Challenges in Executive Compensation: Are You and Your Board Prepared?

www.IHStrategies.com

Presented To

Institute of Healthcare Executives & Suppliers

Presented By

F. Kenneth Ackerman, Jr., FACHE, FACMPE

Chairman

Kevin Haeberle, Executive Vice President

Kevin Talbot, Senior Vice President

www.IHStrategies.com Exclusive to Healthcare. Dedicated to People. SM

Securities offered through First Allied Securities, Inc., A Registered Broker Dealer, Member FINRA/SIPC.

March 10, 2010

Ponte Vedra Beach, FL

Agenda

Integrated Healthcare Strategies Overview -

Ken Ackerman

o Challenges in Executive Compensation

o Best Practices in the Governance of Executive Compensation

Drafting Together: Improved Performance Through

an Aligned Compensation Strategy - Kevin Haeberle

and Kevin Talbot

Integrated Healthcare Strategies Overview

Presentation by:

F. Kenneth Ackerman, Jr., Chairman

Introducing…

Our Mission and History

We are dedicated to helping the people of Healthcare succeed by

strengthening relationships between an organization and its

employees, leaders, physicians, and boards of directors.

Founded in 1967

Initial public offering on NASDAQ in 1998

Moved from NASDAQ to NYSE in 2002

Private in 2007

Clark Consulting and MSA combined to create –

Integrated Healthcare Strategies

Exclusive to Healthcare. Dedicated to People.

Integrated Healthcare Strategies Practices

Who We Are

Offices in Minneapolis and Kansas City

Nearly 120 Associates

Clients include:

■ 1,200 major healthcare providers

● 1,800 hospitals

● 400 integrated systems

■ 500 physician groups

Who We Serve

Hospitals and health systems

Academic medical centers

Children’s hospitals

Large, integrated provider networks and systems

Large, multi-specialty group practices

National and state healthcare associations

Our Markets

Market Share > 40%

76% of all NACHRI member free-standing children’s hospitals

54% of all multi-hospital systems

52% of all state hospital associations

38% of all COTH member teaching hospitals

26% of all AMGA member medical groups

27% of all free standing hospitals with 100 or more beds

24% of all AAMC member academic medical centers

Our Representative Blue-Chip Client Base

Our Distinctions

What sets Integrated Healthcare Strategies apart? Exclusive focus on healthcare organizations

Expertise of our executives, principals, and supporting staff

Five specialty practices

Most comprehensive array of healthcare-specific services

Easy access to information and counsel

Insightful consulting advice from industry professionals

Benefit from “best practices” data from over 10,000 healthcare organizations

Largest data base of compensation and benefit data in healthcare, current data, not just surveys

We are the only firm able to provide total compensation (cash and benefits) reasonableness and competitive positioning data

We use our database to create custom peer groups per our clients’ specifications

Our Distinctions (cont’d)

What sets Integrated Healthcare Strategies apart?

Largest library of published and unpublished surveys of

healthcare compensation data.

A customized individual approach to each assignment with the

Governing Board as our client.

Our Distinctions (cont’d)

What sets Integrated Healthcare Strategies apart?

Ability to deal with unique jobs with no obvious market

comparables

Our research capabilities through our Federal Policy Group in

Washington, D.C., and our specialty law firm, Sherman and

Patterson, Ltd.

Thought leader in the development of new products and services

Tally Sheets

Governance of Executive Compensation Manual

Media & Constituent Communication Tool Kit

Challenges in Executive Compensation

Are You and Your Board Prepared?

“A Brighter Spotlight, Yet the Pay Rises”

“Tax Rule Holds Many Base

Salaries Around $1 Million”

“Say on Pay: A Whisper or a Shout for Shareholders?”

