Nonprofit HR Conference Variable Pay in NPs: The Good, the Bad

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Nonprofit HR ConferenceVariable Pay in NPsThe
Good, the Bad the Ugly
June 13, 2003

• David Pierson, Ph.D.
• The Pierson Group
• piersongrp_at_aol.com
• Marty Cormican, Esq.
• Swarthmore College
• mcormic1_at_swarthmore.edu
• Robert Zimmel
• St. Lukes Health Network

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Agenda

• Starting BIG
• Background Issues
• Advantages Disadvantages
• Who Uses Variable Pay
• Building a Program
• Example
• Landmines
• QA
• Discussion

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Think Big Picture!
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The BIG picture
Corporate Vision/ Mission
Business Strategy
Pay Program Design Admin
HR Philosophy Strategy
Compensation Philosophy
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Background Issues
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What is Variable Pay?

• Compensation that is contingent on discretion,
  performance or results.
• At risk
• Both incentives and bonuses
• Typical in FP

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FP/NP Distinctions

• Tax treatment
• Inurement restrictions
• Work Cultures
• Employee orientations/motivations

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FP/NP Similarities

• Performance matters more than ever
• Resources are tight
• Certain labor markets are tight
• Compete on Total Rewards basis

Total Rewards Salary Variable Pay Benefits
Work Culture
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Bonuses vs. Incentives
surprises

• Bonuses are
• Incentives involve
• Motivational impact differs
• Value to organization differs

expectations
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s
s
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Pros Cons
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Who Uses Them?
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Incidence NP Variable Pay
Source Association Executive Compensation
Benefits Study, ASAE, 2002
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Types of NP Plans
Source Association Executive Compensation
Benefits Study, ASAE, 2002
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Varies by Type of Organization

• Health care
• Nearly all medium to large systems have
  management incentives (gt 95)
• Incidence approximates for profit sector
• Other NPs have been slower to adopt formal
  variable pay programs

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Building the program
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Whats Required

• Performance orientation
• Performance metrics
• Senior leadership support
• Board support
• Management expertise comfort
• Clear line of sight

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Types of Plans

• Individual incentives/commissions
• Group plans
• Company-wide plans
• Profit sharing
• Targeted
• Combination

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Steps

• Conduct a Readiness analysis
• Board
• Management culture
• Performance orientation
• Jobs
• Employees
• Form design team
• Choose type of plan level of intervention
• Organization wide
• Departmental
• Individual
• Combination
• Choose participants
• Set competitive targets/mix by level

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More Steps

• Select one or two circuit breakers
• Choose performance measures
• Mission
• Business strategy
• Departmental objectives
• Individual objectives
• Weight performance measures
• Establish performance levels for each performance
  measure
• Threshold
• Target
• Maximum
• Calculate performance-award relationships

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Even More Steps

• Review with executive leaders
• Create a communication plan
• Introduce participants to the program
• Periodically revisit all aspects of design

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Examples

• Innumerable discretionary plans between Boards
  and NP Executives
• USPS Gainsharing
• 1995 survey showed pay above market
• Began gainsharing program in 1995/1996
• Funded by EVA (economic value added)
• Net income and service increased
• Eroding economics posed significant problems
• Funding will be simplified in 2004

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Examples (cont)

• Health System
• Participation limited to senior management
• Each participant has a target award level based
  on competitive analysis
• Board approves
• circuit breakers
• performance measures
• tentative target incentive pool equal to sum of
  individual targets
• Actual award depends on
• Circuit breakers being met
• Actual performance on performance measures

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Examples (cont)

• Circuit breakers for both Management and Medical
  Chief plans
• System operating income of 2 million
• Maintain JCAHO, PA Department of Health and
  Trauma Center accreditations

System Operating Income
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Landmines

• Intermediate Sanctions on Excess Benefit
  Transactions
• Penalties for excess compensation levels paid to
  disqualified persons
• Individual and decision makers are at risk
• Utilize safe-harbor guidelines
• Use Board committee
• Conduct competitive market study (3rd party?)
• Document
• Should go hand-in-hand with strong budgeting
  process managers need to accept responsibility
• Keep program up to date
• Maintain control of process

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• Why arent incentives used more often?
• Are they worth the effort?
• Where are they most appropriate?
• Have you seen negative outcomes?
• Advice for NPs contemplating them