More Rising Compensation for Executives at Financially Challenged Hospitals, Justified by More Talking Points

In the spring, leaves turn green, and executive compensation turns greener.  The media has provided another set of stories about the inexorable rise of compensation for executives of non-profit hospitals, presented in order of the stories' appearance.

Westchester Medical Center

The Journal-News reported in April,

A Journal News analysis of salary data, obtained through a Freedom of Information request, revealed that 20 hospital administrators received increases in their total compensation for 2010, including one employee whose pay package jumped 18 percent.

Also,

The newspaper’s analysis of data for 2010, the latest year available, shows that 26 administrators at the medical center would have exceeded Gov. Andrew Cuomo’s limit of $199,000 a year for executive compensation. Cuomo signed an order, scheduled to take effect April 15, that restricts the amount of state money that nonprofit organizations can use toward salaries and benefits.

Overall, the medical center spent $11.8 million in compensation to 44 executives in 2010, during which three administrators resigned and three others had their titles downgraded to the director level. The executive payroll rose 11 percent between 2008 and 2010.

In particular,

Administrators who received increases in their total compensation included CEO Israel, who earned the top salary of $1.3 million in total compensation; the chief financial officer; an executive vice president and several senior vice presidents.

However, the fortunes of the top executives were rising at a time of financial trouble for the institution:

That same year, the medical center laid off 130 workers, instituted a hiring freeze and announced an $18 million budget cut for the following year.

'There is no shared sacrifice, there is no appearance of a shared sacrifice,' said Jayne Cammisa, a union representative and a registered nurse in the hospital’s transplant unit.

Those who defended the executives' compensation sounded familiar themes:

Hospital boards rely on compensation committees, outside consultants and market analysis and documentation to justify how much they pay administrators. The medical center uses an outside firm to analyze compensation packages, which are based on market values, [Senior Vice President for Communications Kara] Bennorth said.

The only way to keep the institution and be financially viable is you have to have top management,' [Chairman of the Board Mark] Tulis said.

Note that we briefly mentioned the CEO's compensation in this post.

Connecticut

In May, the Hartford Courant reported,

The health care system may be ailing, but newly compiled data show that compensation for top executives at Connecticut hospitals remains healthy.

Eighteen executives at the state's 30 hospitals made more than $1 million in 2009-10, according to information the hospitals reported to the Internal Revenue Service.

Some of the more notable examples included,

Hartford Hospital's outgoing chief executive officer, John J. Meehan, was the highest paid in Connecticut and one of the highest paid nationally. His compensation totaled $6.98 million – all but $1.1 million of it nontaxable and retirement benefits, according to the hospital.

Also,

In addition to Meehan, Connecticut's 10 highest paid administrators were two Yale-New Haven Health System executives, the departing CEOs at the Hospital of Central Connecticut and the Hospital of St. Raphael, the departing treasurer of Hartford Hospital, the treasurer of the Hospital of Central Connecticut and the presidents of Stamford, Yale-New Haven and St. Francis Hospital and Medical Center. All made more than $1.59 million in 'reportable' W-2 and 1099 miscellaneous compensation.

A few executives had significant 'non-reportable' compensation in addition to W-2 and 1099 pay. The outgoing president at William Backus Hospital in Norwich had $2.2 million in deferred compensation related to his retirement, for total pay of nearly $3 million, according to a C-HIT analysis of the data. The chief operating officer at the Hospital of Central Connecticut had $472,443 in reportable pay and $838,880 in other compensation, for a total of $1.3 million.

Again, there were complaints that executive compensation had nothing to do with the performance of the executives' organizations,

'I don't understand what the hospitals are getting for their money. Some of the highest paid are the worst performing,' said Ellen Andrews, executive director of the Connecticut Health Policy Project in New Haven. 'The system isn't working for anyone – for the state, for the hospitals or for consumers.'

Note, however, that the system is working for the top hired executives.

In response to these complaints, the Courant cited the usual defenses of executive pay:

Others say the compensation reflects the complexity of the health care business, keen national competition for good leaders, and the uncertain future that executives face when they sign on for top-level positions in an industry undergoing enormous change. Pay needs to be competitive to attract and retain key executives, they say – even for nonprofits that are struggling to find their place.

