"The Ronan Report" provides insight about the activities at the Western Maryland Health System in Cumberland, Maryland, and about the changes taking place in healthcare today from a CEO's perspective.

Friday, October 12, 2012

Administration and Executive Compensation

After that very difficult situation last week, I have heard questions about what is administration  doing during this challenging time.   What are we sacrificing?  In fact, the Cumberland Times-News editor called and asked the same question and subsequently provided his perspective.

In addition to losing two key members of the senior management team and not filling those positions going forward, senior management has had their salaries frozen until raise actions are restored for all employees at WMHS.  The duties and responsibilities of the Chief Operating Officer and Vice President, Human Resources will be divided among all of the remaining executives as those two positions will not be replaced.  Someone else will be doing the work currently performed by those executives and those positions will not be filled. 

The issue of executive compensation has also come up.  It is important to remind folks that executive salaries are set by the WMHS Board of Directors based on survey data obtained by a national executive compensation consultant, Mercer.  Mercer provides the Board with data from comparable hospitals and health systems to ensure that the compensation and benefits provided are competitive, but also reasonable.  The data is based on similar hospitals and health systems that have net operating revenues in excess of $300 million, as is the case at WMHS, along with those that are comparable in size, scope and structure to WMHS.   An executive's time in the position and level of experience also figure into the equation. 

The importance of engaging an outside consultant such as Mercer is  that it  also provides for a statement of reasonableness for the health system's annual filing with the IRS.  Because WMHS is a tax-exempt organization, we must meet IRS requirements ensuring that our executive compensation is reasonable and appropriate.  Mercer provides that assurance to the Board each year.  The IRS, along with the Health Services Cost Review Commission (HSCRC) in Maryland, reviews executive compensation once the 990s are filed with both regulatory bodies.  Boards must then be positioned to defend executive compensation as reasonable and appropriate.   One of the other factors that we use at WMHS to determine if our executive compensation is reasonable is by annually reviewing and comparing the administrative expenses for WMHS against all Maryland hospitals.  This information is tracked for hospitals by the HSCRC.  Year after year, those results show WMHS is among the lowest of Maryland hospitals in spending for administrative expenses.  For the most recent reporting period, WMHS was ranked 45 out of the 48 Maryland hospitals.

Executive compensation is always a tough issue, that's why it's best left to the experts.

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