Aligning Executive Compensation with the New Health Care Paradigm: What the Board Needs to Know

Strong health care leadership has never been more important – or more demanding – than it is today. Reform-era chief executives must combine competencies in leadership, strategy development and execution to steer their hospitals and health systems through unprecedented transformational change. The thoughtful and meticulous construction of performance-based incentive compensation programs, overseen by knowledgeable and engaged health care governing boards and their compensation committees, are also critical to success.

This three-part Monograph series, published by the AHA's Center for Healthcare Governance, offers guidance on proactively considering best practices in executive pay, including the changing role of incentive compensation, good governance practices to mitigate risk, and choosing appropriate peer comparison data to support the compensation decision-making process.


SullivanCotter Opens Participation in the 2015 Advanced Practice Clinician Compensation and Pay Practices Survey

SullivanCotter has opened participation for the 2015 Advanced Practice Clinician and Pay Practices Survey. As changes in health care delivery continue to accelerate the demand for advanced practice clinicians (APCs), the survey is a source of valuable insight into APC compensation levels, trends and pay practices.

Read the full article

Revisiting Executive Incentive Compensation: A New Challenge

SullivanCotter’s Kathy Hastings and Maureen Cotter, along with Mary K. Totten, recommend a review of executive incentive compensation plans to focus executives’ attention on their organizations’ most vital priorities and initiatives.

As health care organizations revise their business strategies to address the ongoing transformation of care delivery and payment, health care boards also need to reassess the structure and measures of performance in their executive incentive compensation plans.

read the full article

Effective Physician Compensation in the Movement from Volume to Value

As the health care industry undergoes transformational change to deliver better value to customers, board members and executives face uncertainty around the degree and pace of change. The pressure to simultaneously improve the health of populations, enhance the patient experience, and reduce the total cost of care has spurred fundamental change in the funding and delivery of health care.

SullivanCotter’s Timothy J. Cotter and Mark Ryberg analyze not only the emerging trends but also describe the process necessary to make this transition a successful one.


Peer Group Selection in Foundations, Charities and Other Not-for-Profit Organizations

Compensation insight: Reasonable executive compensation

Foundations, charities and other not-for-profit organizations face unique pressures from the labor market, regulators, donors and other stakeholders when it comes to executive compensation. Establishing an appropriate peer group for compensation comparisons is essential.
The committee must take the necessary steps to (1) define the criteria for peer group selection; (2) identify the right data sources that will provide comparable comparisons; and (3) ensure the recommended compensation is competitive and reasonable. This Compensation Insight will take a closer look at each of these steps.

Peer group Selection

Peer group selection starts with defining the criteria. A board-designated committee should discuss the organizational characteristics that influence the scope and complexity of the positions that are being benchmarked and determine how the proposed peer group organizations are aligned with those characteristics. Careful consideration should be given to organizations that are proposed but do not align with size, scope, talent or other defining characteristics. Once the committee reaches consensus on the peer group, data can be collected and analyzed for review and discussion as a committee agenda item.

Defining executive peer group selection criteria

When developing a custom peer group for executives, committees should consider the following criteria:


  • Operating Model. The operating model influences the scope and complexity of executive roles. For example, a private grantmaking foundation will have different executive staffing needs than a community foundation. A charity may have multiple chapters or affiliates, or it may be a national organization with regional offices.
  • Size. Executive compensation levels are often correlated to the size of an organization. For foundations, size is defined by assets, while public charities define size by revenue and other factors, such as the number of employees. Standard practice is to include organizations that range from one-half to two times the size of your organization, although there may be appropriate circumstances in which that range is expanded. Ideally, the median size of the peer group, however measured, approximates your organization’s size.
  • Talent Market. The talent market can influence position comparability, particularly when specialized education or experience is required. For example, research institutes can find comparable positions in higher education. Development positions can also be found in higher education, social welfare charities or health care organizations.
  • Geographic Location. An organization’s location often influences the level of executive compensation. The cost of labor can vary from one place to another and executive pay in or near large, metropolitan areas is often higher (attributable to higher cost of living).
  • Profit Status. While the regulations define comparable organizations as both taxable (typically for-profit) and tax-exempt (not-for-profit), the use of similar organizations is often the most defensible. However, there are circumstances when comparable positions can only be found in general industry. For example, a large, global charity may not have sufficient peers to benchmark its head of development, but the sales and marketing positions in taxable organizations may require similar skill sets and, therefore, provide strong comparability.

