Managing Compensation in a Changing Landscape

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© 2014 Sullivan, Cotter and Associates, Inc. The material may not be reproduced or copied without written consent of SullivanCotter.

Managing Compensation in a

Changing Landscape

October 23, 2014


Andrew Lewis is a Principal and the West Region Manager of Sullivan, Cotter

and Associates, Inc. Prior to joining SullivanCotter, Andy was a Partner at Mercer

specializing in health care and other tax-exempt organization executive and

broad based compensation.

He is a specialist in helping health care institutions restructure their cash

compensation programs to be more efficient and reflective of emerging market

trends.

Andy brings more than 19 years of consulting experience to SullivanCotter. In

addition to his projects with traditional health care organizations, he has worked

extensively for tax-exempt research institutions, including Federally Funded

Research and Development Centers (FFRDCs) and national labs, as well as

think tanks, membership associations, and foundations.

Today’s Presenter

1

Denver Office

Phone: 303.723.4131

[email protected]

Andy Lewis

Some recent client examples include:

• Assisting the compensation committee of a large academic medical center on the design of a new employment contract for the

CEO, development of change-in-control and severance agreements, and the design of a long-term incentive plan.

• Conducting an audit of the pay programs and policies of a renowned academic medical center in order to facilitate an ongoing

clinical integration program across their various subsidiaries.

• Designing a new annual incentive plan for a regional health care system to better align goal difficultly with that of industry peers.

• Advising the board of a large tax-exempt research institution on a new long-term incentive plan design.

• Helping a community hospital to restructure their executive reporting relationships.

• Developing a new job family based salary program for the employees of a large Midwest health care system.

• Working with numerous compensation committees of health care institutions to ensure compliance with IRS Intermediate Sanctions

legislation.

Andy has a Bachelor of Arts in economics from The State University of New York at Geneseo and a Master of industrial and labor

relations degree from Cornell University.


Our Resources

We draw from the deep technical expertise of over 160 seasoned team members. Actuaries • Attorneys • Certified Compensation Consultants • Compliance Experts •

CPAs • Health Care Operations/Finance/HR Specialists

Since our founding in 1992, SullivanCotter has grown its geographic presence and

executive leadership—offering clients local access with national reach.

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Why We Are Unique

Differentiators

Fresh

perspective

Independence

Practical

solutions

aligned with

business needs

Consider

strategic, market

and governance

factors Focus on

“best fit,”

not just

“best practices”

Collaborative

consulting

approach

Responsive,

locally

accessible

team

Unparalleled

research

and data

3


Discussion Topics

The Changing Landscape

Current Trends and Issues in

Employee Compensation

Delivering Effective Results

Challenges in

Mergers and Acquisitions

Answering Your Questions

4


1. The Changing Landscape

5


Overview of Health Care Reform

6


Physician Shortages

• Demand for physicians will intensify over the coming years.

Talent Shortages

7

According to AAMC

estimates, the United

States faces a

shortage of more than

90,000 physicians by

2020 – a number that

will grow to more than

130,000 by 2025.

This shortage will

have a cascading

effect for all health

care workers.


The Health Care Industry

• The health care and social assistance industry is projected to create 28% of all new jobs created in

the U.S. economy.

• This industry is expected to grow by 33%, or 5.7 million new jobs.

Employment Challenges

8

Source: Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, 2012-13 Edition.

+31%

Medical Assistant

+26%

Registered Nurse

+21%

Medical Records/ HIM Tech

+20%

Nurse Aide

Projected Growth 2010 to 2020


• Despite a minor drop (5%) in transactions in 2013 from the previous year, merger and acquisition

(M&A) activity in health care has been steadily increasing since 2009:


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2013 MAJOR DEALS

• Tenet Healthcare acquired Vanguard Health System.

• Catholic Health Initiatives partnered with St. Luke’s Episcopal Health.

• Community Health System, Inc., $7.6 Billion Acquisition of Health Management

Associates (approved January 2014).

• Baylor Health Care System and Scott & White Healthcare.

Source: PwC’s Deals Practice March 2014 Analysis and Trends in U.S. Health Services Activity 2013 and 2014 Outlook.


Large Health Care System

• ABC had experienced rapid growth, which outpaced the oversight needed to control its compensation

programs.


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• One hospital and

approximately 25

clinics.

• Revenue: $800M.

• 500 employed

physicians.

• Twelve hospitals

and more than 150

clinics.

• Revenue: $2B.

