Challenges in Executive Compensation: Are You and Your Board Prepared?

www.IHStrategies.com
0
Presented To
Institute of Healthcare Executives & Suppliers
Presented By
F. Kenneth Ackerman, Jr., FACHE, FACMPE
Chairman
Kevin Haeberle, Executive Vice President
Kevin Talbot, Senior Vice President
www.IHStrategies.com Exclusive to Healthcare. Dedicated to People. SM
Securities offered through First Allied Securities, Inc., A Registered Broker Dealer, Member FINRA/SIPC.
March 10, 2010
Ponte Vedra Beach, FL

Agenda
 Integrated Healthcare Strategies Overview -
Ken Ackerman
o Challenges in Executive Compensation
o Best Practices in the Governance of Executive Compensation
 Drafting Together: Improved Performance Through
an Aligned Compensation Strategy - Kevin Haeberle
and Kevin Talbot
1

Integrated Healthcare Strategies Overview
Presentation by:
F. Kenneth Ackerman, Jr., Chairman

Introducing…
3

Our Mission and History
 We are dedicated to helping the people of Healthcare succeed by
strengthening relationships between an organization and its
employees, leaders, physicians, and boards of directors.
 Founded in 1967
 Initial public offering on NASDAQ in 1998
 Moved from NASDAQ to NYSE in 2002
 Private in 2007
 Clark Consulting and MSA combined to create –
Integrated Healthcare Strategies
Exclusive to Healthcare. Dedicated to People.
4

Integrated Healthcare Strategies Practices
5

Who We Are
Offices in Minneapolis and Kansas City
 Nearly 120 Associates
 Clients include:
■ 1,200 major healthcare providers
● 1,800 hospitals
● 400 integrated systems
■ 500 physician groups
6

Who We Serve
 Hospitals and health systems
 Academic medical centers
 Children’s hospitals
 Large, integrated provider networks and systems
 Large, multi-specialty group practices
 National and state healthcare associations
7

Our Markets
Market Share > 40%
 76% of all NACHRI member free-standing children’s
hospitals
 54% of all multi-hospital systems
 52% of all state hospital associations
 38% of all COTH member teaching hospitals
 26% of all AMGA member medical groups
 27% of all free standing hospitals with 100 or more beds
 24% of all AAMC member academic medical centers
8

Our Representative Blue-Chip Client Base
9

Our Representative Blue-Chip Client Base
10

Our Distinctions
What sets Integrated Healthcare Strategies apart?
 Exclusive focus on healthcare organizations
 Expertise of our executives, principals, and supporting staff
 Five specialty practices
Most comprehensive array of healthcare-specific services
Easy access to information and counsel
Insightful consulting advice from industry professionals
Benefit from “best practices” data from over 10,000 healthcare
organizations
 Largest data base of compensation and benefit data in
healthcare, current data, not just surveys
We are the only firm able to provide total compensation
(cash and benefits) reasonableness and competitive
positioning data
We use our database to create custom peer groups per our
clients’ specifications
11

Our Distinctions (cont’d)
 Largest library of published and unpublished surveys of
healthcare compensation data.
 A customized individual approach to each assignment with the
Governing Board as our client.
12

Our Distinctions (cont’d)
 Ability to deal with unique jobs with no obvious market
comparables
 Our research capabilities through our Federal Policy Group in
Washington, D.C., and our specialty law firm, Sherman and
Patterson, Ltd.
 Thought leader in the development of new products and services
 Tally Sheets
 Governance of Executive Compensation Manual
 Media & Constituent Communication Tool Kit
13

Challenges in Executive Compensation
Are You and Your Board Prepared?

