The Issue of Healthcare CEO Salaries

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Image credit: pnhp.org

When I was an undergrad studying business strategy, people would ask me what business strategy is. I would tell them that someone who studies finance aspires to become a CFO, someone who studies operations aspires to become a COO, someone who studies marketing aspires to become a CMO, and someone who studies strategy aspires to become a CEO.

Defining the business strategy is the job of a CEO. This involves making decisions about what the company will and will not do. It’s deciding how the company will leverage or develop unique capabilities to offer a unique value proposition relative to competitors so that it can achieve a sustainable competitive advantage, which translates into earning greater profits in the long run.

A company’s board of directors is tasked with recruiting and hiring a CEO. This is a tough job. If they choose the wrong person, the company will end up with a losing strategy, and it could cost the company millions in profits. Therefore, they think of this person as an investment. Getting the right person may cost a few million dollars per year, but if spending a few million dollars per year on the right CEO results in the company making tens of millions of dollars more in profit each year, that was a pretty great investment! (FYI, usually the CEO’s base salary is much lower, but they are paid big bonuses for improving profitability.)

What if the board of directors decided that super high CEO salaries were just unethical in healthcare? What if they tried to offer a regular salary when they’re trying to recruit a new CEO? The most unselfish, ungreedy CEO candidate in the world is still motivated by financial incentives, and if they get an offer for $1 million from one board and an offer for $400,000 from another, that’s a hefty difference. They would have to have some very compelling reasons to give up an extra $600,000 per year. I’m sure sometimes that happens, but I doubt the majority of CEO candidates can find enough compelling reasons to forego hundreds of thousands of dollars per year. Heck, if taking a less desirable job means I can retire years earlier and spend more time with my future grandkids, I’d go for it.

So maybe all healthcare companies could decide together that they will pay their CEOs less? This would work out great until a board decides they want a specific candidate really bad because they believe that person will help their company more than any other candidate could. In the face of the decision to keep that truce for the good of everyone or to make the decision that they think is best for their company, they’re going to usually choose what’s best for their company. Therefore, a truce like that would never last. This is exactly what history shows us whenever companies have colluded over any other price–eventually you get defectors because the benefits of becoming the defector (especially the first defector) are so great.

How about having a new law that limits healthcare CEO pay, as was suggested by Steven Brill in his landmark Time article, Bitter Pill? It would be an interesting thing to try. We don’t know for sure what would happen, but we could infer quite a few things from seeing what has happened other times governments have enacted price controls. Without going into all of those, the biggest thing I suspect is that sophisticated companies would find a way around that limit by compensating them in different ways. This article does a good job of showing the complexities of CEO compensation, which I’m sure companies could leverage to find ways around any wage control.

So, with all that context, what do you think about healthcare CEO salaries? If you still say they are ridiculously high and that a world without such vast pay differences would be great, I agree. But let’s move past the ignorant complaints and comparisons that they seem to spark every time the cost of healthcare is brought up.

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