• More than doubled

employee and

physician head

count.

2005 2013

“We didn’t modify programs as we grew and didn’t fully integrate new practices

as we acquired them,” reported the Vice President of Human Resources.


The Changing Face of Health Care Delivery

• Future health care jobs will look different from those today as technology and cost pressures reshape

the traditional roles into those that reflect the obligation to have people leveraging technology in new

ways. Patient care may migrate significantly from inpatient to outpatient settings. All professionals will

need to work to the top of their scope of practice. These changes will obligate a more nimble and

flexible approach to total rewards planning.

Cost and Efficient Allocation of Resources

• With the imperative to do more with less, health care institutions must understand where inefficiencies

exist in their labor spend. In many health care institutions, the basic tenets of the compensation

programs have been in place for over 10 years. With the seismic shift that has already occurred, such

programs tend to waste resources and use inefficient methods (e.g., salary grades with ranges that are

too wide; special pay practices that have outlived their objectives or “morphed” to departments for

which they were unintended; etc.).

Other Forces Driving Change

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The Imperative to Consider Human Capital From a Strategic Perspective at All Levels of the

Organization

• The health care industry has historically viewed labor costs in a compartmentalized manner seldom

thinking about the interplay of health and welfare benefits, cash compensation, retirement, and other

programs. Additionally, executive performance measures linked to incentive plans don’t always

cascade down through the organization.

• In order to perform at a high level, an organization must align its business strategy with its human

capital strategy to drive the total rewards philosophy. The total rewards program should be tailored

to specific needs vs. broad brush/one size fits all (e.g., unique incentive plans for advanced practice

clinicians; benefits appropriate for physicians vs. other employees; market adjustments consistent with

different market pressures for different job families; etc.).

Employee Engagement

• While compensation and benefit programs may not be the main drivers of engagement or turnover,

health care organizations need to analyze their employee survey data to understand the impact of the

different elements of the total rewards program and then reconfigure them as needed to maximize

engagement and mitigate cost.

Other Forces Driving Change

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2. Current Trends and Issues in Employee

Compensation

13


Top Trends and Issues

Pay for

Performance

Advanced

Practice

Clinicians

(APCs)

HR and

Physician

Compensation

14


APCs Will Outpace the Growth of Almost All Other Occupations in the U.S. Labor Force

APC Employment Projections

15

Source: U.S. Bureau of Labor Statistics, Employment Projections program.

Projected Growth 2012 to 2022

+38%

Physician Assistant

+34%

Nurse Practitioner

+29%

Nurse Midwives

+25%

Nurse Anesthetists


Increase in Employment and Pay

Average projected pay increase of APCs

(although may be higher).

Average projected employment increase of APC staff within the

next year.

Upward Demand for APCs

16


3. Delivering Effective Results

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Current State – Pay for Performance

Rethinking Pay for Performance

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Gain-sharing

Group Incentive

Merit

2011

2013 Data from Integrated Healthcare

Strategies 2013 National

Healthcare Staff Compensation

Survey (co-sponsored by the

American Society of Healthcare

Human Resources Administration):

638 participant organizations.


Considerations and Cautions

Rethinking Pay for Performance

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Ensure performance can be measured.

Communicate actions and behaviors required to improve performance.

Link employees’ actions and behaviors to goals.

When selecting goals for

rewarding health care staff, it

is critical that organizations

can:

Skill Set Time

Commitment Culture Funding

http://blog.mmeconsulting.com/clean-that-gross-screen/dusty-screen-2/


Approach Implications

Performance or Competency Assessment:

Employee’s are evaluated against pre-defined

performance standards or competencies and salary

increases are a direct reflection of these results.

(e.g., Exceeds = 5%, Meets = 3%, etc.)

• Standard and well understood approach.

• Focus is on link between performance and

pay.

• Does not consider employee’s current pay

level.

Performance or Competency Assessment and

Position in Range: Same as above, except an

employee’s increase is also affected by where their

pay falls within their pay range.

• Standard and well understood approach.

• Considers employee’s current pay level.

• Balances pay and performance.

• Can be viewed as overly restrictive and not

popular among higher performers.

Target Pay: Using a competency-profile approach,

define the expected competency profile and map

into expected positioning within a pay range. For

example, a higher level competency profile would

suggest a “target pay” in the upper third of the pay

range.

• Focus is on where in the pay range an

employee “should” be paid.

• Looks at employee more broadly (body of

work).

• Harder to manage.

