Hospital CEO pay rises steadily, but still lags many sectors
Amid headlines over exorbitant CEO salaries, hospital executives have maintained relatively modest pay increases in recent years and fall in the middle of the pack compared to other industries.
That's the takeaway from the human resources firm Total Compensation Solutions's 2018 hospital pay report of 1,332 U.S. hospitals.
TCS Project Manager Tom Bailey told Healthcare Dive that median CEO pay among hospital and health systems is “stable with very modest increases in the range of 2.5% to 3% year-over-year.” That’s compared to other industries like financial services, insurance, and manufacturing that see CEO compensation increases of between 4% and 6%.
The report finds the size of a system, its structure, and its location play driving roles in CEO pay:
- Major metro area hospitals tend to pay CEOs the most because of size, their multi-facility/location structure and because they are in higher-cost geographic areas.
- Single hospitals in major metro areas tend to be the next highest-paying institutions because of the high cost of labor.
- Rural hospitals affiliated with larger institutions tend to be the next highest in pay.
- Unaffiliated rural hospitals are the lowest paying hospitals for CEOs.
The analysis found little difference between hospital CEO pay at for-profits compared to nonprofits.
“We understand that nonprofit hospitals might have marginally lower CEO pay. However, a direct comparison with for-profit hospitals does not indicate this is the case. TCS believes that CEO pay in nonprofits has to be competitive with the for-profit hospitals for retention purposes,” Bailey said.
More broadly, CEOs across sub-sectors within healthcare have seen their earnings continue to grow this decade under the Affordable Care Act. An Axios analysis late last year found that CEOs of the 70 largest health companies earned a total of $9.8 billion, pocketing 11% more money on average each year between 2010 and 2017. Topping that list were execs at drugmakers, including Gilead and Regeneron among others.
The TCS report also found that the average U.S. hospital CEO bonus is 33.2% of base salary. However, the range goes from 0% to 269%, with three-fourths of hospitals saying they pay their CEOs a bonus. TCS found that the size of the bonus is connected to revenue size and “the standard performance metrics used in the hospital industry.”
Dan Marcec, director of content at Equilar, a company that specializes in board recruiting, executive compensation, and shareholder engagement, told Healthcare Dive that he continues to see CEOs across the board paid on performance awards. More than half of a pay package tends to be stocks given if performance goals are met. Those performance goals include increasing shareholder value. He expects that will continue in the coming years.
Healthcare CEO pay ratio
Travel back to the days of President Lyndon Johnson and the difference between what a CEO made compared to the median employee in 1965 was just 20:1. Fast forward to 1989 and it crept up to 59:1. It’s now in triple digits — and for some companies, it's four.
One way to gauge an organization’s pay fairness is to look at its CEO pay ratio. Getting that information from publicly-traded companies is now much easier after the 2010 Dodd-Frank Act required publicly-traded companies to share their CEO pay ratio starting with fiscal year 2017. The idea behind the provision was to improve transparency.
The formula is pretty simple. You take the CEO’s compensation and divide it by the pay of a company’s median employee. It’s an equation that is influenced by many factors, such as the percentage of part-time employees and location. For instance, retailers and manufacturers will likely have high CEO pay ratios because they have more lower-paid part-timers than, say, a pharmaceutical company.
Since the release of CEO pay ratio data, Bloomberg has been pulling and organizing the information for multiple industries. The CEO pay ratio information has been slowly trickling out this year. There have been some eye-popping numbers from other industries, such as First Data Corp. (2,028:1) and Hanesbrands (1,830:1).
Bloomberg found that healthcare CEO pay ratio varies from 930:1 (Veera Systems, a cloud-computing company in the pharmaceutical and life sciences industry) to 7:1 (Alnylam Pharmaceuticals).
So far, a handful of hospitals and health systems have offered their data:
- Universal Health Services — 541:1
- HCA Healthcare — 312:1
- LifePoint Health — 262:1
Other major publicly-traded health systems like Community Health Systems, Tenet Healthcare and IASIS Health haven’t provided their CEO pay ratio information yet.
Meanwhile, more payers have released CEO pay ratio data.
- Centene — 379:1
- Humana — 344:1
- UnitedHealth Group — 298:1
- Cigna — 279:1
- Anthem — 262:1
- Aetna — 235:1
- WellCare Health Plans — 145:1
Some healthcare IT companies have also released data.
- Align Technology — 920:1
- IQVIA — 388:1
- Athenahealth — 108:1
- Cerner — 54:1
How do these numbers compare with other industries? Equilar recently surveyed 356 publicly-traded companies and found the median CEO pay ratio across all industries is 140:1. Companies in the healthcare services sector had a 112:1 median ratio with the median CEO pay at $6.2 million, Equilar reported.
Communicating CEO pay ratio
Though considered controversial before its release, CEO pay ratio has actually been met mostly with a shrug. Steve Seelig, senior regulatory advisor for executive compensation at Willis Towers Watson, told Healthcare Dive that local and national press have picked up the story but it hasn't gotten much traction.
“There are so many things to think about nowadays that it’s hard for this issue to get a whole lot of oxygen,” Seelig said.
Seelig, who co-wrote a report on how companies should communicate the CEO pay ratio last year, is also watching to see whether local jurisdictions use the information to increase taxes on organizations and whether unions use the data during contract negotiations or when employees are looking to organize.
Companies concerned about the fallout of releasing CEO pay ratio information have been pleasantly surprised that there has been so little controversy.
Marcec said Equilar hasn't heard of any employee uprisings related to CEO pay ratio. Marcec said one reason for the lack of upheaval is that companies communicated the information with employees rather than simply releasing it without warning.
Seelig said companies are also teaching senior executives, boards of directors, and human relations departments about the CEO ratio and how it’s calculated, so they’re ready in case they get questions from employees or the community. The number is out there, so company leaders need to be comfortable discussing it.
Though nonprofit organizations aren't required to release the CEO pay ratio, Seelig said some nonprofits are thinking about releasing the information for their company anyway. Their for-profit competitors are already providing it, so nonprofit hospitals and healthcare companies may find patients and the local community want to see their pay data, too.
Plus, sites like Glassdoor are already giving a closer look at company compensation. Nonprofits might want to get out in front and release their data rather than have their employees find it on a website.
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