The 2019 BDO 600 CEO and CFO Compensation Practices: Trends in the Healthcare Industry

The powerful forces propelling the healthcare sector’s growth—an aging population; increases in the incidence of chronic diseases; population growth; and advances in medicine, pharmaceuticals, therapeutics, and technology—are increasing healthcare costs. The entire spectrum of healthcare stakeholders from providers to payers to related service organizations are feeling the pressure of rising expenditures.

Healthcare leaders are challenged with managing increasingly complex issues, including clinical, operational, regulatory/compliance, a new competitive landscape, and financial obstacles that are transforming their businesses in a fast-moving environment— all while they work to create more sustainable strategies. The pressures are further exacerbated by the fact that everyone is impacted by healthcare.  Moreover, the acceleration of complexity means companies need to ensure they have the types of leaders required to manage these challenges.  Few leaders are up to the task, so finding and retaining the best talent has become exceedingly difficult. Executive pay levels and the structure of pay packages are directly affected, as illustrated in BDO’s analysis of CEO and CFO compensation.

Another driving force for industry growth is merger and acquisition (M&A) activity. Developing pay packages that attract, retain, and reward executives for both long-term vision and short-term successes while simultaneously navigating deals and integrations is critical.

The BDO 600 shows that, as the complexity of healthcare rises, so do pay levels. The BDO 600 study found:

• The average Total Direct Compensation (TDC) levels for both CEOs and CFOs ranked third out of the study’s eight industries, with the average TDC at $5.1 million for CEOs and $1.8 million for CFOs.
• Average CEO TDC for healthcare companies is only 8% below the study’s highest paying industry (real estate) but is 5.7 times higher than the study’s lowest paying industry (banking).
• CEOs in healthcare also experienced the second largest year-over-year increase in average total direct compensation (11%), behind financial services (nonbanking) (13%).
• The percentage of pay-at-risk (AI and stock/equity grants) for healthcare CEOs is the third largest among the industries examined, at 85% of the total pay package (almost double that of banking, which averages 47%).
• Healthcare CFOs have the fourth-highest percentage of pay-at-risk, at 76%. This underscores the importance of utilizing strategically important metrics and goals that reflect true success.

 

Key Takeaways

Healthcare organizations and their boards need to consider the following key factors regarding executive compensation:

• Compensation strategy: Understand the right hire and retention strategy for current and future leaders. Ensure that the compensation program aligns with the organizational strategy and mission.
• Performance metrics: Select the right metrics for incentive plans. Plan metrics should encourage long-term growth, reinvestment, financial stability, and TSR.
• Mix of Pay: Balance incentives with fixed pay. Ensure that pay rewards executives for the achievement of the company’s strategic goals, including reinvestment, and does not reward excessive risk-taking.
• Employment agreements: Agreements should be appropriately sized to cover the executives’ compensation, while not exposing the company to undue financial liability.
• Change of control agreements: Enable executives to look for opportunities that will benefit the organization without needing to be concerned about their situation.
• Succession planning: The company should have a talent pipeline for senior-level positions.