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HOSPITALS: How much is too much?

The only major hospital CEO to also be a blogger, Paul Levy at Beth Israel Deaconess, is wondering whether his salary of $1m is too much. My flip answer is, well of course it is, but would you turn it down?

Much of the issue is that salaries for high end positions are set “competitively.” In other words the compensation board of for-profit and non-profit institutions and wants to reward their CEO better than his peers. Like in Lake Woebeggon, every board in Boston and way beyond thinks it has the best CEO, so they deserve more than average—so the spiral increases. And the bigger the non-profit gets the bigger the salaries. Someone sent me a form last year with salaries for the top brass of Kaiser Permanente. I didn’t bother verifying it but I recall that it claimed that more than a dozen senior execs had total comp of over $1m.

I wrote a long article about this last year, called Overpaid Facility Managers?, looking at the salary of a decent sized community hospital in the SF Bay Area with some $300m in revenues—as opposed to Beth Israel Deaconess’ $1 billion. That CEO too was on close to $1m total comp.

The problem is that there are almost 2,000 hospitals of that size or larger. If all their CEOs get that amount, or even $500,000 a year, then the whole comparison inflation cycle goes on. And really how hard is it to run a $300 million business, where most of the income walks in the door because of location, referrals of agents (physicians) and government subsidies? I don’t know.

Paul compares himself to a sports star. But the sports stars make so much because they fill hours of TV cheaply which generates lots of advertising revenue. Would we watch the same teams with less good stars? I doubt it, and it’s for sure that the owners are not willing to risk finding out. Which is why the big stars who are measurably better in both statistics and winning percentage get so much more money than those not quite as good.  There are only so many Kobe Bryants, Ronaldinhos, Derek Jeters et al.

The question Paul needs to ask himself is not whether he works hard and does a good job relative to other big AMC CEOs. Of course he does. The real question is are there more than  couple of hundred people who could do his job roughly as well. In other words if the board changed out a .300 hitter for a .265 hitter, would the effect on Beth Israel Deaconess be noticeable the way it would be for the Lakers if Kobe was traded for a journeyman shooting guard.

My guess is that the cult of the CEO is well overblown. And that while Paul is by no means a big offender in creating it (and may be helping to knock it down), we are stuck in a cycle where no one dares take the risk the way the Oakland A’s do in baseball—get unrecognized young talent in, pay less for it and get just as good results. But it’s unlikely to change for some time.

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Bayard
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Bayard

Now its PROFITABLE!!! BArry Carol you Sir. a douche of the highest order

piec
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piec

Affinity Health Systems in the Fox Valley of Wisconsin and Dr. AlBitar Let me vent for whatever good it will do. I was wishing to just throw out a negative comment about Affinity Health Systems and Dr. AlBitar. They deserve to have something negative said about them in the public arena. My only hope is that when a person googles up the names they’ll see the other side of the story and therefore, get a better picture of the hell that they are. What can I say? I lost. I screamed at them and screamed at them and lost my… Read more »

Casey
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Casey

jd, I think you make some great points. Performance-based comp is something that i think every board should purse with senior level execs. In companies that i work with, we often shoot for company-wide bonuses based on large, bottom-line goals, so that everyone has incentive to perform to a standard. Every employee (including the CEO) should have to meet a performance standard to take home full pay. I also think the reference you and Matthew have made to the Oakland A’s is an interesting one. Not sure if you have read the book Moneyball, but its fantastic and a great… Read more »