“Big Pay for Big Bosses Under Fire”

Outrage Over Executive Pay! Bonuses at Wall Street firms after bailout ignited

firestorm

New rules for firms taking TARP $

New Fed rules for pay at banks

Compensation czar for firms getting exceptional help

Recession, jobless recovery add fuel to fire

Regulators & public are on a roll

Healthcare may be Next Multiple opportunities for new regulation

Healthcare reform legislation

New form 990

Federal, state, local regulatory activity

■ Massachusetts attorney general’s review

■ Rhode Island’s proposed compensation limit

■ Congressional proposals, demands for

investigation

● Section 4958 being challenged

● Questioning of tax exemption

One Study After Another Studies and audits at request of Congress

Senate Finance Committee study and proposals

IRS abbreviated audits of executive compensation

practices (1200 HCOs)

IRS survey to assess compliance with Section 4958

(500 hospitals)

GAO survey on structure & basis for determining

executive pay (100 HCOs)

IRS study of charity care, community benefit at tax-

exempt hospitals (10 hospitals)

Focus of Criticism

Use of rebuttable presumption

Compensation committees’ independence

Inappropriate comparability data

Over-reliance on national comparisons

Consultants’ conflicts of interest

Inappropriate or ineffective process

Level of pay

Perquisites and supplemental benefits

Boards Engaged, Cautious

Insisting on more transparency, disclosure

Questioning

Compensation philosophy

Peer group

Pay above median

Supplemental benefits

Raising performance expectations

Resisting generous severance

Best Practices in the Governance

of Executive Compensation

Best Practices

Dedicated compensation committee

Clear competency standards

Committee charter

Full disclosure to the board

Executive sessions

Self-evaluation/committee evaluation

Review form 990 reporting with full board

Best Practices (cont’d)

Regularly scheduled meetings

3-4 per year

■ 2 meetings for major decisions

Adequate time to –

■ Deliberate

■ Consider appropriateness of programs

■ Consider physician compensation

■ Conduct CEO appraisal

Continuing education (governance and regulations

Evaluate committee performance

Other Best Practices

New member orientation

Audit of travel and entertainment expenses

Tally sheets

TOTAL VALUE ANALYSIS TALLY SHEET PREPARED FOR

JOE M. SMITH PRESIDENT & CEO

THE ABC HEALTH ORGANIZATION

CURRENT AND POTENTIAL TOTAL COMPENSATION*

Current Compensation

Target Potential

Maximum Potential

Salary $550,000 $550,000 $550,000

Annual incentive payout $42,399 $165,000 $247,500

Benefits $201,788 $207,355 $211,100

Perquisite Allowance $20,000 $20,000 $20,000

Total Compensation $814,187 $942,355 $1,028,600

RETIREMENT INCOME AND SEVERANCE BENEFIT

Retirement Income at Age 65 Lump Sum

Annual Value As % of FAS

Qualified Plans

Cash Balance Pension Plan $553,945 $50,981 7.6%

401(k) Match $358,648 $33,007 4.9%

Social Security N/A $15,048 2.2%

Non-Qualified Plans

Cash Balance Restoration Plan $235,560 $21,679 3.2%

Net SERP (after offsets) $3,287,406 $302,548 45.0%

Capital Accumulation Account $324,785 $29,891 4.4%

Total Value of Retirement $4,760,344 $453,154 67.3%

LUMP SUM SEVERANCE BENEFIT (FOR TERMINATION WITHOUT CAUSE)

Now In 2010

2 x Salary $1,100,000 $1,338,000

2 x Continuing Benefits $30,302 $36,832

Total Value of Severance $1,130,302 $1,374,832

This Tally Sheet is an estimate of the value of Mr. Smith’s total compensation, as of July 1. * Please find assumptions and descriptions on the back of this document for more details.

