Healthcare providers and insurers have had very divergent, disruptive experiences in 2020 and 2021, leading to unique sets of challenges and opportunities in executive compensation program design. Managing Directors Steve Sullivan and Ed Steinhoff discuss how their provider and insurer clients are balancing pay and financial and operational performance, and how they are approaching retention in the current unusual labor market.

Q: The impacts of the pandemic have been quite different for providers and insurers. How are you seeing that reflected in executive compensation?

Ed: We are seeing those differences reflected in the design of executive compensation programs going forward, and are certainly seeing those differences in payouts for performance-based metrics. Insurers generally have had two very solid years in a row now, performance-wise.

Steve: On the provider side of the healthcare equation, it’s a different story. Over this past year, I’ve worked with a few health systems whose compensation committees have decided to override the financial requirements in order to deliver a reward for management teams that have been working harder than ever before.

Many systems didn’t pay an incentive in 2020, or it was forfeited or they made a partial payout—ultimately the full incentive was not delivered. Our advice in the current tight employment market is that committees shouldn’t deliver less than what’s been earned two years in a row. In quite a few of these organizations some incentive has been earned in 2021, either through discretionary decisions or modified metrics, or possibly changes to the plan financial trigger. Some of these compensation committees will forgo the margin or operating income requirement and they’re paying for the non-financial achievements.

Ed: The story is different for many payers, where above-target levels have been reached in the financial performance area. Where there is some question is what happens after two or more such high-performance years? The compensation committees I’m working with are trying to understand how to set appropriate financial goals that aren’t lay-ups, but also take into account the ongoing uncertainty of our public health situation. Analysis of how incentive payouts as percentages of target compare with peer organizations helps committees assess how much stretch has been incorporated into their financial goals. Committees are also incorporating non-financial goals in annual and long-term incentives, whether those are based on diversity, equity, and inclusion or other ESG-related issues or on strategic milestones for future growth.

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