Reprinted with permission from Trustee magazine, May 1999, 15-19.

An Incentive for Community Health:

Linking CEO Compensation to Community Goals

During a conference call with AHA regional executives, I described a project on linking performance evaluation to community health. When I had finished, one of them laughed and responded, "That's the craziest damned thing I ever heard."

Linking CEO compensation to community health only makes sense if your board uses incentive compensation (see "Governing Performance," Trustee, June 1997). Some boards operate in contexts that don't enable them to use incentive compensation; others simply don't believe in it. But the practice of using incentive compensation has more than doubled in the last four years—to more than 80 percent of hospital CEOs. Even if you agree that incentive compensation makes sense and that community health goals are essential to your strategic direction, you still might question whether you should tie your CEO's salary to it.

As executives and trustees know, a person's health is actually linked more closely to lifestyle and socioeconomic status than it is to medical care and access, which tends to focus on fixing illness. So the ultimate goal of improved community health is linked to thousands of variables, some of which do not have a measurable impact on community health for 10 years, if at all, and many of which have nothing to do with hospitals. So why try to hold hospital executives responsible for outcomes over which they have little control?

WHY, INDEED

"Creating healthy communities and improving health has got to be a core business strategy for the organization," says Phil Newbold, president and CEO of Memorial Health System in South Bend, Ind. "My board expects me to spend about 25 percent of my time on that, because it's one of the organization's four major strategic goals."

Carolyn Lewis, trustee of Greater Southeast Health System, Washington, D.C., says that "it's not outside the boundaries for trustees to challenge the process of CEO evaluation by linking it to improving community health—or to ask whether the hospital they represent even needs to exist. Let's remember that community health, not structures, is the primary asset entrusted to the board."

Joe Isaacs, vice-president of the AHA's Division of Trustee and Community Leadership, agrees. "When I'm out making presentations with groups of trustees, I find that many of them get excited about the idea" of linking CEO Compensation to community health. "But they quickly hit the wall when they confront the question of how to do it."

READY START, GO

Assuming that your governance team believes in incentive compensation, how do you link compensation to community health?

First, only a portion of the salary should be linked, because financial performance and clinical quality are essential to every hospital's performance. Depending on your strategy and community context, you should also include other measures, such as network development. The attached chart (click here; 413k) shows 13 possible elements of CEO performance evaluation (not necessarily tied to incentive compensation).

The American College of Healthcare Executives first included community health as a recommended component of CEO performance evaluation in a policy position in 1993. According to ACHE, the evaluation should link attainment of organizational objectives with the CEO's personal performance objectives.  Two key organizational objectives are:

The CEO's personal performance goals are the third component of the evaluation.

A board can embrace a hospital's broader impact on community health—if trustees and the CEO are willing to spend the effort needed to identify measures that make sense to them, to their organization, and for their community. Unscheduled read-mission rates are not a community health status measure, but they can show a lot about patient education, follow-up procedures, and coordination across sites of care, as well as hospital performance. Immunization rates are measures of service penetration, not community health status. But they can also be an excellent measure of performance, especially as an indicator of successful coordination among organizations helping to immunize people.

The establishment of primary care clinics in an area's schools hardly lends itself to measurement at all. But it might be the perfect indicator, for example, of how well the chief executive is advancing a hospital's strategy to develop new partnerships to improve market intelligence and service for unenrolled but eligible people and for areas generating ER use unnecessarily or for preventable illnesses. For the following year, then, it might make sense to measure enrollments and use of the emergency department.  None of these variables is a measure of community health status, but any number of indicators can be a measurable next step toward the longer-term vision of a healthier community.

WORDS FROM THE WISE

For Frank Sacco, CEO of Memorial Healthcare System in Hollywood, Fla., performance goals are not strictly quantified, and the only part of compensation that's affected is salary increase.  The board chairman can increase salary from 0 to 5 percent base don his judgment of how well Sacco led the organization in four areas: finance, clinical quality, community benefit, and general productivity. Each area has two to five topics for performance evaluation, for a total of 12 items that are used in checklists for different kinds of performance reviews.

"CEO performance evaluation is only as good as the board makes it and that means active involvement in several different kinds of performance evaluation," Sacco says. "We have an annual cycle that connects evaluation of senior management, board self-evaluation, and system performance with last year's goals, this year's goals, and the development of next year's goals. It's one ongoing cyclical process of continuous improvement designed around the same small set of goals."

