Essays January 2012
Chasing CEO Talent in Healthcare: Is It Really About the Money?
The release of CEO pay and benefits by Ontario’s 151 hospitals has added considerable spice to the post-holiday news lull. It will come as no surprise that the Ontario Hospital Association stoutly defends the compensation packages as essential to attracting top talent. Nor should we be shocked that the business school analysts have fallen neatly in line, reminding us of the iron law of capitalist merit: you get what you pay for.
It certainly didn’t hurt the cause for the defence that the Canadian Centre for Policy Alternatives simultaneously released its report on Canada’s 100 highest-paid CEOs. They average a cool $8.4 million per annum. On this SES gradient, the health of hospital CEOs is at considerable risk, because at $300,000 to about $1,000,000 all-in, they are in this league table depressingly blue-collar. That’s not good. According to a yet-unpublished randomized controlled trial, Ontario hospital CEOs who read the CCPA report developed an instant craving for fast food and began to smoke. The plaque is already forming in their arteries. The hierarchy, the hierarchy.
The CEO pay packets on their own are a tempest in a teapot – if you whacked them all in half you wouldn’t even notice the difference in a $50 billion-plus health budget. But the issue is interesting in principle and symbolically important. How much an industry or an organization pays its top people signifies its value system in absolute and relative terms. The justifications offered reflect their assumptions about what motivates people, what makes an environment attractive, and against whom they are competing. So let’s look at the arguments on their merits.
1. Pay big bucks or lose talent to the private sector
This argument rests on two premises: that CEO-type talent is generic and portable, and that head hunters are routinely trolling the hospital sector to fill jobs at Magna, RIM, and Bombardier that come with million-dollar base pay, bonuses potentially worth triple that, and the down payment on the yacht known as stock options. Really? Has one Canadian hospital CEO ever landed a megabucks job in the private sector? Show us the evidence.
Most CEOs are either physicians, nurses, and/or MHA/MBA graduates who have worked their way up the system. They have spent their lives in healthcare and their knowledge is very sector-specific. (A good thing too – handing healthcare CEO jobs to content-free private sector folks has generally proven, to put it delicately, suboptimal.) More to the point, they went into healthcare knowing full well that their income was going to top out at a figure that barely covers Frank Stronach’s tip money. I believe lots of people in healthcare could have been investment bankers, but they chose not to. Being adults, they know the financial impact of that choice.
2. Pay big bucks or the talent won’t seek CEO jobs
A healthcare CEO job is no piece of cake. In a hospital your ability to manage is limited by the privileges of doctors, the conventions of clinical autonomy, the rigidities of collective agreements, and the inability to manage demand. The CEOs I know work very hard, and they are rarely loved either internally or by their communities since everyone has an axe to grind about something. The ones that fight hard battles and promote the public interest over particular interests are loved least. No one in her right mind would seek such a job without big bucks, right?
Bullfeathers. As study after study tells us, happiness does not rise with income beyond a startlingly modest level – under $100,000. Fabulously rich entrepreneurs repeatedly say – and I believe them – that it’s not about the money, it’s about the game, the power, the control, the ability to make a difference. If people in healthcare were simply interested in maximizing the income:stress ratio, there wouldn’t be any nursing supervisors. They make a pittance more than staff nurses, and sometimes less than those who score a lot of overtime. Every doctor would aspire to be a cataractologist and there would be no one to care for the frail elderly. Authority is its own reward, and according to the illuminating work of Daniel Pink, in general money is not nearly the motivator neoclassical economists assume it is.
Forget about the theory – what about practice? Was incompetence the norm among CEOs in Ontario hospitals when compensation was in real terms lower and absent the gold-plated pension top-ups? Do European CEOs, paupers compared to their North American counterparts, run their companies less well or make fewer catastrophic errors in judgment than the denizens of Lehman Brothers RIP? Avoid errors in reasoning: just because some talented people might reject a job because of the pay doesn’t mean that all equally talented people will opt out of the pool.
There is compelling evidence that in the public sector, whatever the top jobs pay, good people will line up for them. Deputy Ministers make far less than top-paid Ontario hospital CEOs. Is there any evidence that the talent pool is thinner? US Supreme Court Justices make less than Saskatchewan provincial court judges, who whine constantly about their pay. Has anyone turned down a Supreme Court appointment because of the money?