“A Brighter Spotlight,Yet the Pay Rises”
“Tax Rule Holds Many Base
Salaries Around $1 Million”
“Say on Pay: A
Whisper or a Shout
for Shareholders?”
“Big Pay for Big Bosses Under Fire”
15

Outrage Over Executive Pay!
Bonuses at Wall Street firms after bailout ignited
firestorm
New rules for firms taking TARP $
New Fed rules for pay at banks
Compensation czar for firms getting exceptional help
 Recession, jobless recovery add fuel to fire
Regulators & public are on a roll
16

Healthcare may be Next
 Multiple opportunities for new regulation
Healthcare reform legislation
New form 990
Federal, state, local regulatory activity
■ Massachusetts attorney general’s review
■ Rhode Island’s proposed compensation limit
■ Congressional proposals, demands for
investigation
● Section 4958 being challenged
● Questioning of tax exemption
17

One Study After Another
Studies and audits at request of Congress
Senate Finance Committee study and proposals
IRS abbreviated audits of executive compensation
practices (1200 HCOs)
IRS survey to assess compliance with Section 4958
(500 hospitals)
GAO survey on structure & basis for determining
executive pay (100 HCOs)
IRS study of charity care, community benefit at tax-
exempt hospitals (10 hospitals)
18

Focus of Criticism
Use of rebuttable presumption
Compensation committees’ independence
Inappropriate comparability data
Over-reliance on national comparisons
Consultants’ conflicts of interest
Inappropriate or ineffective process
Level of pay
Perquisites and supplemental benefits
19

Boards Engaged, Cautious
Insisting on more transparency, disclosure
Questioning
Compensation philosophy
Peer group
Pay above median
Supplemental benefits
Raising performance expectations
Resisting generous severance
20

Best Practices in the Governance
of Executive Compensation

Best Practices
 Dedicated compensation committee
Clear competency standards
 Committee charter
 Full disclosure to the board
 Executive sessions
 Self-evaluation/committee evaluation
 Review form 990 reporting with full board
22

Best Practices (cont’d)
 Regularly scheduled meetings
3-4 per year
■ 2 meetings for major decisions
Adequate time to –
■ Deliberate
■ Consider appropriateness of programs
■ Consider physician compensation
■ Conduct CEO appraisal
 Continuing education (governance and regulations
 Evaluate committee performance
23

Other Best Practices
 New member orientation
 Audit of travel and entertainment expenses
 Tally sheets
24

TOTAL VALUE ANALYSIS TALLY SHEET
PREPARED FOR
JOE M. SMITH
PRESIDENT & CEO
THE ABC HEALTH ORGANIZATION
CURRENT AND POTENTIAL TOTAL COMPENSATION*
Current Compensation
Target
Potential
Maximum
Potential
Salary $550,000 $550,000 $550,000
Annual incentive payout $42,399 $165,000 $247,500
Benefits $201,788 $207,355 $211,100
Perquisite Allowance $20,000 $20,000 $20,000
Total Compensation $814,187 $942,355 $1,028,600
RETIREMENT INCOME AND SEVERANCE BENEFIT
Retirement Income at Age 65 Lump Sum
Annual
Value As % of FAS
Qualified Plans
Cash Balance Pension Plan $553,945 $50,981 7.6%
401(k) Match $358,648 $33,007 4.9%
Social Security N/A $15,048 2.2%
Non-Qualified Plans
Cash Balance Restoration Plan $235,560 $21,679 3.2%
Net SERP (after offsets) $3,287,406 $302,548 45.0%
Capital Accumulation Account $324,785 $29,891 4.4%
Total Value of Retirement $4,760,344 $453,154 67.3%
LUMP SUM SEVERANCE BENEFIT (FOR TERMINATION WITHOUT CAUSE)
Now In 2010
2 x Salary $1,100,000 $1,338,000
2 x Continuing Benefits $30,302 $36,832
Total Value of Severance $1,130,302 $1,374,832
This Tally Sheet is an estimate of the value of Mr. Smith’s total compensation, as of July 1.
* Please find assumptions and descriptions on the back of this document for more details.
THE ABC HEALTH ORGANIZATION
25