THE ABC HEALTH ORGANIZATION

AB C T o t a l C om p e ns at i on Va l ue

TOTAL VALUE ANALYSIS TALLY SHEET

BREAKDOWN OF CURRENT AND POTENTIAL TOTAL COMPENSATION

Current Compensation

Target Potential

Maximum Potential

Salary $550,000 $550,000 $550,000

Annual incentive payout $142,399 $165,000 $247,500

Benefits Total $201,788 $207,355 $211,100

Health & Welfare Benefits Total, includes: $62,983

Medical and Dental Insurance $11,425

Medicare and Social Security $14,430 $16,208 $17,404

Group Long-Term Disability $960

Group Term Life and AD&D $1,440

Supplemental Survivor Life Insurance $12,710

Flexible Benefit Allowance $22,018

Retirement Benefits Total, includes: $138,805

401(k) Employer Match $9,900

Capital Accumulation $21,982

Cash Balance Pension Plan $6,798

Restoration Plan $12,125

SERP $88,000

Perquisite Allowance $20,000 $20,000 $20,000

Total Compensation: $914,187 $942,355 $1,028.600

Overall Compensation Philosophy

Cash Compensation (base salary) 50th percentile

Incentive, at target (30% of base) 50th percentile

Total Cash Compensation 50th percentile

Benefits, moderate (37% of base) 50th percentile

Perquisites, conservative 50th percentile

Total Compensation 50th percentile

Peer Group: National group of hospital systems of similar size and complexity

Perquisite 3%

Benefits25%

Incentive5%

Base Salary68%

TOTAL VALUE ANALYSIS TALLY SHEET

BREAKDOWN OF RETIREMENT INCOME AND SEVERANCE BENEFIT

Retirement Income at Age 65

Benefit Lump Sum

Annual Value

As % of FAS

Qualified Plans

$912,593 $83,988 12.5%

Social Security

N/A $15,048 2.2%

Non-Qualified Plans

$560,345 $51,570 7.6%

$3,287,406 $302,548 45.0%

Total Value of Retirement $4,760,344 $453,154 67.3%

Lump Sum Severance Benefit (for termination without cause) Now In 2010

2X Salary $1,100,000 $1,338,000

2X Continuing Benefits $30,302 $36,832

Total Value of Severance $1,130,302 $1,374,832

ALTERNATIVE RETIREMENT SCENARIOS

Situation One: Leave ABC Today

Lump Sum

Annual Value

As % of FAS

TOTAL QUALIFIED $509,492 $41,404 8.2%

Non-Qualified

Cash Balance Restoration $106,061 $8,619 1.7%

Net SERP – Not Vested - - 0.0%

CAA $126,418 $10,273 2.9%

TOTAL NON-QUALIFIED $232,478 $18,892 3.8%

TOTAL ALL $741,970 $60,296 12.0%

Situation Two: Retire at Age 62

Lump Sum

Annual Value

As % of FAS

TOTAL QUALIFIED $697,867 $72,165 12.4%

Non-Qualified

Cash Balance Restoration $167,781 $14,456 2.5%

Net SERP $1,966,376 $169,418 29.1%

CAA $220,121 $18,965 3.3%

TOTAL NON-QUALIFIED $2,354,278 $202,838 34.9%

TOTAL ALL $3,052,145 $275,003 47.3%

Other Best Practices (cont’d)

Committee manual

Governance standards and best practices

Committee charter

Calendar

Total compensation philosophy

Salary administration guidelines

Incentive plan documents and administration

Executive benefits and perquisites

CEO total compensation - Tally Sheets

CEO performance appraisal

Employment agreements

Executive severance policy

Other Best Practices (cont’d)

Reconcile form 990 with tally sheets, committee decisions

Publish description of philosophy and program with

form 990

Drafting Together: Improved Performance

Through an Aligned Compensation Strategy

Presentation by:

Kevin Haeberle, Executive Vice President

Kevin Talbot, Senior Vice President

My energy level …

and ready...

ut could

eal...

When is

the co

25% 25%25%25%1. High and ready to go

2. OK, but could use a

little Red Bull

3. I did not realize how

hard these chairs

were going to be

4. When is the cocktail

What do you consider to be your most significant

leadership challenge …

Finding the right... Ensuring that we ... Establishing wher...

