Erlanger looks at new criteria for bonuses

Managers at Erlanger Health System will have to turn a bigger profit to earn bonuses next year, if trustees approve proposed new standards.

Erlanger trustees will vote later this month on a resolution containing more rigorous requirements for management staff and executives to get incentive payments, including a minimum operating profit of $12 million effective for fiscal year 2011, which ends next summer.

"It's a stretch," said Kim White, chairwoman of the management and board evaluation committee, which developed and unanimously approved the new standards last month.

Erlanger reported an operating profit of $8.58 million for fiscal year 2010, which ended June 30, and $10.8 million the previous year.

Hospital executives also have informed trustees that management will receive bonuses this year based on meeting criteria pre-established for 2010. The exact amounts still are being calculated, Erlanger spokeswoman Pat Charles said.

As trustees evaluate how to award bonuses, they have to make sure incentive pay parallels goals in the hospital's strategic plan, trustees said.

"It's very important that the compensation program align to the strategic plan that management has committed to, and for us to hold them to that plan," said trustee Jennifer Stanley.

Ambitious goals will "encourage creative thinking and encourage management to do what it takes to achieve the plan that we've laid out," she said.

Most hospital trustees are members of the management and board evaluation committee, so the resolution likely will get full board approval at the Oct. 28 meeting, White said.

The new criteria represent a "more realistic standard" for what warrants bonus pay, said Jim Worthington, trustee and committee member.

"I think we have put the bar at a higher level," he said. "If we can achieve that level of profit while paying our employees reasonable wages, then we will be on the right track."

PAST BONUSES

Last year, 110 management-level employees received $1.7 million in bonus pay. CEO Jim Brexler got an incentive payment of $198,006, in addition to his $550,000 annual salary.

Those bonuses were based in part on the 2009 profit.

White said executives are sticking to an earlier pledge that this year no managers will receive pay raises or bonuses until the hospital gives raises to staff who are earning less than market norms for their position.

In June, hospital management announced that 1,100 front-line nurses would split $3.5 million in raises as part of that effort.

That kind of commitment to employees is becoming more common among hospitals, said Martina Young, senior consultant with Missouri-based Integrated Healthcare Strategies, formerly Clark Consulting.

"It's good faith on the hospital's side to make sure the employees feel that they're being taken care of," she said.

According to Integrated Healthcare Strategies' spring survey of 151 hospitals, fewer hospitals delayed salary increases in 2010 than in past years. More than one-third of participants reported delaying increases in 2009, but less than 25 percent were putting off raises in 2010.

Erlanger employees last received an across-the-board pay raise of 3 percent in 2009, two years after the previous across-the-board salary increase.

Erlanger employees will not see any cuts to their health benefits this year, officials have said.

The Integrated Healthcare Strategies survey found that about 25 percent of hospitals were reducing spending on benefits plans, usually by cutting the employer contribution to premiums.

CONSULTANTS' INPUT

This year, Erlanger board members brought on consulting firm Mercer Consulting to overhaul the hospital's standards for determining incentive pay, White said.

Mercer recommended cutting down on the number of categories used to evaluate management performance, but raising the threshold for earning incentive pay in key areas, including operating margin, patient satisfaction rates and quality measures such as infection rates, board members said.

"There's an opportunity to get more of a bonus than earlier, but it's more difficult to achieve," said hospital trustee and committee member Dr. Charles Longer. "The whole process here is just to be as objective and rational and fair as we can do it, within the standards of what's accepted practice nationwide."

If the new standards pass, the hospital must make at least $12 million in fiscal year 2011 for bonuses even to be considered. Previously, bonuses could be ruled out only if the hospital failed to meet any of the following standards: Record a positive operating margin; achieve the conditions of its loan agreements, such as maintaining certain cash reserves or revenues; and maintain accreditation by the Joint Commission, an independent, nonprofit commission that accredits health care facilities.

Under the proposed standards, once the basic requirements are met, bonus levels will be determined based on performance in a number of categories, including:

* Operating income is weighted at 30 percent out of the criteria that dictate bonus pay. At minimum, the hospital would have to meet its budgeted operating margin of 3.05 percent to qualify for incentives in that category.

* Fifteen percent of bonus pay would be based on patient satisfaction rates, with a minimum satisfaction rate of 88.9 percent to receive any award in that category.

* Another 15 percent would be predicated upon lowering central line bloodstream infection rates to, at most, 1.12 infections for every 1,000 days that patients are on a central IV line. Erlanger has improved in that measure from 2.39 infections in fiscal year 2008 to 1.18 in fiscal year 2010.