Customizing a peer group for unique positions

Some positions have a unique talent market that differs from the rest of the executive team. In these cases, it may be necessary to further customize a peer group to ensure comparability. Examples of such positions are chief investment officer and head of development.

Determining a position-specific peer group starts with evaluating whether the talent market, scope and complexity of a position are different from the rest of the organization. If so, some factors to consider include the following:

  • Investment Executives. The top investment executive position warrants a customized peer group largely based on the organization’s assets under management, which is very different from total assets. Peer group criteria should also consider peer investment objectives, the type of funds being managed (endowment, pension or other type), the complexity of the portfolio and the staffing model used.
  • Development Executives. The top development executive position warrants a customized peer group largely based on the funds the individual is responsible for raising, which is very different from the organization’s revenue. Peer group criteria should also consider where funds are sourced and the degree of complexity associated with securing those funds.

Challenges in peer group development

One of the challenges with developing an appropriate peer group is finding sufficient data for similar organizations. Generally, a minimum of 15 peer organizations will provide a sufficient sample size. However, an organization could consider adding other types of tax-exempt organizations of comparable size and geographic location (e.g., private foundations, public charities, associations). For example, a large museum in New York might recruit talent from a New York-based foundation (or vice versa), and an arts or cultural institution may recruit from academia. In any case, the rationale for expanding the diversity of the peer group should be carefully documented.

Data Sources

Peer group data illuminate market practices, including competitive levels of compensation and benefits pay practices related to supplemental executive benefits and variable pay. Diversity in the types of tax-exempt organizations requires consideration of a broad range of organizational characteristics when developing peer groups for compensation comparisons. In addition, some positions may require review of the pay practices from multiple peer groups to evaluate comparability from all relevant perspectives. Peer group data can be compiled from published surveys, a custom survey conducted on the organization’s behalf by a third party or the IRS Form 990.2 For many organizations, published surveys provide sufficient and reliable data on executive compensation practices among comparable organizations. For others, published surveys may not fully reflect a unique operating model or talent market for particular positions. Additionally, most surveys only report cash compensation data and exclude the value of other elements, such as health, welfare and retirement benefits that must be considered when evaluating total compensation for purposes of reasonableness. In these cases, it may be more appropriate to gather data through a custom survey of compensation practices among peers or from IRS Form 990. However, interpreting Form 990 can be challenging because it often includes one-time taxable compensation events and accruals that may upwardly skew the total compensation data reported.

Reasonable compensation

Tax-exempt organizations must ensure that their executive compensation programs are reasonable.3 According to Internal Revenue Code Section 4958, if a 501(c)(3) or (c)(4) organization (excluding private foundations that are subject to different regulations under Internal Revenue Code Section 4941) pays unreasonable compensation to executives, those executives and the individuals who approved their compensation may find themselves subject to excise taxes. However, compensation is presumed to be reasonable if the organization meets the following three requirements for the “rebuttable presumption of reasonableness” before the compensation is paid:

  • The compensation is approved by an authorized board or committee (such as the compensation committee) that is entirely composed of independent individuals.
  • The board or committee relies on appropriate comparability data.
  • The board or committee contemporaneously documents the basis for its determination that the compensation is reasonable.

Appropriate comparability data for purposes of establishing the rebuttable presumption of reasonableness under federal tax law comes from appropriate peer group comparisons. According to the regulations, an appropriate peer group is one that represents similar organizations with like positions. Even those organizations that are not 501(c)(3) and (c)(4) organizations (such as private foundations) often voluntarily adhere to these three requirements in making and documenting compensation decisions in order to demonstrate good governance.

Good governance

The committee should reevaluate the data sources and the peer group regularly to ensure their continued appropriateness and document the rationale underlying any changes. By including this on the annual agenda, organizations can ensure that committee members have an opportunity to take part in the evaluation.

The committee’s minutes should articulate the review and approval process regarding the peer group, including the selection criteria used, the rationale underlying those criteria and all third-party opinions. The committee should thoroughly review those minutes to ensure that they constitute a complete and accurate record. Remember, any IRS or state attorney general audit is likely to happen well after the decisions have been made, the committee memberships changed and the memories faded.


