Sponsor Content: Q&A—Setting the 2025 Agenda for the Executive Compensation Committee

May 16, 2025

Q: What are the top priorities for incentive plan goal setting in 2025?

Bruce Greenblatt: With significant environmental and regulatory uncertainties, executive incentive plans are constantly evolving. As goal setting in this environment continues to be challenging, we’re advising committees to focus on three key areas:

Strategic Alignment: Ensure incentive plan performance measures are linked to both short-term operating plans and long-term strategic objectives. Financial sustainability remains an important baseline objective. While operating margin is a core indicator, health systems also are focusing on measures of cost efficiency. With a renewed focus on driving long-term success, more plans are incorporating measures related to growth, patient access, AI advancements, revenue diversification, and value-based care. Committees also need to consider mission-oriented measures – like community benefit and social determinants of health – which tie directly to the health system’s charitable purpose.
System-Wide Integration: Secondly, there is a greater focus on tying incentives to shared system performance goals versus entity-level or individual outcomes – especially as health systems continue to integrate and evaluate their operating models.
Accounting for Uncertainty: To address market volatility, committees should consider goal measurement beyond absolute performance and a broader range of possible performance outcomes. This can include performance relative to peers, year-over-year improvement, and the achievement of important longer-term milestones.

Q: Why is executive succession planning a top priority right now?

Kathy Hastings: Executive turnover remains high, and the increase over the last few years is significant. As such, it’s critical for health systems to ensure effective succession planning and leadership development to manage organization and talent risk.

Compensation committees play an important role here as they understand leadership roles and how a health system’s structures are evolving – which puts them in a strong position to ensure compensation programs are closely aligned with leadership development activities and desired performance outcomes. The cost of external talent is high. Therefore, many health systems look to develop executive talent from within – a key part of the succession planning process. An effective succession process requires tight alignment between executive success profiles, compensation, and talent strategy.

Q: How should committees stay current with regulatory and market trends in a shifting political environment?

Michael Peregrine: It’s vital to track not only legal and policy changes, but also enforcement trends. Committees must adapt quickly under the current ‘flood the zone’ strategy coming out of Washington. Under these circumstances, it is critical to monitor new events and to educate committee members on executive orders and policy changes that affect the committee’s process and have implications for executive compensation.

Bruce Greenblatt: Beyond developments in Washington, committees should continue to monitor trends among their peers in executive compensation levels, performance and incentive practices, and talent strategy. This will enable the committee to remain current in a competitive recruitment market – especially as health systems require more specialized executive skills in this challenging environment.

Q: What level of flexibility should committees maintain in their governance and approval processes?

Michael Peregrine: Any decision must be defensible, well-documented, and follow the process set forth in the committee’s charter. That includes legal guidance and insight from the general counsel to understand what state law permits – whether it's remote meetings, taking actions by unanimous consent, etc. – and ensuring member availability and engagement.

Kathy Hastings: As there is often pressure on committees to make more urgent or timely decisions, it’s important to have some level of flexibility in addition to high levels of defensibility.

Michael Peregrine: This is where the advice from general counsel is very important. They can advise on the availability and appropriateness of flexible processes for a particular action.

Q: How should the committee ensure effective governance and fulfill its fiduciary duties?

Kathy Hastings: Given the complexity of the committee’s decision-making process, the alignment of three key governing documents is critical.

There must be:

A clear charter that defines the committee’s authority, responsibilities, membership, and processes.
A compensation philosophy that guides decision-making, defines compensation components, and aligns compensation strategy with the health system’s performance and goals.
An annual calendar of activities to support timely execution of charter responsibilities. This can serve as a checklist to ensure that the committee’s work is being done according to both the charter and compensation philosophy.

Health systems should review these documents to ensure they capture evolving priorities and the scope of the committee’s activities. Together, these support consistent, compliant, and mission-aligned governance.

