Nonprofit Hospital CEO Compensation: Does Quality Matter?
In the following article, I investigated a research study by
Jenkins, Short, and Ho (2024) that poses a targeted question with real policy
relevance: in nonprofit hospitals, does executive compensation reward clinical
performance or something else? The authors answer this question with a design
that is intentionally straightforward, transparent, and easy for boards to
grasp. They combine CEO compensation data from IRS Form 990 filings with
standard hospital characteristics and quality indicators for two points in
time, 2012 and 2019. They model the logarithm of chief executive pay as a
function of profits, bed size, system versus independent status, teaching
status, charity care, and two commonly used outcome measures: a
condition-specific 30-day pneumonia mortality rate and a hospital-wide 30-day
readmission rate. To understand why pay increased over this period and what
influenced changes in responsiveness to performance, they include an Oaxaca
decomposition. This approach breaks down the observed growth in compensation
into parts that reflect shifts in hospital traits over time and changes in the "rewards"
associated with those traits, along with a residual that captures baseline pay
movement. The sample includes 1,047 organizations in 2012 and 812 in 2019,
providing broad coverage across the nonprofit sector while remaining grounded
in verifiable filings. The main finding is clear: in 2012, higher quality was
somewhat more associated with higher pay, though modestly; by 2019, this link
had weakened, while pay became more closely tied to organization size and
profits. The decomposition indicates two main factors behind the increase:
boards increased the premium for operating very large systems, and baseline
compensation grew independently of measured clinical performance. In summary,
size and profit margins increasingly overshadowed quality in determining executive
pay (Jenkins et al., 2024).
This pattern fits the broader empirical record. A decade
ago, Joynt and colleagues examined compensation in nonprofit hospitals and
found that pay lined up with technology intensity and patient-experience scores
rather than mortality or charity care (Joynt et al., 2014). Boards regularly
state that quality matters, yet the pay formula often prioritizes other factors.
More recently, the same research group as Jenkins et al. (2024) documented that
the biggest jumps in CEO pay cluster in larger systems and track profitability,
reinforcing the size–profit premium. Taken together, these strands describe a
structural tilt in nonprofit hospital compensation: leaders are paid for scale
and financial results, while objective outcome measures carry less weight than
the public narrative might suggest.
Jenkins et al. (2024) pose the concept: "Why should
senior teams, trustees, and community stakeholders care?" Because
compensation design acts as a shortcut for strategy. In a tax-exempt
enterprise, the bonus plan indicates what the organization truly values. When
the scorecard rewards growth in beds, covered lives, and operating margin more
than safer care or equitable access, executives will focus their attention and
political capital where the payoffs lie. The authors also show that, over the
period studied, CEO compensation increased by roughly one-third. Meanwhile,
average RN pay barely changed, creating a gap with real cultural consequences
in an era of burnout and staffing shortages (Jenkins et al., 2024). This
divergence can erode trust, increase turnover, and lead to greater dependence
on premium labor. On the market side, literature on consolidation underscores
concerns that a pay plan emphasizing scale can guide systems toward deals that
raise prices without improving outcomes. Dafny, Ho, and Lee (2019) show that
within-state, cross-market mergers boost prices by 7 to 9 percent, a pattern
consistent with bargaining leverage rather than efficiency. Beaulieu and
colleagues (2020) report that acquired hospitals experienced lower
patient-experience scores and no clear gains in readmissions or mortality after
acquisition. More recently, economists have linked a significant portion of
hospital price growth to lax merger enforcement, with predictably anti-competitive
deals causing around five percent price increases (Brot et al., 2024). This
context makes the Jenkins finding more than just curiosity. If compensation
increasingly rewards scale and margin, leadership teams face a strong push to
pursue footprint expansion as the default strategy, even when clinical value
does not follow.
The internal strength of the paper rests on its clarity of
method and restraint in claims. Regressing log pay on observable traits and
then using an Oaxaca decomposition is standard when the goal is to separate "what
the market pays for" from "how common those features are." The
specification will feel familiar to any finance or HR committee that has seen a
compensation consultant bring "market data" and a multivariate pay
model to a board meeting. That familiarity is an asset because it reduces the
distance between research and governance practice. At the same time, the
authors acknowledge limits that matter for interpretation. The quality lens is
narrow: one condition-specific mortality rate and a global readmission rate cannot
capture safety culture, harm events, timely access, or equity. Measurement
error in such proxies can attenuate estimated associations, pushing estimates
toward zero. Important drivers sit off-model, including fundraising prowess,
payer-mix sophistication, or board composition. IRS 990 data can understate
deferred compensation or one-time payouts, and systems differ in how they
categorize components of pay. Finally, the comparison uses two time points.
That design clarifies before-and-after differences but cannot fully absorb
policy shocks or secular trends between 2012 and 2019. Even with these
constraints, the paper's pattern lines up with independent evidence, which
boosts confidence in the central take-home message: in nonprofit hospitals,
compensation tracks size and financial performance more reliably than core
clinical outcomes (Jenkins et al., 2024; Joynt et al., 2014; Jenkins et al.,
2024).
