Now that the holidays have passed, and with the Super Bowl a couple weeks away, it is time to think about what your health center will want to accomplish in the area of employee compensation in 2014.
Get your CEO Compensation Governance Program Squared Away
Most health centers do not have a CEO compensation governance program/process that is anywhere near “best practice” or would pass even the most basic disclosure and documentation tests — while it is true that very few health centers have CEO compensation that would be found to be “excessive,” somehow or another any six-figure salary paid to a non-profit executive looks tempting to reporters short of content near their deadlines, and as several health centers have learned over the last few years, being on the defensive with the press is not a good place to be.
The unfortunate truth is that in our “Form 990 Assessment,” the typical FQHC gets an “E” grade, frequently because of issues such as:
- real competitive data isn’t considered in determining how to set compensation — looking at half a dozen Form 990s is NOT a study of competitiveness
- the health center uses internal staff (e.g., finance, HR) to collect data and make recommendations — beyond having the CEO do it, there really isn’t a more obvious conflict of interest in this kind of practice
- the performance appraisal/management system is weak and not tied to actual job performance
- incentive plans are discretionary, or allow the Board to change the objectives after the year is over, or “excuse” the failure to reach objectives
- governance processes don’t use some of the key factors that make up “best practice” programs — a compensation philosophy, compensation committee, the use of independent outside advisors, etc.
The biggest problem we have observed over the last 20 years, however, is the failure to properly, contemporaneously, document the Board’s decision making-process. The best program in the world is meaningless if there are no reports from the advisors, no minutes of the meetings, and no explanation of why the CEO is paid whatever they are paid.
If the information “on the record” (including the information in your Form 990) isn’t enough for an outsider to understand your program, and your CEO’s pay, you need to get to work.
Make Sure Your Pay Structures are Current and Competitive
After a few years of stagnation, the market is moving again. Expect pay inflation to return to normal levels (2-3% overall, 4-5% for executives) this year, and watch carefully for the biggest growth in pay — providers, where market rates are increasing about 6% or more per year.
Health centers should do a thorough review of the market and adjust their ranges annually, or at least every other year. Organizations that still use “market-based” ranges may find this costly if they use outside firms, but a more effective pay system that focuses on internal equity can conduct a market review on its own, or with outside assistance, for a relatively small investment.
Resist the temptation to adjust wage structures “across the board” — adjusting all ranges by the same percentage every year is not only an inaccurate method, it also leads to “pay compression.” Furthermore, with the market moving at the rate it is, organizations that don’t follow the trends will find themselves non-competitive quickly.
Take a Hard Look at Provider Compensation
Speaking of the market increases for providers, look at how you manage provider pay and make sure you have a comprehensive program in place — even if you only have a small number of providers. While the chatter about provider recruitment and retention gets louder every year, most health centers are doing little to address the market pressure and compensation issues:
- Like every other employee, providers’ compensation should be reviewed annually, based on their performance and the competitive market. Salaries fixed in contracts may well not be keeping up with the market, or with the health center’s expectations. Whenever possible, keep compensation adjustments out of contracts, and manage compensation annually to ensure that it keeps pace and meets the health center’s needs.
- Make the investment and rationalize all of your providers’ pay. Determine (in the form of a job description) the expectations of the job at your health center, conduct a thorough assessment of each provider against the standards of the job, and determine their appropriate pay (this will be easy if you have a proper pay range in place). Where actual pay does not match up with appropriate pay, either hold off on increases until performance catches up with pay, or come up with a plan to increase pay to get it to the right level.
- If you have an incentive plan in place, ask whether it is really achieving its purpose. If the purpose is to improve the performance of low productivity providers, and it isn’t doing that, consider moving to a base pay program where long-term high productivity is rewarded with a higher salary.
- Stop thinking that a compensation program can substitute for good management. While a pay program can be a significant de-motivator, it is rarely a motivator, and it will not solve your management issues. Manage providers like every other employee.
Provider compensation is actually very easy to manage if you start with a plan and stick to it.
Improve Your Compensation Program
Most health center compensation programs are only “partial” programs. Usually this is because of a lack of understanding of the fact that “tools” such as salary surveys or pay administration software packages are not “programs.” An effective compensation program has three key components:
- A “job evaluation” process that measures the value of a job to the organization, independent of the labor market. This is the only way to fairly and accurately determine how to pay people in jobs that aren’t exactly like those in other health centers, deal with many employees who have multiple roles and ensure that your compensation program is free of gender, race or other forms of job-based discrimination.
- Links to the market. Collecting data on “benchmark” jobs and applying them to the internal equity structure ensures that the entire structure is bother externally competitive and internally fair. In such a “best practice” program, the organization only needs good data on a few of its jobs, rather than struggling to find data on every position.
- A performance management program that ties pay to long-term contribution. It should be a basic principle that all other things being equal, an employee in a job who performs at a higher level should be paid more than one in the same job who does not perform at that level. This will not be achieved in most “merit pay” programs, which do not adequately move employees from where they start to where they should be.
Employee compensation accounts for more than half of the typical health center budget, and when benefits are added will bring the total cost of employees to 65-75% of expenses. Failure to invest in management of that expense is just poor business.
Educate the Board of Directors
Time should be devoted every year to ensuring that the members of the Board of Directors understand how your health center determines employee pay, and add a module on your health center’s compensation programs to your new Board member orientation program. Board members need to understand how programs work, and the implications of those programs. Many Board members, particularly consumer members, may not earn anywhere near the compensation of your CEO, your providers, or even many of your managers. Making sure your Board members understand good compensation management techniques, how the market works, and what effective, competitive compensation means will make them better equipped to deal with the difficult decisions they need to make.
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Every employee compensation program needs a solid foundation, and the “resolutions” suggested above are the building blocks for that foundation. For more information on effective employee compensation, contact the author at firstname.lastname@example.org.