In Springfield, Pa., Crozer-Key stone Health System has received so much attention about the system it's used since 1993that "honestly, it's a little embarrassing," says John McMeekin, president and CEO. "I don't mind telling people about it, but it seems perfectly natural to us. We don't see it as a big deal." Three of 12 system goals were tied directly to improved community health in 1998. The three measurable objectives for performance review on these two goals were:

"Our compensation policy pegs my salary at the 50th percentile for health systems of comparable size and complexity," McMeekin says. "Normally, 70 to 80 percent of goals are reached or surpassed, resulting in total compensation at about the 75thpercentile. Community health is very directly part of 15 percent of the goals, and indirectly tied to others. We use a similar sys-tem for everyone who reports to me.

"In this context, everyone knows that community health matters," he adds. At Memorial Health System, Phil Newbold's bonus can comprise up to 50 percent of base salary. With four bonus areas of equal weight, creating a healthy community can represent about13 percent of total compensation. In 1998, the other three major goals/bonus areas were:

Each goal/bonus area gets two or three measurable objectives tied to it. "The point is not to measure everything," cautions Newbold, "but to design a small set of objectives that really do give an indication of how we're doing on our strategic goals." Fifteen other senior managers are subject to the same goals and measurable objectives. More weight is placed on certain goals and objectives depending on the manager's role in the organization.

Mission Hospital Regional Medical Center is part of the Joseph Health System. St. Joseph, based in Orange, Calif., has a crystal-clear and streamlined approach to setting direction. This approach is found in many different kinds of documents, from board books to management planning documents and community reports. Everyone, from the St. Joseph System board down to the middle managers in each hospital, is on the same page—literally.

Community health and community benefit are explicitly part of chief executive Peter Bastone's annual performance review." The number-one goal of the seven that guide the system and the hospitals is to collaborate with the community to identify, understand, and respond to community needs that have an impact on health and quality of life," explains Bastone. "We establish specific quantifiable targets for each goal. One-seventh of my bonus depends on reaching the targets for community health and benefit."

He cites five principal benefits of having his annual bonus tied to community health: "It allows me to lead courageously; it allows me to use my expertise to formulate initiatives that make a significant impact on the community; it helps me express the values of my organization; it has helped me establish boundaries and goals for stewardship of the organization; and it's wonderful to know that I can be rewarded for having a positive impact on the community in addition to the organization's mission and bottom-line performance."

Approaches to linking executive compensation to community health include:

WIN-WIN

All of the CEOs noted in this story are convinced that linking their compensation to community health benefits the performance of their organizations, their boards, and themselves. "If community health is a core business strategy, it makes perfect sense to tie part of compensation to it," says Newbold. "It helps us keep focused on our strategy. But for this to work, community health has to be a priority for the organization."

He also sees it as valuable to his board. "Linking compensation to community health helps remind you of your values on a daily basis. It helps you get away from measuring everything by money. It puts some of your resources and strengths squarely upstream, targeting prevention, screening, early diagnosis, and other efforts that produce health for our neighbors and patients. That's what we say, and that's what we do."

Sacco would remind trustees and chief executives that clarity of purpose is a critical leadership characteristic in today's tough health care world. "The board and I don't have time to be all over the map on strategy. We have far too much to do to be lackadaisical about direction. If excellence is a home run, focus is a good eye for the ball. Including community benefit as one of only four performance areas helps us keep our eye on the ball. Making the connection to incentive compensation based on community benefit adds a keen edge to our concentration."

"We are absolutely convinced," concludes McMeekin, "that our focus on community health improvement improves our over-all performance. From the very beginning of our system, quick and relatively smooth mergers were possible mainly because the various leadership teams could work together clearly and enthusiastically around community health goals. We tie compensation to community health as part of our success strategy. It's that simple."

Bastone offers a twist that might help your governance team begin discussing whether tying compensation to community health makes sense: "We've been linking compensation to community health since this hospital was purchased by the St. Joseph Health System. This hospital was doing OK before that. But you've heard that saying, 'no margin, no mission'? We believe it's just the opposite: no mission, no margin. Working toward our community health mission reaps far more benefits than costs.  I guess it may sound crazy to people who haven't tried it, but I wouldn't want it any other way."

Richard J. Bogue, Ph.D., then Senior Director of the Division of Trustee and Community Leadership for the American Hospital Association, Chicago.