“Why?” Trustees are asking. “When the rest of the economy is still slow, when unemployment is still high, when the future is so uncertain—why is pay still rising for healthcare executives?” They claim that salaries aren’t rising much in the rest of the economy, or at least not in their own businesses. They find it hard to understand why they should authorize salary increases for executives when so many people are looking for work.
In other industries, it is true, downsizing has thinned management ranks, and lots of executives are looking for work. No doubt many companies can easily fill their open positions and do so without paying more than they did a few years ago. Further, some can fill their vacancies at lower salaries than they used to pay. Turnover is lower than it was five years ago, so there aren’t that many vacancies to fill, especially not in management ranks. In this environment, it’s no wonder that some companies don’t need to increase pay.
But where this is the case, it is due to supply and demand. Some firms are still downsizing, and few are growing fast enough to need new executives. With low turnover and little growth, there is no need to increase pay, either to recruit or retain.
No doubt there are pockets in the economy where executive pay isn’t rising, but every survey of executive pay in general industry indicates that pay is rising in manufacturing, financial services, and other industries just as fast as it is in healthcare. Most companies froze salaries for a year or two sometime over the past five years (as did many hospitals and health systems), but most large firms are now budgeting for 3% salary increases, the same as in healthcare.
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More important, the economic crisis hasn’t hurt healthcare nearly as much as it hurt other industries. Healthcare organizations didn’t suffer much decline in volume or revenues, and they didn’t need to shed many jobs. There aren’t many unemployed healthcare executives, and there are plenty of vacancies to be filled. With nearly 6,000 hospitals and hundreds of health systems competing for executive talent, there are always plenty of open positions and a lot of recruiting activity. Few hospitals have sufficient bench strength to fill many of their leadership positions through internal promotions, so they need to recruit talent from other organizations, where the candidates are already well paid and aren’t likely to move without a significant raise.
Just as important, healthcare is facing a different kind of crisis—a major transition in the way healthcare services are provided, managed, and paid for. As hospitals and health systems recruit new executives, they are not just trying to fill positions – they are looking for change masters, people who can improve quality and cost-effectiveness quickly and radically enough to keep up with the pace of change in the industry. They are looking for the best people they can find, not someone willing to start low in the salary range for the job.
At the same time, many hospitals and health systems are doing their best to hold onto executives who are ready to retire, and trying to entice them to stay for another few years. Without strong internal candidates for succession, many healthcare organizations have decided that this isn’t a good time to replace someone who is willing to stay for another few years. This, too, drives up pay, since someone who is really ready to retire and who has already earned a fully competitive retirement benefit, needs some real enticement to stay when there’s no need to work.
This is symptomatic, however, of a larger dynamic that feeds inflation. Boards generally want to retain most of their executives. So long as they are satisfied with performance, they prefer stability to change. They know how much the organization needs to change, and how quickly it needs to adapt to healthcare reform, and they are loath to lose good leaders now. They know executives expect raises and want to be rewarded for good performance. They know how disruptive it can be to lose good leaders.
Fear of losing good leaders, fear of the disruption it might cause—or at least reluctance to take unnecessary risk of losing leaders—tends to make trustees willing to keep raising executive salaries, though they may not believe it necessary and may not understand why other organizations keep increasing pay for their executives. More often than not, boards think their executive team is better than average, so they want to retain them and are willing to pay enough to do so. What they have a hard time understanding is why other boards feel and act the same way.