The Leadership Quandary: Competition for Talent and Constraints on Executive Pay Will Challenge Nonprofit Healthcare Providers

With the Affordable Care Act now in full swing, a challenging new normal has emerged for nonprofit healthcare providers: Not only is there continuous innovation across all fronts of care, there’s also a constant pressure to contain costs. Now more than ever before, all healthcare providers need senior management with the skills and expertise necessary to navigate this complex and transforming landscape. As the need for dynamic leaders continues to grow across the industry, nonprofit healthcare providers need to ensure that recruiting, retaining and compensating their senior management keeps pace with the competitive market. Heightened competition coupled with strict constraints on executive pay will require successful organizations to explore new strategies for attracting and rewarding successful top talent.

Developing new recruitment and compensation strategies can be difficult under the best of circumstances.  In times of change, the difficulty is compounded. With that in mind, here are four key considerations around compensation for nonprofit healthcare providers when they are preparing to enter the talent hunt:

Higher premiums for talent: Top leadership positions require experienced and highly skilled executives that can manage complex cost control measures, extensive oversight and reporting and the ability to navigate constant innovation in service delivery and technology. As a result, these leaders are in high demand.  Executive compensation levels within for-profit healthcare and other for-profit talent pools are generally higher than nonprofit levels.

Limited Pay Vehicles: As we’ve highlighted before on the blog, nonprofit organizations are limited in what they can offer their executives. For example, they are precluded from offering any sort of equity-based compensation or revenue/net-profit sharing incentives. Similarly, there are heavy restrictions around long-term incentives, as well as retirement and deferred compensation.

Reasonable offerings: Tax-exempt organizations must also be mindful of the need to ensure that total compensation is reasonable, avoiding any “excess benefit” that might run afoul of IRS Intermediate Sanctions or similar constraints at the state level. For more information on excess benefits, check out this post by Laura Kalick.

Complex compliance issues: Alternative compensation arrangements that are available to tax-exempt organizations (e.g., 457f deferral arrangements, executive-owned life insurance arrangements, etc.) can be structured as attractive compensation components to offset those found only in the for-profit sector. However, careful attention must be paid to how such components are structured, documented and administered. Organizations and executive participants that fail to comply with regulations can face onerous tax penalties, loss and repayment of compensation and other severe repercussions.

Overall, keep in mind that excessive reliance on pay as the primary motivator for recruiting and retaining key executives can produce “coin-operated” leaders, and can inadvertently cause numerous problems.  Ideally, an individual’s commitment to the organization and its mission is the significant factor in his/her desire to lead. Realistically, however, pay will remain a considerable motivator for nonprofit healthcare executives, and it is therefore critical that organizations and their Boards stay abreast of current compensation trends—both in the healthcare sector and among the for-profit organizations that compete for the same talent.

Steven Shill is co-Leader of the Healthcare practice at BDO and Mike Conover is a Senior Director in the Compensation & Benefits practice at BDO. They can be reached at sshill@bdo.com and mconover@bdo.com, respectively.

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