Is Pay Linked to Performance among Hospital CEOs?

The relationship between organizational performance and managerial pay is of keen interest within economics and related fields, owing in part from wide variation in compensation and performance. The relationship is of even greater salience in the context of health care, due to the policy significance of this sector and prevalence of tax-favored nonprofit organizations within it. Recent research has explored this relationship among nonprofit hospitals in the U.S., and found that high CEO compensation is not associated with better outcomes for patients or the provision of greater benefits to the community. In this study, we assess the link between hospital productivity and CEO pay. To do so, we apply a production function framework to a sample of elderly Medicare fee-for-service beneficiaries hospitalized for heart attack in 2010, defining high-quality care by 30-day survival without an unplanned readmission. CEO compensation (including bonuses and options) is reported in IRS filings (Form 990) required of nonprofit hospitals. In preliminary analysis, we find that 10% higher revenues are associated with 3% higher compensation (p < 0.001), consistent with the existing literature on executive compensation. However, the CEO of a 10% more productive hospital is expected to earn 0.8% less in total pay (p < 0.001). This pattern is inconsistent with the notion that hospital CEOs are rewarded for achieving high productivity, and also with the notion that high-quality CEOs − who command more in the marketplace – deliver better results, at least in terms of productivity. We plan to refine this preliminary analysis by improving our database on compensation and productivity (our current cross walk between data sources yields a sample of 320 hospitals). In addition, we plan to address concerns about identification by comparing changes in compensation to changes in productivity.