The committee should reevaluate the data sources and the peer group regularly to ensure their continued appropriateness and document the rationale underlying any changes. By including this on the annual agenda, organizations can ensure that committee members have an opportunity to take part in the evaluation. The committee’s minutes should articulate the review and approval process regarding the peer group, including the selection criteria used, the rationale underlying those criteria and all third-party opinions. The committee should thoroughly review those minutes to ensure that they constitute a complete and accurate record. Remember, any IRS or state attorney general audit is likely to happen well after the decisions have been made, the committee memberships changed and the memories faded.


1. We have used “committee” to refer to the committee of the board of trustees or directors that has the responsibility for making decisions regarding executive compensation (or to the whole board if it has the responsibility).
2. IRS Form 990 is the annual information return for tax-exempt organizations, which includes disclosure of compensation and benefits. Private foundations file a similar Form 990-PF. References to “Form 990” are intended to encompass both versions.
3. This discussion is intended only as a high-level summary of very complex tax rules relating to reasonable compensation in tax-exempt organizations.


Transforming Executive Incentive Compensation

In the American Hospital Association’s Center for Healthcare Governance article "Transforming Executive Incentive Compensation," Managing Principal Jose A. Pagoaga outlines how health care governing boards can reexamine the structure and metrics of their organization’s executive incentive compensation plans to ensure that they address current market conditions and are aligned with current business strategies and goals.

Has your organization transformed their executive incentive plans to meet changing business needs?

read the full article

Simple and Strategic: The Next Generation of Executive Benefits

This article, featured in the December 2014 issue of Becker’s Hospital Review magazine, provides insight into executive benefits trends that address the changing needs of the hospitals and health care systems.

read the full article

SullivanCotter’s 2014 Manager and Executive Compensation Survey Highlights

Now in its 22nd year, the survey provides data to help health care industry leaders meet the challenges of regulatory compliance and performance-driven executive compensation.

Read the full article

Kim Mobley Spoke at the American Health Lawyers Association’s FMV Affinity Group Roundtable Discussion

SullivanCotter Managing Principal Kimberly Mobley presented with a panel of speakers during the FMV Affinity Group Roundtable Discussion on “hot button” physician compensation issues. The webinar took place on November 14, 2014.

The Fair Market Value (FMV) Affinity Group is part of the Hospitals and Health Systems Practice Group sponsored by the American Health Lawyers Association (AHLA). The FMC Affinity Group committed to promoting a dialogue on the many methodologies of developing FMV for hospital referral source transactions, and to fostering discussion with respect to common and divergent experiences across the country with respect to valuation of referral source transactions and assets, with the goal of assisting members in constructing compliant hospital-referral source transactions.

For more information, click here.

Debra Slater Spoke at the Center of Advancing Provider Practice’s APRN/PA Annual Summit

This educational summit covered a variety of topics including innovative models of care, building the business case for advanced practitioners, regulatory and compliance issues and compensation trends.

To learn more about this event, visit their website by clicking here.

Brad Vaudrey Addresses the AICPA’s 2014 Health Care Industry Conference

The AICPA Health Care Industry Conference is the one event that recognizes and addresses the industry’s transformative changes and their varying impact on CPA, physician and administrator stakeholders.

For more information on the AICPA Health Care Industry Conference, click here.

Michelle Johnson and Joe Levitch Address the 2014 VHA Upper Midwest Annual Meeting

VHA Inc. is a national network of not-for-profit health care organizations working together to improve performance and efficiency in clinical, financial and operational management. With 12 regional offices and staff in Washington, D.C., VHA serves more than 1,350 not-for-profit hospital and more than 72,000 non-acute health care facilities nationwide.

For more information, click here.

The Growing Influence of For-Profit Pay Practices on Nonprofit Executive Pay

SullivanCotter’s Sally LaFond and John Collins discuss how governing boards of not-for-profit hospitals and health systems are reexamining their executive compensation programs to support evolving business strategies and include the appropriate mix of pay focused on outcomes.