Barry Carol
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Barry Carol

jd, A few more comments on CEO (and other executive) compensation. Over a 35 year career in the money management business, I have met and interacted with literally hundreds of CEO’s, company presidents and CFO’s in many different industries and have developed some strong opinions about issues relating to senior corporate management. First, there are many issues that affect a given company’s economic and profit performance, some of which senior management can influence and some of which it can’t. Among the latter are growth (or lack of it) in GDP, level of inflation and interest rates, pricing of global commodities… Read more »

jd
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jd

Barry, Thanks for the history and context. It sounds like you’ve been around the block once or twice more than I have. There might have been a miscommunication. I wasn’t contemplating government regulation of compensation so much as thinking from the board’s point of view. If there is so little correlation between what they vote to compensate the CEO and performance, why not (a) pay less, and/or (b) tie payment more to performance? One way to think about the lack of correlation is this: boards really aren’t very good at predicting good CEOs. This is especially true if by “good”… Read more »

Barry Carol
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Barry Carol

jd, A number of years back (I forget how many), Congress passed a law that only allows a tax deduction for executive pay up to $1 million per year unless it is tied to performance. The performance component came to consist mainly of stock options and restricted stock on the theory that the only way the stock would go up is if the management grew the enterprise. Unfortunately, stocks also go up when the underlying companies grow in line with the economy or their markets and stock price earnings multiples rise due to lower interest rates and long term inflation… Read more »

jd
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jd

jojo raises another point worth repeating: it isn’t just that pay is not (or not sufficiently) tied to performance. It is that the average CEO pay is too high relative to total company wages. We are creating the kind of bi-polar society that you find in Latin American countries, with a wealthy elite that exploits a vast, poorly educated working class. The middle class that expanded greatly with unions in the 1940s and 50s is slowly eroding. I am of the view that class war is inevitable under such circumstances. Our politics would tend more and more to oscillate between… Read more »

jd
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jd

Barry, I like your formula for options, though I think that there is more to Matt’s point than you addressed. It isn’t just that CEO options and bonuses show no correlation with performance, but that CEO pay overall does not. Now, I haven’t seen those statistics, and I’m not sure if they apply to companies beyond the Fortune 500. Assuming it does, then we really need to ask ourselves: is pay tied to performance at all? And if not, why the hell not? Here is an additional suggestion: when CEOs get hired, they agree to tie their total compensation (including… Read more »

john
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john

Matthew:
There is only one problem with Billy Beane analogies:
http://sports.espn.go.com/espn/page2/story?page=betweenthenumbers/billybeane/060405

Jojo
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Jojo

Most CEO’s are little more than figureheads that depend on the people under them to do the real work, all the way down the chain. Therefore, the wealth should be spread more evenly throughout the company. 400 to 1 pay ratio’s are criminal. Pay should be more reasonable and and whatever is left over should be returned to the shareholders or the customer (in the form of lower prices).

Barry Carol
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Barry Carol

Matthew, I agree with you on the lunacy of corporate CEO’s who create no value or even destroy value getting huge paydays to go away (or to stay). Disney’s Michael Eisner, for example, destroyed value during the last ten years of his tenure but he personally never had a bad year. If it were up to me, CEO’s and other senior executives who are in a position to formulate and execute strategy would get competitive salaries. Competitive means enough to attract and hold qualified people. Option awards should only pay off based on the extent to which total return to… Read more »

Matthew Holt
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Barry–This is obviously true if you are right and that you NEED a .300 hitter. But the A’s have shown that you can do just as well in the market with cheaper talent. And you know that assessments of Fortune 500 CEO performance show little relation between performance and compensation. Remember HP paying Fiorina $20m to go away?

RW
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RW

I think most conversations about CEO comp have two elements: 1) jealosy; and 2) the belief that no on really “needs” that much money. The real issue should be accoutability and results, just as it should be with every position (including physicians).

Barry Carol
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Barry Carol

Matthew, When Paul Levy took the job to become CEO of BIDMC in January, 2002, it was losing $70 million per year. Now it’s profitable, thanks in large measure, to his leadership and that of the Chief Information Officer. For some insight into their approach to IT, read this article. I think he is well worth his compensation and said so on his blog. The former CEO of General Electric, Jack Welch, has commented in the past that having the right person in a key spot in an organization can make a huge difference in how the organization performs. It… Read more »