Pay for Performance: Base Salary Considerations

Perf

Rating

Position in Salary Range

Lower Middle Upper

3 8% 6% 4%

2 6% 4% 2%

1 2% 0% 0%

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• A compensation and benefits review is a systematic process wherein an organization seeks to

diagnose its issues:

– Effectively catalogue and understand the various types of compensation and benefits programs.

– Determine whether the current state/strategy is effectively aligned with the organization’s business

strategy.

– Determine if there are cost efficiencies that can be obtained.

– Determine if the administrative protocols, rules, policies and procedures used to administer the

programs are being followed.

– Define the ideal compensation and benefits program designs taking into consideration typical and

best practices along with the organization’s business strategy, mission, financials, talent market, and

growth trajectory.

Aligning Your Practices with Best Practices

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• The review focuses on achieving better outcomes in four key areas:

– Program efficiency, consistency, value/cost, and alignment with market typical and/or best practices.

– Plan documentation and employee communications.

– Internal processes.

– Regulatory compliance (for benefits).


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Catalogue and confirm

Assess alignment with strategy

Assess alignment with policies

Identify costs and savings

Define the ideal state

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• Health care, more than any other industry, uses special pay programs to reward employees for a

variety of behaviors, activities and actions.

• Special pay programs are often not well defined or documented.

• The cost of the programs can range from 1% to 5% of the total wage expense.

– Example of a total wage expense summary:

Understanding Where You Are

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79.3%

9.9%

4.9%

2.5% 1.2% 1.1%

1.0% Base

Paid Time Off / Leave

Special Pay

Other Cash

Overtime

Base and Differential

Home Health

Summary of Annual Payroll Dollars

Earnings Type

Total

Dollars

% of

Total

Base $118,983,378 79.3%

Paid Time Off/Leave $14,804,438 9.9%

Special Pay $7,301,280 4.9%

Other Cash $3,824,932 2.5%

Overtime $1,854,666 1.2%

Base and Differential $1,714,786 1.1%

Home Health $1,556,997 1.0%

Grand Total $150,040,478 100.0%

Outside of overtime, special pay in excess of 5% can be

viewed as a red flag and a signal to explore further.


Special Pay – Example

• It may or may not be effective to vary the types of special pay provided to Physician Assistant specialty,

but in the case below, there was no articulated strategy and Human Resources was unaware of some

components of pay and the distribution.

Why You Need a Strategy

25

58.9%

88.8%

71.8% 82.2%

4.1%

4.9%

12.1%

7.0%

29.6%

10.6%

6.8%

2.7%

5.4%

4.7% 6.2%

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

Physician's Assistant - Surg

(EEID 2)

PA - Hospitalist Regular (EEID 3)

Physician Assistant (EEID 5)

Physician Assistant (Average)

Other

Bonus

Special Pay

Leave

Regular


Labor Force Efficiency Opportunities

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Pay Policy/Procedure Issue/Observations

Special Pay Programs Do these programs meet a business need or simply supplement

non-competitive pay levels?

Key objective is to eliminate eligibility in multiple programs.

Certification Pay Do the certifications add value to the work performed?

Key objective is to eliminate payment for certifications that are not

required to enhance the performance of value added

responsibilities.

Differentials Are they paid as a flat rate versus a percent of base salary?

Movement is to flat rates for cost control.

Have you reviewed the market need for all differentials?

Overtime Is the organization still using the 8 and 80 rule or some variation?

Movement is to use the standard 40 hour work week based on

current staffing models.



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Pay Structure Do traditional pay structures make sense in a time where the

distribution of pay in the market is narrow?

Are you still using ranges with 40%-60% range spreads?

Some organizations are narrowing ranges to better reflect market

pay distributions (pharmacy).

Other organizations are adjusting minimums at a different rate

than maximums.

On-Call Are there positions receiving on-call pay that should not?

Movement is to eliminate on-call pay for positions that are not

called in.

Clinical Ladders Do they result in a more efficient and effective delivery models or

just higher pay? Movement is to ensure that advanced skills are

regularly used and that there are measurable results (higher levels

provide mentoring, take charge, take on projects, etc.).



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Pay Increase Procedures Does it make sense to provide pay increases to employees who

are paid high in their range or the market? Some organizations

provide pay increases as a percent of midpoint to mitigate.

Is timing of market and “merit” causing pay inflation? If merit

increases follow market adjustments, total increases may well

exceed market norms and inflate salary costs.