3. Pay big bucks or get outbid by peer organizations
Ah, the old bidding war argument. This one is valid: if hospitals can independently decide how much to pay their CEOs, inevitably someone will up the ante and the pack will follow. The early bidders start the auction; the next wave embraces it as the new normal, others go along reluctantly, and still others abdicate by pegging their own rate to a certain percentile within the peer group. It’s always, always a race to the top.
But it has nothing to do with necessity, or transparent and defensible decision-making. At best it starts rather innocently, with a decision taken in a particular context, a one-off that ends up reverberating throughout the system. At worst it is an arbitrary and self-serving windfall sanctioned by people with little connection to reality. It is no mere coincidence that a) University Avenue CEOs are far and away the highest paid in the country, and b) their boards are populated by private sector gazillionaires whose income benchmarks are stratospheric.
4. Independent compensation reviews validate the scales
I’m sorry to offend the compensation review and headhunting communities, but the art of figuring out how much executives should get paid is more often than not a self-referential, value-free, inherently inflationary exercise. Some boards seek such reviews in genuine search of a fair outcome. But mostly they’re cover for big raises, often prompted by CEOs acutely aware of argument #3 above. And if peer behaviour is the major driver of increases, it will determine “objective” pay rates. You end up paying whatever everyone is paying, even if the whole scale is off the rails. The process is conveniently fungible. The composition of the comparator groups is negotiable. No one breaks ranks on the low end; it’s again a race to the top.
Years ago, when I last had a real (but modest) CEO job, the board commissioned a review of my pay. Predictably, the recommendation was to give me more money. The logic of the report was flimsy at best – I could have argued that it was unfairly low or unreasonably high. I didn’t even want more money, and said to the board, why don’t you think of other ways to reward me, like a course, or a mini-sabbatical? Too complicated, so they gave me more money.
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Let me be clear: I don’t care or begrudge what Ontario CEOs get paid, and could be persuaded by good evidence and reasoned argument that as a group they are more able and talented than occupants of other senior public sector positions. If a reasonable number of hospital boards documented a systematic shortage of worthy candidates attributable to prevailing pay ranges, a plausible case for more begins to emerge. If the number of good candidates for CEO jobs had thinned across the board, again there may be a case for the past decade’s enrichment.
But it is also possible that Ontario NDP leader Andrea Horwath is right – there needs to be a cap. I know a few hospital CEOs in Ontario who have moved from senior governmental or health region CEO jobs elsewhere. They are discreet and perceptive people, and I am not quoting them. But I infer from their accounts of the transition that their Ontario jobs are easier and better paid than their previous ones. They got offers they couldn’t refuse. Depending on your perspective, that makes Ontario either a talent magnet or a compensation truant.
Other provinces have insulated themselves against idiosyncratic practices. Saskatchewan mandates pay grids for health region CEOs, topping out just north of $300,000 plus benefits in Regina and Saskatoon, and little more than half of that in the smallest regions. These CEOs are all responsible for acute, long term residential, and community care in multiple sites and multiple communities. I’m not saying it’s enough, or not enough. But you’d have to prove it to me that our talent pool is systematically inferior to Ontario’s even if it is highly unlikely that any current Ontario CEO would move west on our terms.
Numbers aside, this whole business, just like pay for performance for doctors, has a troubling aspect to it. When compensation becomes the primary indicator of worth and the principal driver of performance in healthcare, over time the system gravitates toward market-speak and abandons its cultural heritage. CEO pay may partly reflect the values and context of the health sector, but it also partly defines those values and that context. It is a signalling device, a canary for what may happen in the mineshaft.
There is no definitively right amount to pay hospital CEOs. My solution: give them interesting work to do, pay them well, be suspicious of those only in it for status and money, and don’t worry if the odd one gets away. You don’t need every potential star to want your job; you just need one, who wants it for all the right reasons. Healthcare is public service motivated by the desire to do good works. We want it to be great and well led, but we do not want its motivations to reduce to the narrower imperatives of the private sector. Governments and boards should keep the distinction in mind when deciding on how and how much to pay their CEOs, and contemplating the consequences of their approach.
About the AuthorSteven Lewis is a health policy consultant based in Saskatoon and Adjunct Professor of Health Policy at Simon Fraser University.
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