'Hospital executives are responsible for extremely complex organizations,' said Michele Sharp of the Connecticut Hospital Association. In addition to managing advanced medical services and technology, a skilled staff and extensive physical plants, hospital CEOs are often responsible for an array of services beyond the hospital, such as primary care clinics, home health organizations and surgery centers. They work in a highly regulated environment and must comply with demanding standards in areas that range from patient safety and financial performance to institutional stability and community health, Sharp said.

'When you bring in exceptional talent, you can manage effectively and efficiently,' said Vin Petrini, senior vice president for public affairs atYale-New Haven Hospital. 'It's a very complicated and complex industry. We need to be thoughtful about how we manage and retain and recruit talent.'

Wake Forest Baptist

The Winston-Salem Journal uncovered the compensation of several local executives,

A commitment Wake Forest Baptist Medical Center made to Dr. John McConnell, its chief executive, when he was recruited led to a nearly 50 percent increase in his total compensation for fiscal year 2010-11, the center reported Tuesday.

McConnell was paid almost $2.5 million in total compensation, compared with $1.68 million for fiscal 2009-10.

The total included essentials such $25,560 for moving expenses and $9,568 for country club dues.

Other executives did well too:

Donny Lambeth, former president of N.C. Baptist Hospital, had a 36 percent increase in total compensation to $1.16 million. Lambeth now serves as president of Davie County Hospital and Lexington Medical Center. His salary dropped 11 percent to $537,997, while his bonus and incentive compensation rose 165 percent to $186,261.

Dr. Thomas Sibert, president of Wake Forest Baptist Health and chief operating officer, received a 2 percent increase in total compensation to $995,133, including $545,517 in salary and $166,027 in bonus and incentive compensation. Sibert took over his role in September 2010.

Edward Chadwick, chief financial officer, received a 32 percent increase in total compensation to $974,587. His salary rose 71 percent to $503,663 in salary, while his bonus and incentive compensation fell 42 percent to $200,000.

Dr. William Applegate, retired president of Wake Forest University Health Sciences and dean of its medical school, was paid $743,541 in total compensation, down 25 percent. His salary dropped 3 percent to $518,231, while his bonus and incentive compensation fell from $378,900 to $99,900.

Doug Edgeton, former president of Piedmont Triad Research Park, received a 38 percent decrease in total compensation to $655,048. His salary fell 1 percent to $484,360, and his bonus and incentive compensation fell from $361,600 to $111,700.

However, a Winston-Salem Journal article in April noted that the same CEO, Mr McConnell would be aggressively cutting costs and possibly laying off employees:

Wake Forest Baptist Medical Center has told employees it is considering reducing its workforce as part of a major initiative aimed at improving patient outcomes at a lower cost.

The center confirmed Friday a memo sent April 2 by Dr. John McConnell, its chief executive, which addressed what the center is calling 'accelerated transformational initiatives.'

In particular,

In a separate statement, the center said it is looking at expense-reduction opportunities that include 'energy conservation, cost savings through supply chain management, revenue-cycle improvements, efficiencies such as reducing length of stay, reduction in discretionary spending, and managed employment through attrition, retirements, eliminating duplication and process redesign.'

"Managed employment" seems to be the latest circumlocution for layoffs.

The largess given to top executives at a time when lesser employees may be sacked was explained by trotting out the usual suspects,

Wake Forest Baptist said the center is a 'very complex organization that requires a special set of skills and experience to manage relationships with physicians and researchers, the university, its patients and community.'

I wonder if "complexity" comes from a set of talking points, since it gets aired so often in this context.

Note that we discussed compensation given to Wake Forest executives the year before, and its relationship, or lack thereof to the quality of their leadership here.

Summary

There they go again. We have the latest additions to what has become a long series of examples of executive exceptionalism in health care organizations. Top hired executives, be they of for-profit health care corporations, or non-profit organizations, tend to be paid very well, even when their organizations perform poorly or are financially threatened.

The same rationales are cited repeatedly to justify their treatment. Executives are said to have very difficult jobs, Competitive pay is necessary to hire the brilliant people required.  Left unsaid, however, is how difficult these managerial positions are in comparison to the demanding work and sometimes life or death responsibilities of health professionals, how brilliant executives are in comparison to such well trained professionals, and why the executives deserve competitive pay when other employees may be laid off. Perhaps the close ties of those making the arguments to the executives explains the questions they beg.