The current market shows similar signs. Hospital and
physician-practice consolidation continues, including many deals that are below
Hart-Scott-Rodino reporting thresholds. These smaller deals can still change
local bargaining power and contribute to the "scale premium" that
boards seem willing to pay. Enforcement has become more active in certain
regions, but the proportion of challenged deals remains small compared to total
deal flow. When agencies allowed suspect mergers to go forward, prices
increased in ways that antitrust models would predict (Brot et al., 2024).
Buyers and regulators have become more skeptical that mergers improve quality,
partly due to high-profile studies like those cited above. Within
organizations, noticeable gaps between executive pay increases and frontline
wages heighten reputational risks and labor tensions. Leaders notice this
through higher vacancy rates, increased agency spending, and a culture that is
tired and weakens clinical reliability.
What should boards and senior teams do with this evidence?
Start by restoring a clean line of sight between pay and the clinical results
that matter. That requires more than dropping a token HCAHPS item into the
annual bonus. Tie a meaningful share of variable compensation to a small,
stable set of risk-adjusted outcome metrics that clinicians recognize and
patients experience. Examples include serious safety events, harm-free care
composites, mortality and readmission bundles that reflect the organization's
case mix, and access measures that track equity, timeliness, and continuity.
Use multi-year rolling averages to dampen noise and disincentivize gaming. Weigh
these elements heavily enough to shape behavior, and publish the weights. Next,
remove direct rewards for scale. If the formula implicitly pays more for more
beds or covered lives, the strategy will tilt toward acquisition. Replace size
as a pay driver with measures of value created for the community per tax-exempt
dollar. This reframes the job from "get bigger" to "create
better outcomes at a given scale," which aligns with the sector's public
purpose and the literature on consolidation's mixed clinical returns (Jenkins
et al., 2024; Dafny et al., 2019; Beaulieu et al., 2020).
Boards should align margin and quality within the same plan
year. Executives should not be able to meet financial targets solely through
price leverage while missing clinical goals, or vice versa. Setting paired
targets makes it clear that sustainable value depends on both stewardship and
outcomes. Transparency is key. Require a public, plain-language summary of the
metrics used to determine pay, their weights, and the organization's three-year
performance against these targets. In other nonprofit areas, increased
disclosure has been linked to stronger pay-for-performance relationships,
partly because it sharpens oversight and invites external scrutiny. Finally,
tailor committee expertise to the scorecard. Compensation oversight should not
be the responsibility of only finance and law. Include members with strong
patient-safety and quality backgrounds, and give them authority equal to the
financial experts. When governance bodies have the skills to scrutinize quality
claims, management practices improve, and clinical performance tends to rise,
creating a stronger connection between oversight and outcomes.
It also helps to view hospital patterns within a broader
nonprofit context. In sectors driven by mission without owners, executive pay
tends to increase with organizational size and financial strength more than
with program results. Stronger governance and improved measurement can help
strengthen that link. Public higher education provides a similar example:
econometric studies have shown that the pay of presidents and provosts
correlates more consistently with institutional characteristics and size than
with improvements in student outcomes. Community health centers, which are
closer to hospitals on the care delivery spectrum, display a similar pattern,
with weak connections between CEO pay and objective clinical performance.
Corporate research in for-profit sectors offers a practical lesson:
pay-performance relationships can be modest and inconsistent, but tools like
relative performance evaluation, multi-year vesting, and clear peer benchmarks
can improve alignment and reduce gaming. Nonprofits can adopt these design
features without compromising their mission.
The Jenkins et al. (2024) study delivers a subtle but
important message that leaders should pay attention to. Goodhart's law warns
that when a measure becomes a target, it may stop being a good measure. This does
not mean you should not link pay to outcomes; instead, it suggests selecting a
few strong, risk-adjusted metrics, updating them at a steady pace, and
supplementing them with qualitative review. It also recommends designing
incentives that reward improvement based on a baseline, rather than only
rewarding absolute levels that favor already advantaged institutions.
Executives respond to the incentives they face. If the bonus plan makes it
personally rewarding to reduce harm events, close equity gaps, and manage total
costs, leaders will focus on these areas. If the bonus plan pays a premium for
size, leaders will pursue it.
Taken together, the evidence clearly indicates a trend. Over
the past decade, the nonprofit hospital sector has prioritized paying leaders
more for scale and profitability rather than for measurable improvements in
clinical quality, and this bias became even stronger by 2019. The market
environment does not justify that choice, as consolidation usually increases
prices and does not consistently improve patient outcomes. In this context, how
organizations design compensation becomes a crucial strategic tool. Boards
aiming for safer care and better access need to revise their payment
strategies. This involves focusing on fewer metrics, emphasizing outcomes that
truly matter, balancing both cost management and clinical results, openly
sharing the calculation methods, ensuring committee expertise to scrutinize
both data and narratives, and shifting incentives from "how big" to
"how well" will steer organizational efforts in the right direction.
Jenkins, D., Short, M. N., & Ho, V. (2024). The
determinants of nonprofit hospital CEO compensation. PLOS ONE, 19(7),
e0306571. https://doi.org/10.1371/journal.pone.0306571
Comments
Post a Comment