Over the past several years, a number of our clients have postulated that the increasing prevalence of physician-led not-for-profit health care provider organizations is likely to bring a decline in the prevalence of incentive-based pay in the executive ranks. Typically, these conversations point to a few well-known organizations as quintessential examples of the success that can be achieved without maintaining incentive plans to motivate executives. There are several assumptions underlying this theory:
- Physician executives are not motivated by incentives in the same way that other executives are motivated.
- The recruitment process at the organization is flawless (or nearly flawless) in its execution, hiring only those who are self-motivated and of outstanding quality.
- On those (rare) occasions when there is a miss in the hiring process, the organization is swift to have the difficult conversations to either turn performance around or exit the individual from the organization.
- Other organizations can be readily converted to a similar model.
To test this theory, Claire Anastasia Kitz, a student at Hamilton College, and I conducted research among several experts in the field. Our conclusion was that, while an incentive-free model may be attractive on some level, it’s unlikely to be widely implemented, despite the increased prevalence of physician leadership in the health care sector.
Health care provider organizations are increasingly hiring physicians into executive leadership positions and we expect this trend to continue, given the many potential benefits of the approach:
- Physicians have the knowledge and determination to enable health care organizations and the overall industry to make necessary changes critical for economic viability and growth, as well as for the delivery of improved value to patients.
- Physicians have an intimate understanding of the health care process; they’ve been in the trenches and are able to carry on more educated discussions with their board and other stakeholders regarding the critical elements required for their organizations to operate at optimal levels.
- Given their understanding of the tasks that must be performed to move toward the value-based purchasing model, physicians may be better prepared to understand and manage the realignment toward value-based care.
- Some physicians feel they can make a bigger impact on patient care by leading change from the top and value that to some degree.
- Certainly, some physicians struggle with cultural challenges when making the transition to executive leadership posts. (See Thomas H. Lee, M.D., “Turning Doctors into Leaders,” Harvard Business Review, April 2010.). However, their background and training allow them to design effective and actionable performance metrics to improve patient care, staff and patient satisfaction, and the financial prospects of the organization.
WHERE EXECUTIVE INCENTIVES FIT IN
Whether for-profit or not-for-profit, health care delivery organizations should — and typically do — have meaningful incentive plans for their executives, reinforcing their overall mission as an organization. In the not-for-profit sector, in particular, we frequently see a balanced-scorecard approach to incentive metrics, with a heavier weighting on quality and patient satisfaction metrics, and a lower (though still significant) weighting on financial metrics.
Physician leaders are uniquely suited to identify key clinical and patient satisfaction measures and understand their impact on the overall quality of care. They’re also uniquely suited to developing solutions to address poor quality indicators. Their facility with reviewing and interpreting the volumes of data available serve them well when making informed decisions and identifying the most effective approaches to the improvement of quality and value.
As executive leaders, however, they are charged with ensuring that the entire organization (not just their personal practice) is moving in the right direction along the quality and value spectrum. And, like any other executives, physician leaders will expect to be compensated for their successful management of today’s complex health care delivery organizations. While some organizations have enjoyed great success without the use of incentives, they are clearly in the minority and have a history and culture that supports such a model. For others, well-designed executive incentive plans can serve to drive and reward needed behaviors and results.
Increasingly, members of not-for-profit health care boards are being recruited from for-profit companies, bringing with them a knowledge base and belief in the power of incentives to drive performance. As the composition of the compensation committees of these organizations changes, so too does the focus on performance, with increased attention paid to its alignment with pay levels. Fixed pay (base salary and retirement) has moderated in the health care industry over the past decade, while performance-based pay has figured more prominently in the pay mix, directly reflecting the expectations of committee members.
While physician leaders may be less enthusiastic about incentive pay than those in other industries, we’ve observed an increasing acceptance and recognition of the value of incentive plans in the health care delivery system. When viewed from the perspective of serving the patient— rather than the shareholders — incentive plans become another tool in the doctor’s black bag to enhance quality, patient care and value, while providing positive reinforcement for success.
Despite the undisputed success of prominent health care organizations that have eschewed executive incentive plans, we don’t foresee a wholesale migration of the industry to similar models for a number of reasons:
- Board members and, increasingly, non-physician executives have their roots in the for-profit sector and firmly believe in putting pay at risk pending the achievement of clear performance metrics.
- Physicians often take on executive positions in order to further the mission of providing quality patient care, and are eager to use all means at their disposal to move the bar forward. (See Andis Robeznieks, “Hospitals Hire More Doctors as CEOs as Focus on Quality Grows,” Modern Healthcare, May 10, 2014.)
- Data on performance against quality metrics are readily available, allowing organizations to easily establish benchmark standards versus their peers. And performance against such metrics influences the organization’s financial success, through value-based purchasing.
- Where organizations have not employed executive incentive programs, their success can be attributed to their unique cultures, which would take many years to establish at other organizations.
We continue to believe that executive compensation programs should “incent and reward the behaviors and processes that reinforce the activities organizations undertake to create sustainable long-term value for multiple stakeholders,” as stated in Willis Towers Watson’s Principles and Elements of Effective Executive Compensation Design. Executive incentive plans, properly designed, are positioned to do exactly that for health care providers as well by driving behaviors that result in quality care for patients, which ultimately results in financial success for the provider organization.
Susan Sulisz is a managing director in Willis Towers Watson’s executive compensation consulting practice in Detroit and a leader of the firm’s not-for-profit consulting team. Email firstname.lastname@example.org or email@example.com.