So it is time to say it again,....  Health care organizations need leaders that uphold the core values of health care, and focus on and are accountable for the mission, not on secondary responsibilities that conflict with these values and their mission, and not on self-enrichment. Leaders ought to be rewarded reasonably, but not lavishly, for doing what ultimately improves patient care, or when applicable, good education and good research. On the other hand, those who authorize, direct and implement bad behavior ought to suffer negative consequences sufficient to deter future bad behavior.


If we do not fix the severe problems affecting the leadership and governance of health care, and do not increase accountability, integrity and transparency of health care leadership and governance, we will be as much to blame as the leaders when the system collapses.

The CEO as False Messiah

Why is the leadership of health care organizations so bad?  An important explanation of one part of the puzzle appears on InformationWeek's Brainyard blog written by Venkatesh Rao. 

The Visionary, Charismatic, or Messianic Leader

In "The Fall of the Messiah Leader," Rao described the rise of the concept of "visionary" leadership:

we'll look at the rise in the 1980s and impending fall of the idea of 'Leadership' as a pop business construct. The role of visionary leader emerged to make up for the apparent failure of the manager mind, but it evolved into something very different, illustrated in the picture below: a role dedicated mainly to creating and maintaining an illusion of control in the markets interspersed with occasional Big Bold crisis management moves that generally fail.

Rao suggested that the first example of the messianic organizational leader was former General Electric CEO Jack Welch:

Welch was the first modern example of 'charismatic leadership,' and his was the first widely recognized business name since the robber barons. I challenge you to name, off the top of your head, one "celebrity" business name between Rockefeller and Welch that the average man on the street would have recognized.

Rao described the charismatic, or visionary leader in truly messianic terms:

one savant-like figure can intuitively read market conditions, spot brilliant strategic opportunities, create clarity of purpose in pursuit of that opportunity, and steer by an innate sense of True North, without a compass.

Oh yeah, and while performing this miracle routinely, the leader also models virtues and values that would put saints to shame. This idealized leader sparks a pursuit of corporate greatness with a brilliant strategic insight every few years, and he ensures that the pursuit is conducted in accordance with values so noble you feel like writing epic poems in his honor.

These charismatic figures are supposed to be capable of intuitively cutting through complexity and producing visionary decisions that make the managers' jobs tractable again.

In case this description of supposedly messianic leaders of recent years sounds far-fetched, recall the example of the failed, then eventually jailed CEO of what was once the Allegheny Health Education and Research Foundation (AHERF), one of the largest vertically integrated health care systems of the 1990s. (Currently, we call such organizations accountable care organizations, or ACOs.) Abdelhak was described in an American College of Physicians publication as a "visionary." (See the summary beginning on p 5 here.) Abdelhak had previously been called a "visionary" or a "genius" in the media. [Gaul GM. Creator of a cross-state health system despite personal and financial questions, Sherif Abdelhak has boldly expanded from Pittsburgh to Philadelphia. Philadelphia Inquirer, March 4, 1991. P. D1. Gaul GM. The new prescription for health care: Hahnemann’s merger dwarfs - and frightens - many local rivals. Philadelphia Inquirer, November 21, 1993. P. E1.]  For more recent examples of how health care leaders may be described in messianic terms, look here, here, and here.

The False Messiahs

Just as Abdelhak proved to be not a messiah, but a criminal, most messianic leaders are anything but. As Rao put it,

Do these Messiahs actually do the job required of them--relieve beleaguered mere-mortal managers and steer the company toward greatness? Nine out of 10 times, they do nothing of the sort. What they do is convince people that they're in control.

His main point is that the "messiahs" are just people playing at that role, supported by public relations, if not propaganda and disinformation:

Heroic, charismatic leadership in the context of large public companies is mostly a myth. What makes it a myth isn't that such figures don't exist (there have been a handful, such as Welch himself, Jobs, and Bezos), but the idea that the phenomenon can be studied in general terms, codified, and turned into a teachable skill.

True leaders are born, not manufactured. And they're quite rare. What the leadership cottage industry can manufacture are false leaders: People who can act like leaders. That theater has two audiences: the media and Wall Street.

