SullivanCotter, the nation’s leading independent consulting firm in the assessment and development of total rewards programs, workforce solutions, and technology and data products for the health care industry and not-for-profit sector, recently released results from its 2020 Manager and Executive Compensation in Hospitals and Health Systems Survey — which is now in its 28th year. This year’s results include information from more than 2,300 organizations. More importantly, the survey contains the last set of benchmark data compiled prior to the onset of COVID-19 and provides important pre-pandemic reference points for assessing executive compensation programs.
“While pay actions are being impacted by the pandemic, the foundational structure of executive compensation programs has generally remained unchanged. The 2020 survey data can be used to assess the competitiveness of base salaries, the level of incentive opportunities and other program design considerations. In light of the impact of the pandemic on business operations, now is an appropriate time to evaluate the broader implications of COVID-19 on your talent strategy, compensation philosophy and program design to ensure they reflect your organization’s new priorities,” said Tom Pavlik, Managing Principal, SullivanCotter.
Base Salaries in 2020
In recent years, executive salaries were trending upward due to the focus on recruitment and retention of key leadership talent and an increasingly complex health care market. When comparing data reported by organizations that participated in SullivanCotter’s survey in both 2019 and 2020, median base salaries going into 2020 increased at a rate of 3.4% to 5.6% for the most senior executives of independent health systems (Vice Presidents, Senior Vice Presidents, CFOs, COOs and CEOs) as opposed to 0.8% to 4.1% for those executive positions at system-owned hospitals.
However, due to the financial impact of COVID-19, many organizations have implemented temporary executive base salary reductions. According to SullivanCotter’s COVID-19 Executive and Employee Compensation Practices Survey series, which was conducted between April 2020 and August 2020 to provide insight into the current practices of more than 100 large health systems, only 14% of organizations were considering or had implemented executive base salary reductions as of April. By May, this number had risen to 31%. Through August, implemented salary reductions reached 45%. However, of this 45%, nearly half had already reinstated the pre-pandemic salaries with the remainder expected to do so by the end of the year.
Base Salary Increase Budgets
An analysis of the survey data indicates that, prior to COVID-19, median salary increase budgets for health care executives were expected to remain consistent with recent years at 2.7% for independent health system executives and 3.0% for system-owned hospital executives. The pandemic has impacted the financial condition of many organizations and is moderating salary increase plans for FY2021.
According to SullivanCotter’s proprietary COVID-19 research, about 40% of organizations had determined their FY2021 executive salary increase budgets by mid-August. The preliminary median executive salary increase budget is 2.5%, with 15% planning to freeze executive salaries. The other 60% of organizations had not yet determined their salary increase budget, and 20%-25% are delaying the timing of these increases. These figures may change over time as financial performance will impact the ability to fully fund planned budgets, and it is anticipated that more organizations may consider executive salary freezes for FY2021.
Executive Annual Incentive Plans
Executive annual incentive plans (AIPs) are still the norm as organizations are increasingly focused on system-wide alignment and pay-for-performance. Prior to COVID-19, 89% of independent health systems and 67% of system-owned hospitals utilized AIPs with award opportunities varying by health system size based on net revenue.
According to SullivanCotter’s research, however, COVID-19 has had a significant impact on executive incentive plans for FY2020. As of mid-August, more than half of the participating organizations had implemented or were still considering changes to FY2020 plans. While one-third did not yet know how they will handle their FY2020 annual incentive payouts, approximately 20% are eliminating or considering eliminating payouts, nearly 30% expect to pay below target, and only about 20% expect to pay at target or above.
Considerations for 2020 and Beyond
As hospitals and health systems plan for what lies ahead and look to support financial sustainability and mitigate risk, organizations should consider both market practices and their individual financial circumstances when determining their executive compensation and workforce-related actions moving forward.
“SullivanCotter’s 2020 survey reflects the most recent normative year prior to COVID-19. Due to the current pandemic and the extremely dynamic environment, the survey data should be used thoughtfully, with appropriate context, and with sound business judgement as you are planning and considering your pay decisions for FY2020 and beyond,” said Bruce Greenblatt, Managing Principal, SullivanCotter.
There are a number of important executive compensation considerations for organizations to consider as they move forward:
- Be mindful of how to appropriately use 2020 survey data. Understand the timing of the data and consider what you are trying to assess before using them. The data can be helpful in benchmarking the competitiveness of compensation program elements and award opportunities.
- Rely on sound business judgement and discretion when evaluating base salary actions and incentives for FY2020.
- Plan to revisit incentive performance goals for FY2021 to ensure they are tailored to the current environment.
- Assess the broader impact of COVID-19 on executive talent strategy and review the compensation philosophy and program design.
- With continued uncertainty in FY2021 and beyond, remain mindful of the environment and be flexible.