Attacks on hospital CEO pay are cheap shots

September 03, 2010

The recent column by Jay Hancock on CEO pay ("For hospitals, 'nonprofit' stops with CEO's pay," Aug. 29) demonstrates that hospital boards and CEOs are easy targets for cheap shots on the issue of executive compensation.

My firm's primary business is to provide executive compensation advice to the boards of non-profit hospitals and health systems. Occasionally, we hear of out-sized compensation packages; but these are few and far between. The figures you reported for Maryland hospitals are all reasonable and are not in that category.

I have been practicing in this field for more than 25 years. From my perspective, there are several important facts that need to be noted:

(1)Hospital CEO pay is subject to the same law of supply and demand as everything else. From time-to-time when there have been nursing shortages, nursing pay has increased. The same is true for experienced, high-performance hospital CEOs. Right now, there is a supply-demand imbalance that impacts salary levels.

(2)Our 2010 annual survey of hospital executive compensation revealed that the median age of current CEOs has been steadily increasing and that half of CEOs are already 56 and over. In fact, half of these are already age 61 and over. We are already seeing increased numbers of baby-boomer CEOs retiring, and the number of retirements will increase significantly in the next five years. The supply of younger, experienced CEOs will not be sufficient to fill these ranks.

(3)The pay of a hospital CEO is a tiny fraction of a percent of the budget of any hospital. To imply that the high cost of health care results from CEO pay is ridiculous.

(4) Hospital boards are well aware of the Internal Revenue Service requirements for reasonableness of compensation in non-profit institutions. There can be serious financial penalties to both the CEO and the board if the I.R.S. standards of reasonableness are breached. Boards set pay with these standards in mind. A recent government survey revealed that over 80 percent of hospitals nationwide follow the process contained in I.R.S. regulations.

(5)Hospital boards are typically made up of members of the local community and are well aware of community sensitivity to CEO pay, and, in my experience, this factor is always considered in setting pay. Trustees recognize their responsibility to their communities to carefully shepherd hospital assets and act responsibly in this regard.

(6)Hospital boards and CEOs are careful to maintain appropriate independent relationships between the compensation consultant and the board compensation committee. We are frequently retained by new clients where we have not met the CEO. Our contact in the selection process is entirely with the board compensation committee. There is no "rubber-stamping" as stated by Mr. Hancock.

Rian M. Yaffe

The writer is chairman and CEO of Towson-based Yaffe & Company, Inc.

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