1. Finding the right

talent to help me lead

2. Ensuring that we are

all driving towards the

same goals and

objectives

3. Establishing where

we are going

Leadership’s Purpose

Achieve Desired Outcomes with Limited Resources

Create the Best Opportunity to Perform at the Highest Level

in the most effective and efficient manner

Being accountable for Achieving Desired Outcomes through

the Performance of Others

Motivating individuals to perform as a group towards

common objectives

What do you think we find is the common component

among high performing healthcare organizations …

est ta

len...

er facil

iti...

xcelle

nt ca.

ited C

ompet..

ly alig

ned...

20% 20% 20%20%20%1. The best talent –

leadership or clinical

2. Newer facilities

3. A excellent case mix

4. Limited Competition

5. Highly aligned

leadership,

employees and

physicians

The Power of Alignment

Just One Cycler

Optimal Alignment (drafting)

One gets out…

And everyone has to work harder and progress slows down…

Sometimes, even someone else can take the lead.

With Optimal Alignment…

What do you believe is the alignment level of your

senior leadership team …

100%90%

than 8

25% 25%25%25%1. 100%

2. 90%

3. 80%

4. Less than 80%

middle management team …

100%90%

than 8

25% 25%25%25%1. 100%

2. 90%

3. 80%

4. Less than 80%

How do you think your middle management team would

assess the alignment of Senior Leadership …

100%90%

than 8

25% 25%25%25%1. 100%

2. 90%

3. 80%

4. Less than 80%

How do you think your middle management team would

assess the alignment of themselves …

100%90%

than 8

25% 25%25%25%1. 100%

2. 90%

3. 80%

4. Less than 80%

employees …

100%90%

75%50%

than 5

20% 20% 20%20%20%1. 100%

2. 90%

3. 75%

4. 50%

5. Less than 50%

What do you believe is the alignment level of your key

physicians …

100%90%

75%50%

than 5

20% 20% 20%20%20%1. 100%

2. 90%

3. 75%

4. 50%

5. Less than 50%

What do you believe is the alignment level between you

and your senior team and your key Board members …

100%90%

75%50%

than 5

20% 20% 20%20%20%1. 100%

2. 90%

3. 75%

4. 50%

5. Less than 50%

Do you think if you were more effectively aligned, you

would could place the organization in a position to

perform at a higher level ..

25%25%

Yes Somewhat Already highly al... It is hopeless

1. Yes

2. Somewhat

3. Already highly

aligned

4. It is hopeless

The Keys to Successful Alignment

• Accountability for alignment – not just setting goals

• Needed Skill - A structured process which aligns

all levels of the organization together,

understanding the unique aspects of each level

• The ability to lead through influence

• Needed Skill – Persuasion tools to gain

acceptance and buy-in

• Incentives to align (not just perform)

• Needed Skill – A understanding of the

motivational components of different work value

systems

• Limited tolerance for leadership misalignment

• Needed Skill – Effective tools to create

expectations and to monitor performance at all

levels

If I had to choose, I would rather the team be …

25%25%

Satisfied Engaged Aligned Committed

1. Satisfied

2. Engaged

3. Aligned

4. Committed

Other Components of Alignment

Satisfaction

•Measure gap between perceived reality and expectations

•Expectations low right now – Satisfaction OK

•As economy improves, expectations will rise

•Hospital’s will lag in response

Engagement

•How deep is your well – credibility and trust

•Needs mutual commitment

•Diminished by each unilateral act

Alignment

•Acceptance of goals and objectives – more than a direction

•Uncertainty of where healthcare is headed

•Leadership’s job is to plan for the future – are they aligned

Commitment

•Loyalty is a brand

•Consolidations and loss of identity

•New generations loyalty different

What do you consider to be your most significant

leadership challenge …

Finding the right... Ensuring that we ... Establishing wher...

1. Finding the right

talent to help me lead

2. Ensuring that we are

all driving towards the

same goals and

objectives

3. Establishing where

we are going

My energy level …

and ready...

ed Bull (

d to t.

