This month, our Guiding Principles case study concentrates on nonprofit health systems. We discuss how to apply the principles of alignment, engagement and accountability to create an executive compensation (EC) system that provides sufficient incentive to drive organizational and individual performance in an industry marked by mounting consolidation and regulation. Our Guiding Principles website includes new case studies and a video on this application of the Principles.
Nonprofit health systems — the majority of large U.S. health care facilities—are part of an industry marked by rising consolidation and increasingly complex and stringent regulation. As such, the design of effective compensation systems at such organizations must take into account their nonprofit status while incorporating features to drive organizational/individual performance and adherence to their mission. Applying the EC principles of alignment, engagement and accountability can motivate mission-driven performance and retention while better linking individual performance to organizational strategy and providing critical transparency around rewards and eligibility.
Large U.S. health care providers and medical facilities are mostly nonprofit organizations; many are operated as part of academic medical centers. While their nonprofit status and the tight regulatory regimes in which they operate may limit bonus compensation relative to for-profit companies, health systems’ missions appeal to their employees. Still, they need to provide sufficiently competitive hiring terms, including compensation, to compete with entities across sectors.
Moreover, many health systems use compensation structures and policies that are inconsistent and overly discretionary regarding bonus eligibility, and eligibility may not go deep enough within the organization. These related challenges diminish engagement and accountability, while also posing recruiting challenges, especially when target hires are from for-profit companies or would have to relocate to a less desirable geographic region to join the health system.
Compounding compensation issues further is the shift in performance criteria driven by health care reform — especially provisions of the Affordable Care Act—from largely quantity of services delivered to quality of care provided, with mounting scrutiny of health-system compensation practices.
In this context, practices associated with the EC principles of alignment, engagement and accountability can be used to promote better individual/organizational performance across dimensions. For example, managers can explain how individual team member’s bonus-related goals relate to strategic imperatives, and help members set SMART — specific, measurable, attainable, realistic and time-related—goals to enhance alignment, engagement and accountability.
Health systems can standardize such explanations and goal-setting into documents or other materials shared organization-wide, to improve transparency and understanding, including as related to strategic goals and imperatives, compensation criteria and eligibility.
To determine compensation levels and ensure they are competitive, benchmarks should be created based on the broader health care provider market, with a focus on moving eligibility as deep into the organization as possible. To this end it can also be helpful to make anyone in a given pay grade eligible for the associated bonus plan, regardless of title.
The organization should also perform a cost-impact analysis to model the impact of including everyone at a certain level or grade as bonus-eligible, to understand how best to deploy compensation systems—such as releasing new pay grades or bonuses over time rather than over a short time frame. In this regard it’s also helpful to set a “circuit-breaker,” or minimum level of organizational-level financial performance required for any bonuses to be awarded at any level.
In general, health systems should aim for consistent application and communication of a compensation system that ties individual goals closely to corporate strategy and values, while maintaining transparency and driving eligibility deep into the organization. This approach should improve alignment, engagement and accountability while enhancing longer-term recruitment and retention.
Please go to the Willis Towers Watson Guiding Principles website for case studies and videos on this topic.
Don Delves is Willis Towers Watson’s executive compensation practice leader for North America. Email email@example.com or firstname.lastname@example.org.