Compensation and Retention Strategies for Healthcare Executives

To thrive today, healthcare organizations must provide competitive compensation and implement strategies to recruit and retain talented executives. Short- and long-term incentive plans – along with retention arrangements – are increasingly being tied to successfully vying for healthcare’s top talent.

Healthcare organizations compete for the best leadership talent by offering a unique and compelling value proposition that includes a balance of mission served, performance challenges, engagement of diverse stakeholders, and competitive compensation.

It’s essential that these organizations use total rewards strategies to successfully guide the design, administration and governance of their pay and benefit programs. The strategy should be developed and designed to support the organization’s strategy (i.e. incent growth and performance, utilize the financial resources of the organization, etc.) and culture. Top-performing health systems have written strategy statements that are board-approved and shared with existing and potential employees.

Compensation and Retention Strategies for Healthcare Executives

The value of benefits and perquisites make up a smaller percentage of executive total rewards. There are fewer executive benefits (i.e. executive medical insurance, supplemental disability plan, etc.) and many organizations are offering executives the same benefits offered to other employees. Limited executive perquisites are the new norm and any enhanced benefits and/or perks must be justified as having a legitimate business purpose.

Establish a Compensation Strategy for Executive Talent

Compensation is a key element of the total rewards strategy to attract and retain the best leadership, and healthcare systems should develop a compensation framework that includes:

  • Base salary
  • Short-term incentives
  • Long-term incentives
  • Retention incentives

Base Salary

Base salary is fixed compensation that typically does not vary according to performance or organizational results. It pays for experience, knowledge and individual performance. It is common practice to establish and maintain a salary administration program with two objectives: providing base compensation that is competitive with the market, and controlling fixed costs. In addition, the program should ensure that pay is internally equitable when compared to similar positions within the organization.

The majority of organizations target base salaries at the market median, which is the 50th percentile. Likewise, recent surveys and Findley’s industry experience indicates 65% of healthcare organizations target leadership base salaries at the market median. The next most popular target, used by 15% of organizations, is to set the range at the 60th or 65th percentile of market.

In practice, not all salaries will be equal to the target and there are a number of valid reasons why salaries may vary from the target. The salary administration program has pay ranges that allow management and the board flexibility to determine salaries by evaluating factors that include individual experience, market rates, length of service and business needs.

Short-Term Incentives

Top-performing organizations design short-term incentive plans, (also know as annual incentive plans), to award incentives using an objective and disciplined approach. The plan should reinforce the philosophy that executives are connected to organizational results; it should motivate and drive appropriate behaviors and deliver rewards that are in alignment with organizational success and growth.

“Recent research and Findley’s industry experience, indicate formal short-term incentive plans are used in more than 75% of healthcare organizations.”

Compensation and Retention Strategies for Healthcare Executives Guide

Long-Term Incentives

Long-term incentive plans are emerging as important components in compensation strategies for healthcare systems as the plans prove valuable in retaining and recruiting top talent. Based on market studies and Findley’s experience, offering long-term incentive plans varies by the size of the organization, with more than 40% of organizations with net revenue greater than $2 billion featuring long-term incentive plans in their compensation programs.

As organizations look for long-term performance-based compensation solutions, there are a variety of options to consider. One solution that is growing in popularity is a performance-based long-term incentive plan that awards cash at the end of a multi-year performance period based on the achievement of predetermined goals.

“Boards of directors in this pay-for-performance era are seeking alternatives to deliver long-term performance-based compensation.”

Compensation and Retention Strategies for Healthcare Executives Guide

Another approach that is becoming more common is the “performance-based” SERP. This combines the planning and techniques used for defined contribution SERPs, along with the performance measurements of an annual incentive pay plan. This option offers competitive long-term compensation, assuming adequate levels of sustained annual performance.

Long-term incentive plan options vary, too, between for-profit and non-profit healthcare organizations. For-profit healthcare systems are able to include some type of “equity” award in the total compensation package for executives. Executives in the non-profit, tax-exempt healthcare environment lack the opportunity of real “ownership.” Measuring long-term value is even more important with a tax-exempt organization because the “shareholders” are taxpayers and members of the community.

Historically, long-term plans have been merely an accumulation of short-term metrics over a multi-year period. The trend has shifted and long-term or value-focused metrics force a more strategic or visionary view of future guideposts for success. While financial results remain important, organizations are including more measures that focus on growth, market share, community impact, and employer brand.