ABC Total Compensation Value
BREAKDOWN OF CURRENT AND POTENTIAL TOTAL COMPENSATION
Current Compensation
Target
Potential
Maximum
Potential
Salary $550,000 $550,000 $550,000
Annual incentive payout $142,399 $165,000 $247,500
Benefits Total $201,788 $207,355 $211,100
Health & Welfare Benefits Total, includes: $62,983
Medical and Dental Insurance $11,425
Medicare and Social Security $14,430 $16,208 $17,404
Group Long-Term Disability $960
Group Term Life and AD&D $1,440
Supplemental Survivor Life Insurance $12,710
Flexible Benefit Allowance $22,018
Retirement Benefits Total, includes: $138,805
401(k) Employer Match $9,900
Capital Accumulation $21,982
Cash Balance Pension Plan $6,798
Restoration Plan $12,125
SERP $88,000
Perquisite Allowance $20,000 $20,000 $20,000
Total Compensation: $914,187 $942,355 $1,028.600
Overall Compensation Philosophy
Cash Compensation (base salary) 50th percentile
Incentive, at target (30% of base) 50th percentile
Total Cash Compensation 50th percentile
Benefits, moderate (37% of base) 50th percentile
Perquisites, conservative 50th percentile
Total Compensation 50th percentile
Peer Group: National group of hospital systems of similar size
and complexity
Perquisite 3%
Benefits
25%
Incentive
5%
Base Salary
68%
26

BREAKDOWN OF RETIREMENT INCOME AND SEVERANCE BENEFIT
Retirement Income at Age 65
Benefit Lump Sum
Annual
Value
As %
of FAS
Qualified Plans
$912,593 $83,988 12.5%
Social Security
N/A $15,048 2.2%
Non-Qualified Plans
$560,345 $51,570 7.6%
SERP
$3,287,406 $302,548 45.0%
Total Value of Retirement $4,760,344 $453,154 67.3%
Lump Sum Severance Benefit
(for termination without cause) Now In 2010
2X Salary $1,100,000 $1,338,000
2X Continuing Benefits $30,302 $36,832
Total Value of Severance $1,130,302 $1,374,832
ALTERNATIVE RETIREMENT SCENARIOS
Situation One: Leave ABC Today
Lump Sum
Annual
Value
As %
of FAS
TOTAL QUALIFIED $509,492 $41,404 8.2%
Non-Qualified
Cash Balance Restoration $106,061 $8,619 1.7%
Net SERP – Not Vested - - 0.0%
CAA $126,418 $10,273 2.9%
TOTAL NON-QUALIFIED $232,478 $18,892 3.8%
TOTAL ALL $741,970 $60,296 12.0%
Situation Two: Retire at Age 62
Lump Sum
Annual
Value
As %
of FAS
TOTAL QUALIFIED $697,867 $72,165 12.4%
Non-Qualified
Cash Balance Restoration $167,781 $14,456 2.5%
Net SERP $1,966,376 $169,418 29.1%
CAA $220,121 $18,965 3.3%
TOTAL NON-QUALIFIED $2,354,278 $202,838 34.9%
TOTAL ALL $3,052,145 $275,003 47.3%
I
27

Other Best Practices (cont’d)
 Committee manual
Governance standards and best practices
Committee charter
Calendar
Total compensation philosophy
Salary administration guidelines
Incentive plan documents and administration
Executive benefits and perquisites
CEO total compensation - Tally Sheets
CEO performance appraisal
Employment agreements
Executive severance policy
28

Other Best Practices (cont’d)
 Reconcile form 990 with tally sheets, committee decisions
 Publish description of philosophy and program with
form 990
29

Drafting Together: Improved Performance
Through an Aligned Compensation Strategy
Presentation by:
Kevin Haeberle, Executive Vice President
Kevin Talbot, Senior Vice President

My energy level …
31
High
and
ready...
OK,butcould
...
Idid
notreal...
W
hen
isthe
co...
25% 25%25%25%1. High and ready to go
2. OK, but could use a
little Red Bull
3. I did not realize how
hard these chairs
were going to be
4. When is the cocktail
hour?

What do you consider to be your most significant
leadership challenge …
32
33%
33%
33%
Finding the right... Ensuring that we ... Establishing wher...
1. Finding the right
talent to help me lead
2. Ensuring that we are
all driving towards the
same goals and
objectives
3. Establishing where
we are going

33
Leadership’s Purpose
 Achieve Desired Outcomes with Limited Resources
 Create the Best Opportunity to Perform at the Highest Level
in the most effective and efficient manner
 Being accountable for Achieving Desired Outcomes through
the Performance of Others
 Motivating individuals to perform as a group towards
common objectives