The psychological allure of 'leadership' as a concept is almost entirely due to its profitability as a business-writing cottage industry, which in turn is based almost entirely on appealing to the vanities of wannabe-Messiahs. On the other side, there's an entire shadow world devoted to manufacturing perceptions of Messianic capabilities, by 'proving' claims to charismatic leadership using hagiographic narratives.

Rao claimed that the rise of such falsely messianic leadership was due to the ability of such leaders to bewitch investors:

The de facto job of a leader is to manage perceptions on Wall Street and thereby manage the stock price. Projecting an image of charismatic leadership is the easiest way to do that. Managers fight fires out of sight, creating a perception of corporate normalcy and control, and the Glorious Leader uses that blank canvas of apparent normalcy to spin tales that mesmerize Wall Street.

Who Else Benefits

Rao wrote mainly in the context of understanding the stresses and challenges of managers (who he sees as distinct from leaders in the context above). Thus he may not have written about other factors in the etiology of falsely messianic leaders.

I hypothesize that such leaders are not only good at bewitching investors, but bewitching other constituencies and stakeholders. Most health care organization now must deal with government agencies. Non-profit health organizations must deal with groups that are interested in their ostensibly charitable missions. Having a apparently messianic leader makes it possible to bewitch these groups.

Furthermore, I hypothesize that falsely messianic leaders greatly benefit two groups within their organizations. The first is obviously their apostles, often the top layers of organizational executives just below the CEO. Such positions are now almost as personally remunerative as are CEO positions. The second is obviously the spin-doctors, that is mainly the public relations and sometimes the marketing people who help produce the theatre that creates the perception of messianic qualities.

The Final Common Pathway

Rao suggests that falsely messianic leaders are likely to lead their organizations to a bad end, even if they themselves may escape the consequences:

Charismatic theater-leadership is about to die a messy death, like Qadaffi, because the sheer amount of chaos converging in a bottom-up torrent to the CEO's office will become unmanageable very soon. The theater will become increasingly hard to sustain.

Leaders fail when their managers fail to keep up with the fire-fighting. Once the fires become visible externally, the apparent normalcy necessary for the leader to manage perceptions is gone.

At this point, the leader is an impossible situation, but the theater must continue. And so we're treated to the grand finale of the tenure of a CEO: the Big Bold Move, the Bet The Company moment.

The Big Bold Move is usually a Big Dumb Move--deciding to go after large new markets, taking on bold new product initiatives costing hundreds of millions of dollars, making major acquisitions. It's a high-stakes game with a billion-dollar ante.

And usually these moves fail because charismatic leaders are forced to make them at terrible times, with bad data, when growth has stagnated or is plummeting, and there's a need for an 11th hour business model shift to replace hundreds of millions of dollars of collapsing revenue streams. A case of too much, too late.

The leaders who fail are sacked, land safely with golden parachutes, and proceed to loudly blame 'culture' (read: 'incompetent middle management') for the failure.

Rao is writing for a general business audience. The outcomes of such failures when the falsely messianic leader is in charge of a health care organization can obviously be even worse, leading to rising health care costs, declining access and quality, and threats to patients' and the public's health.

Summary

We have seen many health care leaders praised for their brilliance and paid royally despite leadership resulting in financial distress, threats to the organizations' health care missions, poor patient care, unethical behavior, or even crime. (The most recent example as of the time this was written was here. For other examples look here.)   Yet health care CEOs are just people, sometimes smart, but almost never brilliant.  Promoting them as messianic to bewitch key constituencies, justify the remuneration of other top managers, and the hiring of more public relations flacks is likely to lead to the sort of organizational disasters and system-wide dysfunction we discuss on Health Care Renewal.  The rise of the falsely messianic leader may allow the entry of the most dangerous false messiahs, the psychopathic ones.  (We discussed the likelihood that some health care leaders are actually psychopaths here.)

Rao's theory of falsely messianic leadership (and related, and also religiously allusional theories of the "divine rights of CEOs," look here and here), suggest that the better paid the CEO, and the more expansive the descriptions of the CEOs talents, the more skeptical we ought to be. 

In the secular occupation of health care, we ought not to yearn for messiahs, but hope for reasonable leadership that draws on the collective knowledge and values of health care professionals rather than dubious "visions," and that show accountability, integrity, transparency, honesty, and ethics.