Erlanger approves $1.7 million in bonuses

Erlanger President and CEO Kevin Spiegel speaks with members of the Chattanooga Times Free Press editorial board Thursday.

At the end of a year that started with freezing employees' vacation time and warnings of financial crisis, Erlanger Health System will award $1.7 million in bonuses to its top management for financial performance.

Erlanger trustees voted Thursday to pay the incentives, which were determined by a series of benchmarks set last year. The public hospital's financial turnaround -- driven largely by a $19 million infusion of federal money -- will enable the payout averaging $17,100 to 99 managers.

Erlanger CEO Kevin Spiegel will collect $234,669 in bonus pay, bringing his total compensation this year to $914,669. Trustees also voted to give Spiegel a 10 percent raise next year, upping his base pay to $748,000, and approved a 2 percent nonbudgeted pay raise for hospital employees.

Trustees said the incentives were merited after the hospital came back from three years in the red and posted $18 million in operating income by year's end.

"Management has performed exceedingly well," said board Chairman Donnie Hutcherson, who added that the compensation is comparable to that of other hospitals such as Erlanger. "This is well deserved. They have put in long, long hours."

But Gerald Webb, the only one of the 11 Erlanger board members who voted against the bonus payouts and the changes to Spiegel's contract, said he believed the move was problematic given the hospital's recent fiscal turmoil.

"Erlanger has had financial issues for a while. For the first time we're seeing positive numbers," Webb said in an interview after the meeting. "My thinking is that more of a percentage of that money needs to go to into reserves or to employees, instead of vice presidents and executives. I had to vote my conscience."

One Erlanger nurse, who asked not to be named for fear of losing her job, said the management incentives "have come at the expense of their employees and the sacrifices they have made."

"[Employees] have had vacation time taken away and are paying more for benefits. They are routinely overworked and understaffed," the nurse said Friday. "The morale among staff and doctors is the lowest I have ever witnessed. If that constitutes a bonus, obviously my belief system of what I think is morally and ethically right and wrong is not shared by the management or board members at Erlanger."

Since taking Erlanger's helm in April 2013, Spiegel has spearheaded a crusade to cut costs, a process that has included phasing out employee pension plans, tightening paid time off policies and doing away with retiree insurance altogether as of Jan. 1.

Spiegel also petitioned local, state and federal officials to grant the hospital access to the federal Public Hospital Supplemental Payment Pool, which supports public hospitals with a heavy load of indigent care. That money brought $19 million toward Erlanger's bottom line.

Trustee Jennifer Stanley said rallying the political support to get the money was a "tremendous feat," and that it could not be described as a "handout."

"Those were funds that were legitimately owed Erlanger Health System for years," said Stanley. "I'm ashamed to say that I as a board member did not know we were owed that money. Our two previous CEOs did not know we were owed that money. Kevin Spiegel, together with his management team, found that out Day 1, and worked day, night, holiday, weekends, middle of the night, to go get that money for the services that Erlanger provides. ... And that just counts as revenue, much like revenue for any other service we provide would count."

Erlanger management's last bonuses came in 2011, when they collected about $1.9 million after posting a profit of $8.5 million. Then-CEO Jim Brexler collected a bonus of $192,395.

The next year, the hospital did not meet its fiscal benchmarks for bonuses, and it ended the three years after that in the red.

Erlanger's current executive incentive plan requires the hospital to meet both financial and quality benchmarks before executives and top managers can receive bonuses. The maximum cap on the plan is $2.5 million.

This year the hospital generated $13.3 million excess revenues over expenses, which is the operating income plus interest expenses and tax. The bulk of that, $11.4 million, will be reinvested in the hospital system. Meanwhile, $200,000 will go toward an "employee recognition event."

The board set up the structure of the incentive plan with the help of independent consulting firm Sullivan Cotter, which specializes in executive compensation.

Jose Pagoaga, a managing principal of Sullivan Cotter who spoke with trustees Thursday night, said the agency identified 50 peer hospitals with similar characteristics to Erlanger with which to compare payment structures.

"In laymen's terms, let me assure you -- for the group that we're talking about, [Erlanger's] compensation is below market," Pagoaga told board members before their vote. "And it will continue to be below market if you approve the action that is in front of you."

Hutcherson also said that Spiegel's pay raise puts him "just over the 50 percent median" for hospital executive pay.

"I think that anyone who looks at our financial performance over the last 18 months would see -- [Spiegel]'s not an average performer," said Hutcherson.

Spiegel's new base pay lands in the range of what other CEOs have been paid in hospitals in Tennessee, and is still well below others, 2012 tax forms show.

According to IRS 990 forms filed two years ago, Memorial CEO James Hobson was making more than $726,000 annually. The CEO of Knoxville's UT Medical Center in Knoxville made more than $1.2 million; the CEO of Methodist Le Bonheur Healthcare in Memphis reported more than $1.8 million; and the CEO of Shelby County's public hospital, Regional One Health -- also known as The Med -- reported compensation of over $750,000.

Still, Webb said he believed giving Spiegel a raise at this point was premature.

"Kevin Spiegel is a dynamic leader for Erlanger. The hospital is moving in the right direction," said Webb. "But I would have preferred to see a longer stretch of performance."

After Thursday's votes about incentives and raises -- which were added to the agenda shortly before the meeting -- the board also approved changes to the incentive eligibility plan next year. Approximately 127 employees could be eligible for bonus payouts instead of the 99 paid this year.

"We're moving more toward pay for performance," said Hutcherson.

The new standards will also be weighted more heavily toward quality performance, which measures things like number of hospital-acquired infections and patients' length of stay.

"That change does not mean we're out of the woods in the financial side of things, but it is a shift in quality metrics next year," trustee Jack Studer said Thursday night. "Hopefully we get to a place where we're financially solvent and we can be all about quality, but we're not there yet."

Contact staff writer Kate Harrison Belz at kbelz@timesfreepress.com or 423-757-6673.