Compete more effectively in a tight market for executive talent.
Featured in the July 2024 edition of The Governance Institute’s E-Briefings
By Bruce Greenblatt, Managing Director and Executive Workforce Practice Leader, SullivanCotter
Healthcare continues to evolve—and some organizations are struggling to keep pace. With complexity at an all-time high and the supply of talent limited, the need to recruit, retain, and engage leadership talent is greater than ever. Designing executive pay programs that are market-competitive and drive organizational performance while also aligning with the overall talent strategy is complicated. Moreover, healthcare boards and their compensation committees are tasked with ensuring executive compensation is fair and reasonable and reflects the mission and values of their organizations—all amidst changing market pressures and growing demands.
Does your organization know how to move forward? With these challenges in mind, this article outlines four important priorities for compensation committees to consider as they oversee the organization’s approach to executive compensation, performance, and talent management.
Pay Competitiveness
In a competitive talent market, effectively attracting and retaining key leaders is more pressing than ever. As some leaders continue to step away and as operations become more complex, there is a critical gap in expertise. The skills required to lead through such change are evolving, and greater value is being placed on those able to lead transformation efforts, drive integration, and operate in a volatile environment.
Moreover, demand continues to outstrip supply as the pool of qualified executive talent is increasingly limited. According to SullivanCotter’s Executive Compensation Pulse Survey conducted in May 2024, 87 percent of health systems are either increasing executive recruitment efforts or undertaking the same level of activity as compared to 2023. All of this is putting upward pressure on total compensation—particularly via higher base salaries.
Compensation committees must ensure that compensation is competitive enough for external candidates and existing high-performing leaders who may be attractive to competitors. Since financial resources are limited, compensation decisions should be measured and strategic, focusing foremost on the most impactful roles. Rewards must be differentiated in a dynamic marketplace to ensure the total spend is optimized—some roles may be appropriately compensated in the mid-market, while others may warrant a compensation premium based on their criticality and impact.
Talent Strategy and Organization Design
Considering evolving talent needs and the limited talent supply, compensation committees and leadership should pay particular attention to the executive talent strategy and succession planning process. Increasingly, an organization’s best source of talent for key leadership roles is found internally. Having a deliberate and ongoing process in place to identify talent requirements, assess availability and needs, mitigate any flight risks, and define and execute development plans is key. Compensation committees should be appraised at least annually of any related succession planning initiatives, including leadership performance, emergency successor readiness, and long-term pipeline development. Given the high demand and changing needs for CEO talent, boards and compensation committees should be especially diligent in developing and monitoring succession plans for this position.
In addition to assessing talent strategy for individual positions, it also is important for compensation committees and leadership to assess the overall organization structure to ensure it is optimized and aligned with strategic objectives. With upward pressure on individual compensation, organizations are assessing whether their total leadership headcount and spend is optimal. In SullivanCotter’s recent Executive Compensation Pulse Survey, 88 percent of health system participants indicated that they have recently or plan to assess the effectiveness of their organizational structure. These actions include reviewing the headcount, spans of control and management layers, reducing or freezing hiring, and developing titling/leveling/career architecture guidelines. Health systems are focused not only on cost optimization but also on talent development by clarifying leadership role definitions and creating clearly defined pathways for career progression through the organization.
Revisiting Incentives
While the initial disruption of the pandemic has subsided, several market pressures are still changing the way executive performance is measured and rewarded. Compensation committees should ensure that incentive performance measures align with operating and strategic priorities as they evolve and that goals have been calibrated appropriately. With financial and operational volatility as the backdrop, goal calibration for executive incentive plans poses a significant challenge. SullivanCotter’s research indicates that nearly half of healthcare organizations have revisited their goal calibration for 2024 incentives.
Changes include the following:
- Evaluating both relative performance compared to peers and absolute scoring results for indicators such as workforce or patient engagement, as an example.
- Widening the range between threshold and target and target and maximum goals to account for volatility and uncertainty in forecasting.
- Setting goals based on expected improvement levels rather than simply absolute scores.
- Seeking third-party assessment of the performance objectives to provide validation around the goals.
In addition to calibrating performance goals, compensation committees should also evaluate incentive program circuit breakers to ensure they remain appropriate. Circuit breaker provisions reduce or eliminate incentive payouts if minimum financial performance is unmet and act as a fail-safe if affordability becomes an issue. Given the volatility of performance in the market and the challenging economic environment, circuit breakers must be meaningful and reasonable. They should balance the need for financial stewardship while also recognizing that other mission-related performance priorities should be rewarded, including delivering high-quality care, ensuring greater patient access, engaging the workforce, and providing exemplary patient service.
Pre-pandemic, a typical circuit breaker would reduce or eliminate incentive awards for performance below 75 to 85 percent of the budgeted operating margin. Such standards may not be appropriate today, with margins hovering, on average, at 1 percent or below. Thus, consideration can be given to setting absolute dollar thresholds for the circuit breaker and/or using a tiered method to reduce awards in pre-defined stages based on actual results. Alternatively, the circuit breaker could be eliminated while a greater weight is placed on financial performance in the organization’s scorecard to ensure an appropriate focus on fiscal stewardship.
Board Governance
With the heightened scrutiny of executive pay levels within tax-exempt healthcare organizations, it is increasingly important for compensation committees to ensure they take a broader view of the compensation program beyond just market competitiveness. As adjustments are considered for the compensation program and individual pay decisions, considerations should also include other essential factors such as pay equity, mission, performance, talent strategy, and more. By adopting a more holistic approach to these decisions, boards and compensation committees can ensure that executive reward programs remain highly defensible and beyond reproach as market conditions evolve, new risks emerge, and organizational dynamics shift.
Conclusion
In the current environment, compensation committees must remain diligent in their oversight and governance. Take a broad view as your organization navigates the nuances of developing a competitive compensation program. Doing so can help compensation committees be confident that their approach will meet organizational objectives in a fiscally prudent manner while supporting recruitment, retention, performance, and talent needs in challenging times.
Key Board Takeaways
Is your executive compensation and talent strategy optimized in today’s environment?
Financial, operational, and workforce challenges within the healthcare industry are at an all-time high. The executive talent market is extremely competitive as the demand for talent continues to outstrip supply. Attracting, retaining, and rewarding leadership is critical.
Boards should consider the following priorities as they reassess their organization’s approach to executive compensation, performance, and talent management:
- With upward pressure on total compensation and unabating financial challenges, explore opportunities to optimize compensation spend. Strategies include differentiating compensation for direct rewards to the most critical talent. At the same time, prepare for highly competitive offers when recruiting externally.
- Ensure critical talent is retained and seek opportunities to build from within. Assess talent risk and direct interventions to critical positions that may be at risk. Focus on succession planning and leadership development.
- Optimize the organization structure by focusing not only on headcount, spans of control, and management layers, but also on titling and career architecture to support talent development.
- Revisit incentive plans to ensure performance goals are properly calibrated and that circuit breakers balance financial sustainability with rewards for advancing the mission.
- Ensure a holistic review of executive compensation beyond just market competitiveness, including consideration of pay equity, mission alignment, performance, and talent strategy.