay hikes to the annual change in stock price. The executive is not overpaid if the increase in the stock price exceeds the increase in compensation. Trends that indicate CEO remuneration is outpacing stock performance may indicate overcompensation for poor results, which might be detrimental to investors in terms of money paid out and motivation to perform.
The law governing executive compensation
Many new legislations have been established to allay investor worries about CEO remuneration. Companies are now required to include an “Executive Compensation Discussion and Analysis” section alongside future pay details in all SEC filings due to changes in SEC reporting rules. This part needs a “readable” description of the methodology used to establish the compensation and what it includes.
Other legislation has taken a more direct approach to limit business activities. The elimination of the deferred compensation tax loophole, which assisted many CEOs in saving millions of dollars in taxes, is a great illustration of this.
Additionally, it is now much more difficult for boards to defend high rewards and conceal these expenditures from investors due to changes in other tax loopholes.
Take-Home
As top executives in health systems are expected to deal with increasingly complex operational and financial challenges, their earning structures have been continuously evolving. The above four factors are only a sneak peek into the factors that determine how much a hospital CEO, CFO, or COO will earn. The elements are complicated, but generally, these are the four primary reasons.