Compensation programs should reflect the new competitive environment while still adhering to the charitable mission and the requirement to pay no more than reasonable compensation. This is no easy task since the competition for proven executive talent is fierce and is now coming from both within and outside of healthcare, including the for-profit sector.

read the full article

SullivanCotter Partners with McDermott Will & Emery in Presenting the Complimentary Webcast: Addressing and Managing Challenges in Health Care Executive Compensation

Health care reform and consolidation challenges have dramatically transformed the health care industry. To succeed in this current climate, it is critical for organizations to have a strong executive team at the helm. What are the latest pressures forcing your organization’s compensation strategy to change, and how can you mitigate risks?

McDermott Will & Emery and SullivanCotter presented this complimentary webcast that focused on the current trends and challenges in executive compensation for the health care sector.

Date: Tuesday, September 23, 2014

Time: 1:00-2:00 p.m. EDT

Cost: Complimentary

This program was tailored for hospital and health system professionals who want to evaluate the executive compensation environment. This webcast focused on industry concerns such as:

  • Industry consolidation.
  • Chief Executive Officer retirements.
  • Financial realities/declining reimbursements.

The webcast also provided insights on:

  • Latest trends and best practices in retention strategies, retirement benefits and succession planning.
  • Compensation decision making with appropriate fiduciary oversight.
  • How state regulators are addressing the challenges.

For more information, please click here.

The American Medical Group Association (AMGA) today announced findings from SullivanCotter’s 2014 Medical Group Compensation and Financial Survey

The American Medical Group Association (AMGA) today announced findings from the 2014 Medical Group Compensation and Financial Survey conducted by the national consulting firm of SullivanCotter

Survey data indicate the average increase in physician compensation is 2.9 percent and small upward and downward movements in compensation based on specialty area. This survey gives a complete financial picture of medical group operations in one volume, providing compensation, productivity, and financial operations data from healthcare providers throughout the United States.

Read the full press release

Modern Healthcare Examines Executive Compensation Trends Using SullivanCotter Survey

This year’s article “Hospital Executives See Slower Growth In Compensation” examines the increases in total compensation for hospital executives and the correlation between pay and quality of care.

Both Kathy Hastings and Tom Pavlik contributed analytical insights that were quoted in the article.

Read the full article

Aligning Physician Compensation With Strategic Goals

Authored by MCHS and SullivanCotter, the article “Aligning Physician Compensation with Strategic Goals” provides an in-depth look at the challenges MCHS experienced. By executing strategies that included dual leadership, shared services and automated data management and reporting, MCHS was able to implement a centrally administered, system-wide plan with consistent compensation metrics. “The new model incorporates quality metrics, provides physicians with regular reports of their performance, and already has resulted in greater physician attention to outcomes, safety, and patient experience.” The article was authored by:

  • Brian Bunkers, MD, site CEO for the Faribault, Northfield, and Owatonna, Minn., clinics as well as the Mayo Clinic Health System, and Chair of the MCHS Physician Compensation Standardization Advisory Group.
  • Mark Koch is Chief Administrative Officer, Mayo Clinic Health System, Rochester, Minn.
  • Becky McDonough is Director, Provider Performance Management Technology, SullivanCotter
  • Brian Whited, MD, is Vice Chair, Operations, Mayo Clinic Health System, Rochester, Minn., and Chair of the MCHS Quality Oversight Committee.

Read The Full Article


The Perils of Payment

Effectively addressing the challenges associated with physician compensation and financial arrangements is a key component for governing boards striving to meet strategic objectives in a high-risk and complex health care environment.

In the July/August 2014 issue of Trustee magazine, Kim Mobley, Managing Principal and National Physician Compensation Practice Leader, and Marc Hallee, Consulting Principal, address compensation issues. The article, titled “The Perils of Payment,” outlines the varying types of physician and financial arrangements that are emerging. It provides a checklist of activities to support effective risk management and board oversight of physician compensation and questions to consider when formulating your organization’s approach to this intricate issue.

read the full article

Executive Summary of the 2014 Employee Benefits Practices in Hospitals and Health Systems Survey

In its third annual survey of hospital and health system employee benefits practices, SullivanCotter compiled and analyzed information from many of the top hospitals and health systems across the country to help answer the questions listed above. Unlike research that includes insurance companies, pharmaceutical manufacturers and other organizations related to the health care sector, this survey focuses solely on hospitals and health systems.

Download the Executive Summary

Principal Dave Hesselink Addresses The Healthcare Roundtable

For more information on this meeting, please visit The Healthcare Roundtable website by clicking here.