What do you think we find is the common component
among high performing healthcare organizations …
34
The
besttalen...New
erfaciliti...A
excellentca...
Lim
ited
Com
pet...Highlyaligned...
20% 20% 20%20%20%
1. The best talent –
leadership or clinical
2. Newer facilities
3. A excellent case mix
index
4. Limited Competition
5. Highly aligned
leadership,
employees and
physicians

35
The Power of Alignment
Just One Cycler
20
30
40 50
60
10
70
80

36
10
20
30
40 50
60
70
80

37
Optimal Alignment (drafting)
10
20
30
40 50
60
70
80

38
One gets out…
And everyone has to work harder and progress slows down…
40 50
30 60
20 70
10 80

39
Sometimes, even someone else can take the lead.
With Optimal Alignment…

What do you believe is the alignment level of your
senior leadership team …
40
100%
90%
80%
Lessthan
80%
25% 25%25%25%1. 100%
2. 90%
3. 80%
4. Less than 80%

middle management team …
41
100%
90%
80%
Lessthan
80%
25% 25%25%25%1. 100%
2. 90%
3. 80%
4. Less than 80%

How do you think your middle management team would
assess the alignment of Senior Leadership …
42
100%
90%
80%
Lessthan
80%
25% 25%25%25%1. 100%
2. 90%
3. 80%
4. Less than 80%

How do you think your middle management team would
assess the alignment of themselves …
43
100%
90%
80%
Lessthan
80%
25% 25%25%25%1. 100%
2. 90%
3. 80%
4. Less than 80%

employees …
44
100%
90%
75%
50%
Lessthan
50%
20% 20% 20%20%20%1. 100%
2. 90%
3. 75%
4. 50%
5. Less than 50%

What do you believe is the alignment level of your key
physicians …
45
100%
90%
75%
50%
Lessthan
50%
20% 20% 20%20%20%1. 100%
2. 90%
3. 75%
4. 50%
5. Less than 50%

What do you believe is the alignment level between you
and your senior team and your key Board members …
46
100%
90%
75%
50%
Lessthan
50%
20% 20% 20%20%20%1. 100%
2. 90%
3. 75%
4. 50%
5. Less than 50%

Do you think if you were more effectively aligned, you
would could place the organization in a position to
perform at a higher level ..
47
25%
25%25%
25%
Yes Somewhat Already highly al... It is hopeless
1. Yes
2. Somewhat
3. Already highly
aligned
4. It is hopeless

48
The Keys to Successful Alignment
• Accountability for alignment – not just setting goals
• Needed Skill - A structured process which aligns
all levels of the organization together,
understanding the unique aspects of each level
• The ability to lead through influence
• Needed Skill – Persuasion tools to gain
acceptance and buy-in
• Incentives to align (not just perform)
• Needed Skill – A understanding of the
motivational components of different work value
systems
• Limited tolerance for leadership misalignment
• Needed Skill – Effective tools to create
expectations and to monitor performance at all
levels

If I had to choose, I would rather the team be …
49
25%
25%25%
25%
Satisfied Engaged Aligned Committed
1. Satisfied
2. Engaged
3. Aligned
4. Committed

Other Components of Alignment
Satisfaction
•Measure gap between perceived reality and expectations
•Expectations low right now – Satisfaction OK
•As economy improves, expectations will rise
•Hospital’s will lag in response
Engagement
•How deep is your well – credibility and trust
•Needs mutual commitment
•Diminished by each unilateral act
Alignment
•Acceptance of goals and objectives – more than a direction
•Uncertainty of where healthcare is headed
•Leadership’s job is to plan for the future – are they aligned
Commitment
•Loyalty is a brand
•Consolidations and loss of identity
•New generations loyalty different
50

What do you consider to be your most significant
leadership challenge …
51
33%
33%
33%
Finding the right... Ensuring that we ... Establishing wher...
1. Finding the right
talent to help me lead
2. Ensuring that we are
all driving towards the
same goals and
objectives
3. Establishing where
we are going

My energy level …
52
High
and
ready...
The
Red
Bull(...
Iam
used
to
t...
W
hen
isthe
co...
25% 25%25%25%1. High and ready to go
to the next session
2. The Red Bull (this
presentation) helped
3. I am used to the
chairs now
4. When is the cocktail
hour?