Q: What are the committee’s responsibilities in terms of reporting relationships?

Jeffrey Holdvogt: Compensation committees should regularly report to the board on their activities. While the committee should serve its function independently, it should also keep the board and other committees well apprised of what’s happening as they all aim to fulfill their fiduciary duties and serve the broader purposes of the organization.

This is important for two reasons. First, operationally, the board needs to know that the health system is well positioned to recruit, retain, and reward talent utilizing reasonable compensation benchmarks. Second, the board needs to know that the committee is effectively serving its function to minimize risk.

While these reports to the board should be done annually, we often advise that they occur more regularly – both formally and informally. These updates should include:

Approved levels of compensation, incentives, and benefits.
Reasonableness determinations using appropriate comparability data and benchmarks.
Confirmation of members’ disinterested status.
Recommendations for changes to the charter or calendar.

Michael Peregrine: In addition to updating the board, there also should be appropriate coordination with other committees – like audit, governance, and quality. Many topics overlap, and hand-in-glove communication prevents disconnects and helps to ensure that everyone is on the same page.

Q: As innovation becomes a strategic priority, how should committees approach executive compensation in new ventures and commercialization efforts?

Kathy Hastings: Health systems are increasingly launching new businesses, venture funds, and innovation arms as they look to diversify revenue and improve patient access and outcomes.

Health systems may need to source executives from industries such as venture capital, private equity, or asset management. Talent in these markets is often compensated differently – lower base salaries and higher incentives – than traditional not-for-profit health care leaders. Thus, health systems may need to implement tailored compensation programs for leaders of these businesses.

For example:

For-profit subsidiaries often use equity or carried interest plans, aligning payouts with value or fund returns and offering tax advantages.
Not-for-profit subsidiaries often use cash long-term incentive plans focused on multi-year performance tied to returns on invested capital.

These plans should be tailored to the circumstances of the business and health systems must be mindful of considerations related to tax status. This is an evolving space with new practices emerging.

Q: Is compensation for board members becoming more common in not-for-profit health systems?

Bruce Greenblatt: Yes, although board compensation is still a minority practice, prevalence has increased – especially in health systems with over $5 billion in revenue. Board service is more demanding as systems grow in complexity and risk. Compensation can help attract and retain qualified board members, especially those with outside industry expertise, and can ensure active member engagement by encouraging them to devote the necessary time to board responsibilities.

However, any such program must be carefully evaluated considering the increase in regulatory scrutiny and state charity regulations.

Q: What are some important considerations as health systems assess the composition of their executive compensation committees?

Jeffrey Holdvogt: Committee membership should be regularly assessed to ensure it can meet the growing demands of its important oversight role. To maintain a reasonable size, we generally suggest at least 5 to 7 members based on the system’s unique circumstances. While most members won’t have experience in all areas, we recommend a combination of those with expertise in compensation, finance, human resources, and benefits or prior service on similar governing board committees. This will also help to ensure diversity of thought and viewpoints.

Disinterested status is essential – meaning no conflicts, financial ties, or reporting relationships to executives under review.

Q: What should committees do to prepare for external scrutiny?

Kathy Hastings: Executive pay remains under intense media and political scrutiny – and we don’t expect this to change. Health systems should ensure they engage in highly defensible and well-documented compensation decision-making. Many of the governance practices we previously outlined are the best way to ensure the process is robust.

Bruce Greenblatt: A well-governed and transparent process will support the defensibility of the compensation program – one tied to performance, backed by market data, and rooted in best practices.

Michael Peregrine: Don’t assume regulators are standing down just because of budget cuts. State charity officials and media outlets remain active. It is imperative to protect your health system’s reputation and trust. These are two intangible assets that boards are responsible for preserving.

Jeffrey Holdvogt: Maintain detailed documentation of the key facts of every decision – who was involved, what data were used, and how any deviation from benchmarks was justified. This record is the committee’s shield.

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