June 2000

The Future of Health Care Compensation

By Paul R. Dorf

Employers across the country--regardless of their type of business, industry, or location--face similar challenges in attracting and retaining qualified talent. The record low unemployment rate and the tightest labor market in more than 30 years, coupled with medical advances and breakthroughs, require health care organizations to modify the manner in which they traditionally have operated. Changes in business and marketing strategies will lead to a shift in recruitment and compensation efforts throughout the health care industry.

Within the health care sector, the problem is compounded by a projected increase in the number of health service jobs in the next decade. As organizations continue to streamline operations in an effort to control costs, they must set themselves apart through exceptional service and quality, and exhibit the skills and abilities required to apply medical breakthroughs and deliver quality service and products to a greatly expanding graying population.

Typical arrangements of pay assignment will not be sufficient to change behavior. Compensation objectives must be aligned with organizational strategies to reinforce and achieve performance standards.

Recently, a shift from typical compensation strategies to more creative methods of providing rewards has aligned individual objectives with organizational strategies. Specifically, more health care organizations are tying rewards to performance by implementing merit- and skill-based pay plans, providing individual and group bonuses tied to goal attainment, and implementing other variable incentive pay programs. As organizations continue to streamline operations, they are desperately trying to control costs, and as a result, heath care employers must manage compensation expenses more directly and tie them to the organization's success.

Studies repeatedly have shown that linking pay directly to performance can influence employees to work more effectively. Variable pay programs put more of the employee's total compensation "at-risk" by offering less base pay with large bonuses for exceeding performance standards. In addition, employers no longer provide annual increases automatically; employees must earn them through performance.

Performance-based pay plans provide competitive annual salary increases for meeting performance standards, no increase for poor performance, and above average increases for exceeding standards. Employees therefore assume more responsibility for end results, reinforcing productive behavior and a clearer understanding of overall business objectives. Incentive pay programs offer similar benefits.

Providing employees with more control and accountability enhances motivation and retention. Employees tend to view the organization in a more positive light, which facilitates recruitment strategies and enables the organization to achieve greater success. *

Editor's Note: Paul R. Dorf will speak at FAE's Health Care Conference on August 1 in Albany and August 8 in New York City. He will discuss the changing compensation issues affecting many industries, including health care.