When is

the co

25% 25%25%25%1. High and ready to go

to the next session

2. The Red Bull (this

presentation) helped

3. I am used to the

chairs now

4. When is the cocktail

Questions

Appendix

Leadership Team

KEN ACKERMAN

Chairman

BOB ERRA

President

Our Five Specialty Practices

GROVES

Executive VP & Practice Leader MSA Executive

Search

HAEBERLE

Executive VP

& Practice

Leader MSA

HR Capital

TALBOT

Practice

Manager Total

Executive

Compensation

Executive VP &

Practice Leader

Physician

Services

RICE, Ph.D.

Exec VP & Practice Leader Governance &

Leadership Services

SUSAN MCGANNON

EVP/CFO

Integrated Healthcare Strategies

Integrated Healthcare Strategies provides clients with access to

the most comprehensive array of healthcare-specific services

available through our five specialty practices.

• Executive Total Compensation

• Executive Search

• Governance & Leadership Services

• HR Capital

• Physician Services

Practice Overviews

Chairman - F. Kenneth Ackerman, Jr., FACHE, FACMPE

Ken brings over 30 years of background in health care

administration to Integrated Healthcare Strategies. Mr.

Ackerman’s consulting experience spans the entire spectrum

of health care--management of hospital-based, multi

specialty group practices; integrated systems; and executive-

level involvement in rural health maintenance. Prior to

joining Integrated Healthcare Strategies, Mr. Ackerman was

the Vice President of McManis Associates in Washington,

D.C. He is a past chairman of the Medical Group

Management Association.

Practice Overviews

Executive Total Compensation - Kevin Talbot, Practice

Manager

The compensation challenge today is to attract and retain the

best talent available while meeting both your fiscal and

executive retention goals. The solution is a compensation

package developed to match your organization’s compensation

culture, strategy and philosophy through a variety of specific

compensation components. The right mix and balance of base

salary, bonuses, deferred compensation, contractual

allowances, long-term incentives and executive supplemental

benefits is the key to success.

Practice Overviews

MSA Executive Search - Jane Groves, Executive VP,

Practice Leader

No matter where you are today in the process of choosing a

new executive, our customized search methodology can assist

you. With statistics such as 100% of CEO searches closed on

the first slate presentation, the most comprehensive candidate

evaluation in the industry and 98% client retention rate over the

past 10 years, it’s no wonder we rank as one of the top 15

healthcare retained executive search firms in the country.

Practice Overviews

Physician Services - Steve Rice, Executive VP, Practice

Leader

Physician Services assists not-for-profit healthcare

organizations to develop successful relationships with their

employed and affiliated physicians. Consulting services focus

on: physician fair market value assessments and expert

opinions; physician integration, affiliation and

strategy consulting; physician compensation review and

design; physician opinion assessments; organizational

structure and physician leadership development.

Practice Overviews

MSA HR Capital - Kevin Haeberle, Executive VP, Practice

Leader

To be most effective, your human resources organization must

support your strategic objectives. MSA HR Capital provides

comparative data from over 1,000 hospital organizations to

tailor solutions for your specific work environment to ensure

that you reach objectives by integrating your management,

compensation, labor relations and employee engagement

goals into one seamlessly operating whole.

Practice Overviews

Governance & Leadership Services - James Rice, Ph.D.,

Executive VP, Practice Leader

You can depend on the industry leader to provide you with

valuable information, insights, design, implementation strategy,

and support for a variety of governance and leadership issues

and challenges. These services include Continuity Planning

and Development, Governance model design development and

refinements, Board retreats to enhance effectiveness, CEO

and Executive Performance development and appraisals,

Physician Leader Services, and our unique Governance of

Executive Compensation services.

Our Vision

To be the best at what we do

To recruit and retain the most talented people

Opportunities for career development

To grow the company

Grow organically

Develop new products and services

Grow at the margins

Acquisitions

To retain and add premier clients

To be recognized as the knowledge leader in the industry

in the consulting spaces we serve

Sample Cover or Title Slide

Presented by:

Ken Ackerman

Kevin Haeberle

Kevin Talbot

Challenges in Executive Compensation: Are You and Your Board Prepared?

people of healthcare

state healthcare associations

major healthcare providers

integrated systems

executive pay

best practices data

specialty practices

total compensation cash

Healthcare

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