Working to Top of

License/Expanding Scope of

Practice

Does it make sense to continue to use RNs for surgical first assist

when Surgical Techs can do this work?

Should there be a pay difference between RN Case Managers

and BSW Case Managers?

Should a job be valued on unique skills and training (example:

training in neonatal transport) by increasing base pay or salary

ranges, or should the reward be provided only when the skill is

used (i.e., a differential for hours spent in transport)?

There are no “data” to guide answers to these decisions – HR

needs to be a true business partner in guiding its organization to

the correct response.



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Alignment of Benefits Does it make sense to provide the same level of benefits to

positions in outpatient (clinic) settings as in a hospital?

As hospitals/health systems acquire physician practices, this issue

is becoming increasingly important. Frequently, actual pay levels

in a clinic setting may not differ greatly from the levels for the

same jobs in acute care, but most physician-owned practices have

much less generous benefits. The costs for providing the “same”

benefits for all may make the acquisition less attractive.

Salary Program Administration Do you still provide across-the-board increases?

For people at their salary range maximum, do you provide a lump

sum increase?

Do you have any people above the range maximum?


4. Compensation Challenges in


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Key Components for Successful Integration

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Compensation Questions for HR in M&A

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How will we address shared staff?

Will we create “shared services”

and when?

What is our retention/severance

plan?

What are “best practices” for special pay?

How quickly should we align key

compensation components?

What other programs need to

be aligned?

Who will develop/own the communication

plans?


Aligning Special Pay

Typical Market Practice or Prevalence Current Practice

• Charge pay is typically found only in nursing areas. While prevalence in non-

nursing areas is not usual, “creep” may move into support and ancillary areas.

• A good practice is to review eligibility and utilization every year or every other.

• IHS (2011): South Central; charge pay is prevalent in 77% of reporting

organizations, with 92% having flat rates, 50th percentile is $1.25, average is

$1.30.

• GroupOne (2011):

– 75% report compensating RNs for taking charge duties.

• The average reported rate is $1.45 per hour (ranges from $.50 to $2.50

per hour).

– 52% report compensating non-RNs for taking charge duties.

• The average reported rate is $1.33 per hour (ranges from $1.00 to $2.00

per hour).

• “In Charge” differential at XYZ is $1.50 per hour

and has been effective since June 12, 2006.

Only staff who work in a bedside department are

eligible for charge pay:

– However, there are instances the Team

reports where charge pay is used in non-

clinical areas to compensate individuals who

function as a team lead and this appears to

be the case based on review of the payroll

database.

• Charge differential at ABC is $1.25 per hour; no

history of the differential is available.

Observations/Comments/Recommendations

• Charge pay at ABC is within market practice but lower than XYZ.

• SullivanCotter also recommends aligning ABC with XYZ:

– If they are aligned at $1.25 per hour charge, the system will save approximately $181,000.

– If aligned at $1.50 per hour, the system will incur a net cost of about $60,000. (Assumes no change in Charge Pay utilization).

In aligning programs, it’s critical to consider the employee relations

impact as well as costs/savings.

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Aligning Special Pay

The relationship between savings and costs identified in a special pay analysis to the

impact on employee relations or improved administration.

Align Shift

Differential

Eliminate Shift Diff on

PPL & ESL

Eliminate Weekend

Differential at Hospital A

Eliminate On-Call

Stacking

Align Call

Back

Eliminate Call

Back Add On

Align Holiday Hours

Premium Definition

Eliminate CCL

& EP Incentive

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

-10 -8 -6 -4 -2 0 2 4 6 8 10

Sav

ing

s

Negative Impact on Employee Relations or Improved Administration

Align Weekend

Differentials

Standardize

On-Call Rates

Align Charge Rates

($650,000)

($550,000)

($450,000)

($350,000)

($250,000)

($150,000)

($50,000)

$50,000

-10 -8 -6 -4 -2 0 2 4 6 8 10

Co

sts

Positive Impact on Employee Relations or Improved Administration

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• Several years of limited or no increases, with little

attention paid to staff compensation.

• Decreasing reimbursements and increasing costs

drive the need to evaluate the effectiveness of

salary dollars, a significant portion of operating

expenses.

• Special pay programs contribute to a significant

portion of payroll $ and need to be carefully

understood.

• Pay for performance driven programs will continue

to increase.

• M&A activity drive the need to attain synergies and

cost efficient operations.

Parting Thoughts

35


5. Your Questions

36

Documents

Managing Compensation in a Changing Landscape