Leadership Team
KEN ACKERMAN
Chairman
BOB ERRA
President
Our Five Specialty Practices
JANE
GROVES
Executive VP &
Practice Leader
MSA Executive
Search
KEVIN
HAEBERLE
Executive VP
& Practice
Leader MSA
HR Capital
KEVIN
TALBOT
Practice
Manager Total
Executive
Compensation
STEVE
RICE
Executive VP &
Practice Leader
Physician
Services
JIM
RICE, Ph.D.
Exec VP &
Practice Leader
Governance &
Leadership
Services
SUSAN MCGANNON
EVP/CFO
55

Integrated Healthcare Strategies
Integrated Healthcare Strategies provides clients with access to
the most comprehensive array of healthcare-specific services
available through our five specialty practices.
• Executive Total Compensation
• Executive Search
• Governance & Leadership Services
• HR Capital
• Physician Services
56

Practice Overviews
Chairman - F. Kenneth Ackerman, Jr., FACHE, FACMPE
Ken brings over 30 years of background in health care
administration to Integrated Healthcare Strategies. Mr.
Ackerman’s consulting experience spans the entire spectrum
of health care--management of hospital-based, multi
specialty group practices; integrated systems; and executive-
level involvement in rural health maintenance. Prior to
joining Integrated Healthcare Strategies, Mr. Ackerman was
the Vice President of McManis Associates in Washington,
D.C. He is a past chairman of the Medical Group
Management Association.
57

Practice Overviews
Executive Total Compensation - Kevin Talbot, Practice
Manager
The compensation challenge today is to attract and retain the
best talent available while meeting both your fiscal and
executive retention goals. The solution is a compensation
package developed to match your organization’s compensation
culture, strategy and philosophy through a variety of specific
compensation components. The right mix and balance of base
salary, bonuses, deferred compensation, contractual
allowances, long-term incentives and executive supplemental
benefits is the key to success.
58

Practice Overviews
MSA Executive Search - Jane Groves, Executive VP,
Practice Leader
No matter where you are today in the process of choosing a
new executive, our customized search methodology can assist
you. With statistics such as 100% of CEO searches closed on
the first slate presentation, the most comprehensive candidate
evaluation in the industry and 98% client retention rate over the
past 10 years, it’s no wonder we rank as one of the top 15
healthcare retained executive search firms in the country.
59

Practice Overviews
Physician Services - Steve Rice, Executive VP, Practice
Leader
Physician Services assists not-for-profit healthcare
organizations to develop successful relationships with their
employed and affiliated physicians. Consulting services focus
on: physician fair market value assessments and expert
opinions; physician integration, affiliation and
strategy consulting; physician compensation review and
design; physician opinion assessments; organizational
structure and physician leadership development.
60

Practice Overviews
MSA HR Capital - Kevin Haeberle, Executive VP, Practice
Leader
To be most effective, your human resources organization must
support your strategic objectives. MSA HR Capital provides
comparative data from over 1,000 hospital organizations to
tailor solutions for your specific work environment to ensure
that you reach objectives by integrating your management,
compensation, labor relations and employee engagement
goals into one seamlessly operating whole.
61

Practice Overviews
Governance & Leadership Services - James Rice, Ph.D.,
Executive VP, Practice Leader
You can depend on the industry leader to provide you with
valuable information, insights, design, implementation strategy,
and support for a variety of governance and leadership issues
and challenges. These services include Continuity Planning
and Development, Governance model design development and
refinements, Board retreats to enhance effectiveness, CEO
and Executive Performance development and appraisals,
Physician Leader Services, and our unique Governance of
Executive Compensation services.
62

Our Vision
 To be the best at what we do
 To recruit and retain the most talented people
Opportunities for career development
 To grow the company
Grow organically
Develop new products and services
Grow at the margins
Acquisitions
 To retain and add premier clients
 To be recognized as the knowledge leader in the industry
in the consulting spaces we serve
63

Sample Cover or Title Slide
Presented by:
Ken Ackerman
Kevin Haeberle
Kevin Talbot
64

Challenges in Executive Compensation: Are You and Your Board Prepared?

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