Healthcare Issues & Trends

Advice & Insights for Healthcare's Leaders & HR Professionals

Are Executives Paid Too Much?

Posted on November 1, 2012 by David Bjork

Next week, voters will decide if compensation at El Camino Hospital in Santa Clara County, California should be limited.  If Measure M is passed, voters will approve “capping the annual salary and compensation package for any executive, manager, or administrator of either the District or El Camino Hospital to no more than twice the annual salary of the Governor.”  Since the California governor's salary will be $165,288 as of December 3, 2012, the passing of Measure M will limit annual compensation at El Camino Hospital to $330,576.

According to an article from The Bay Citizen, nine El Camino Hospital executives currently earn salaries over $330,576.  The current annual salary of El Camino Hospital’s CEO is $695,000.  If Measure M passes, the CEO’s salary will be cut by more than half.

Although executive pay has been a popular discussion point the last few years, Measure M is an unusual action to attempt to limit executive pay.  Should executive pay be limited?  Are healthcare executives paid too much?  These questions are discussed in an excerpt from the book Healthcare Executive Compensation: A Guide for Leaders and Trustees.


ARE EXECUTIVES PAID TOO MUCH?

The short answer is no. Executives are not overpaid. If they were, employers would not willingly pay them as much as they do. And when executives change jobs, their new employer would not pay them as much as or more than their previous employer did. There are exceptions, of course, due to special circumstances, but the question is whether executives as a class are overpaid.
But this short answer does not address the emotional intensity associated with the question, which arises from its moral, political, sociological, and economic dimensions. It is not one question, but at least four:

    1. Are executives paid more than they should be paid?
    2. Why should executives of organizations that are tax exempt and dependent on public funding for Medicare and Medicaid be paid as much as they are?
    3. Why should executives be paid so much more than other employees?
    4. Are executives paid more than they are worth?

People who are paid a lot less than executives—that is, most people—are likely to think executives are overpaid; they have a hard time imagining that a job or a person can be worth so much. The opinion usually comes with a moral veneer—no one should be paid that much. Sometimes the opinion is more explicit—it’s wrong or immoral to pay a person so much.

Much of the deep-seated resentment of executive pay in the healthcare field can be attributed to the fact that tax-exempt hospi¬tals are community institutions paid for in large part by taxpayers. It is colored by the opinion that we all have a right to healthcare services—so no one should get rich off them.

In the political sphere, the resentment takes the form of pro¬posed limits on executive pay and other regulations. In some states, for example, no executive of a public hospital can be paid more than the governor. In others, legislators propose limiting executive pay in hospitals to a multiple of average pay for other employees. The US Congress and state legislatures conduct hearings, launch investiga¬tions, and express outrage against hospitals for allegedly abusing the public trust. Since 1996, federal law and regulation have threatened to impose fines, or “intermediate sanctions,” on executives of tax-exempt hospitals and health systems if they are deemed overpaid, and on trustees if they agree to excessive executive pay.

High compensation for healthcare executives feeds social dis¬content over the widening disparity in wealth and income in the United States. It also drives boardroom debates about the extent to which executives should be well paid while the hospital is trim¬ming costs everywhere else and asking employees to pay a greater share of the cost of healthcare and retirement benefits.
But labor market forces drive pay for executives, just as they do for other employees. Just as doctors are paid differently than nurses, because their jobs are different and represent a different segment of the labor market, executives are paid differently than doctors and nurses. Hospitals may be tax-exempt charities serving the public good, but they are still big, complicated businesses with narrow profit margins, and they need talented executives to keep them strong. Tax exemption and public funding for Medicare and Medicaid have no bearing on what it costs to recruit and retain executives. Each of the 6,000-plus hospitals in the United States needs a group of execu¬tives, creating a dynamic market for executive talent that determines how much executives are paid. There is no rational basis for the view that executives should not be paid as much as they are paid, just a personal attitude, generally held by someone who is paid less.

The intrinsic worth of an individual may be impossible to deter¬mine, but the intrinsic value of a job can be quantified. Economists and most workers judge the value of a job by how much it pays. A job is worth what an employer is willing to pay an employee to do it, or what an employee is willing to accept as payment for the job. Virtually no one doubts that principle—except when it comes to executive jobs.

Hospitals and health systems continually look for ways to reduce their costs. When they come across jobs that cost more than they are worth, they eliminate the jobs and either eliminate the work, redistribute it to other employees, or outsource it to cheaper labor. They view executive jobs the same way. When hospitals and health systems find an executive job that seems to cost more than it is worth, they eliminate it if they can and redistribute the work to other managers. The one action they cannot take is outsource the work to a cheaper labor force, because there is no cheaper labor force capable of doing the job well.  Therefore, executives must be worth what they are paid, because employers keep them on the job and willingly continue to pay what¬ever they are paid. Even when they leave or lose one well-paid job, they can usually find other employers who are willing to pay them just as much as or more than they were paid in their previous jobs.

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