Revisiting Executive Incentive Compensation: A New Challenge
By Kathy Hastings and Maureen Cotter with Mary K. Totten
Incentive compensation plans are intended 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. Such an assessment can help to determine whether incentive plans and executive performance are aligned with a health system’s current goals and the changing marketplace.
WHERE WE’RE GOING AND WHY
The prevalence of incentive compensation arrangements is growing among nonprofit health care organizations as they consolidate, integrate, and grow in size and complexity. More executive pay is being put at risk, and boards are expanding the types of measures they use to evaluate executive performance.
Annual incentive compensation plans have traditionally focused on rewarding operational performance, of which a primary component has been financial results. There is no question that financial performance is integral to the ongoing viability of the organization and its ability to invest in the future and meet its nonprofit mission. However, organizations are finding themselves in a position where resources must be expended to execute long-term strategies, which may affect short-term financial results.
In these cases, emphasizing measures of annual financial success in determining executive compensation may not be the right recipe for success. Specifically, these organizations often grow in size and scale as part of multiyear strategies to simultaneously address a variety of environmental factors that impact organizational performance [see Change Agents, Page 18].
Boards can benefit from reviewing the areas of performance their executive compensation plans are measuring and how measurement and rewards are structured. Te aim is to ensure that these plans truly focus on driving achievement of both shorthand long-term critical organizational goals.