Retention Incentives

One component that has seen significant growth over the last several years is the implementation of retention compensation. The healthcare industry in particular has been on the forefront due to the recent and expected future consolidation of hospitals and healthcare systems.

Often, retention incentives occur in instances of an anticipated transaction which requires continuity in order to execute transition plans and maintain the ongoing value of the enterprise. It can be essential to ensure that key talent is retained, operating functions are held intact, and relationships are maintained during a significant transition (i.e. pending sale, reorganization or new leadership).

The structure of retention arrangements varies as some organizations may choose to incorporate retention benefits within individual employment agreements, while others create standard agreements or policies for groups of executives.

Learn more about our findings and the solutions to implementing effective and creative strategies to recruit and retain talented executives in the healthcare industry in this guide below:

Compensation and Retention Strategies for Healthcare Executives Guide

Design and Implement an Effective Compensation Strategy

The healthcare industry is going through significant transformation and it is imperative for organizations to have well-designed executive compensation programs with retention strategies to recruit and retain top talent. Designing and implementing effective plans requires:

  • Taking a total rewards and total compensation planning perspective;
  • Aligning the compensation plan design with the mission and strategies of the organization;
  • Creating and maintaining conditions that are favorable to delivering competitive compensation and;
  • Designing retention strategies that align the interests of the executives with the stakeholders.

Questions or need advice on implementing an effective compensation strategy or successful incentive programs at your organization. Please contact Jen Givens or Tom Hurley by filling out the contact form below.

Published May 15, 2020

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Employee Retention: 5 Tactics to Developing an Effective Strategy

Economic Principles…Makes Sense

The law of supply and demand – you’re probably familiar with this economic principle. When one goes up the other goes down. As a geographic market experiences rapid population and economic growth, you might think an increase in job seekers will result in a decrease in the market value of jobs. If there are more people vying for a position, the less you have to pay in salary to fill the position. However, any good HR consultant will tell you this principle isn’t the only one you should consider in developing your compensation policies. Turnover is another factor which drives a job’s market value. As more companies move into a geographic region, the talent pool will begin to shrink. You will have to pay more to attract a new hire. Retaining your top talent will keep you competitive in your industry and save you time and expense training in the long run.

Strategy Over Theory

Employers, looking to retain key employees, should develop a retention strategy. While most employers will state that they want to retain all of their employees, a well-designed retention strategy is likely going to require additional revenue to be invested in employees and is unlikely to require implementation across the entire organization. Employers need to evaluate their business and determine key positions in which they want to avoid turnover and identify talented employees whom they want to ensure they retain.

A retention strategy may improve the value proposition delivered to all employees. When budget constraints exist, your retention strategy should be designed with key employees and positions in mind. Consider these five tactics as you develop your organization’s employee retention strategy:

  1. Ensure that your managers actually know how to manage. Poor managers and pay issues are the two leading causes of employee turnover. Quality managers should be accountable, effective, honest, focused, emotionally intelligent, and motivated.

Tip: Consider if managers would benefit from training and development.

  1. Create a pay for performance culture. Key employees are often the best performers. Top performers become discouraged when they receive the same rewards as everyone else. Adopting a pay for performance system communicates that performance does matter. It allows leadership to allocate more financial resources to employees who are top performers. Keep in mind, organizations must be willing to deal with poor performers in order to take care of top performers.
  1. Verify that your total rewards package is competitive. Use external market data to identify if your total rewards are competitive. Ensure your total rewards strategy is well-designed, executed effectively, and communicated properly.

Tip: Consider putting in place long-term incentive pay strategies that promote top level employee retention.

  1. Foster employee engagement. Engaged employees are more content in their roles, perform better, and feel valued. Engaged employees respond to feedback and desire appreciation. They’re engaged and expect honesty.
  1. Communicate with employees (repeatedly) the organization’s values If the organization provides a workplace experience and total rewards package that are the envy of competitors, take the time to communicate that to employees. Employees don’t know what they don’t know. Take credit for the opportunities your organization provides to employees. It’s easy to communicate good news.

Tip: Annual Total Rewards Statements will effectively communicate your organization’s benefits providing employees with greater awareness, understanding, and appreciation for their total compensation.

In Perspective

Knowing that turnover is a substantial cost for an organization, employers have an opportunity to embrace a proactive approach to employee retention. An effective employee retention strategy just might reduce the costs or turnover and improve employee morale across the board.

Questions? Contact the Findley consultant you normally work with or Brad Smith at Brad.Smith@findley.com, 419.327.4414.

Posted February 6, 2019

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