FARGO -- A variety of forces have driven consolidation in health care. One consequence is large salaries for executives running bigger organizations.
Sanford Health and Essentia Health, both the result of mergers in recent years, aim to pay top executives and physicians competitive salaries and incentives, drawing upon surveys of peer institutions.
At Sanford, specialist physicians with large practices often earn more than top executives as a result of their advanced skills and productivity, with several earning more than $2 million in 2013-14, the most recent figures available.
Big retirement payouts helped push some Sanford executives into the top of the pay ranks for 2013-14, but Sanford's CEO, Kelby Krabbenhoft, earned total compensation of $1.9 million for the period, lower than at least five physicians and also lagging behind a senior vice president who drew about $4 million in retirement pay.
Essentia's outgoing physician-CEO earned $2.5 million and was the highest paid Essentia employee, according to IRS records
How salaries are set
Essentia's compensation benchmark for its CEO is to earn in the 65th percentile among peer health systems, while the goal for other executives is to reach the 60th percentile, said Dick Blair, chairman of Essentia's board.
Generally, he said, if Essentia executives reach their goals, incentive pay can add between 20 percent and 40 percent, with 30 percent typical.
"If you miss the goal, you get zero," in incentive pay added to base compensation, Blair said.
Executive pay reflects the growing size and complexity of running health systems, he said. Also, Blair added, nonprofit health care institutions can't provide pay incentives, such as stock options, commonly awarded to executives of for-profit companies.
At Sanford, the philosophy for compensating executives is a bit different. Sanford's board aims to pay its executives in the midrange, or 50th percentile of peer organizations -- but the benchmark is higher for those who have been on board for 20 years or more, said JoAnn Kunkel, Sanford's chief financial officer.
While bonuses and incentives figure prominently in Essentia's executive compensation packages, Sanford has moved away from the practice in recent years, Kunkel said.
"Several years ago, over 100 were eligible for incentive bonuses and as the compensation philosophy has become more sophisticated, it became apparent that only a small subset could affect the overall performance of the organization," Kunkel said in a statement.
Retirement brings payouts
Retirement compensation for health care executives has evolved over the past several decades, said Blair, who himself was a career health care manager, retiring as Allina's chief financial officer in 2002.
Until the 1990s and early 2000s, health care executives were awarded defined-benefit retirement plans, similar to a pension, he said. Since then, the common practice has been for executives to get a defined contribution retirement plan, where the employer contributes a certain amount.
Under the defined-benefit retirement plans, executives received large payouts as their retirements drew near. Under the now more common defined-contribution plans, executives receive a more uniform payout throughout their tenure, typically 18 to 20 percent of base pay, Blair said.
An example of the big retirement payouts under the defined-benefit arrangement came with the retirement in June 2015 of Dr. Peter Person as Essentia's CEO, who received $937,342 in retirement pay and total compensation of $2.5 million in the 2013-14 fiscal year.
Person, who had a master's degree in business administration, joined the organization as a physician in 1981 and held administrative positions for his last 20 years at Essentia.
"That's unusual to have anybody in that position that long," Blair said, adding that most health care CEOs last about five years in a job before moving on.
In an era when most stayed longer, the pension-style retirement plans were more attractive. But in today's world, he said, where the turnover is much greater, most executives prefer "portable" retirement plans that travel with them.
Some top Sanford executives with long tenures also received very large retirement sums during the 2013-14 fiscal year, the most recent figures publicly available, according to disclosure forms filed with the Internal Revenue Service.
Rebecca Nelson retired as Sanford's senior vice president and chief operating officer in November 2013. Her "other" compensation of almost $4.2 million included retirement payouts, according to Kunkel.
"Some executives have a long-standing deferred compensation package that accrues over time, but which is paid only once, upon retirement," she said in her statement. "Becky Nelson would be an example of an executive who earned this benefit over the 38 years of her employment and the benefit was paid upon her retirement."
Another example of a retiring Sanford executive was Dr. Bruce Pitts, who retired in July 2013 as chief medical officer at Sanford Medical Center in Fargo. His "other" compensation of almost $1.8 million included an accrued retirement payout.
Krabbenhoft earned a base salary of $1.1 million and retirement of $608,477, with total compensation of $1.9 million.
In terms of base and incentive compensation, Sanford's top earners in 2013-14 were specialist physicians.
For example, Dr. Tomasz Stys, a cardiologist, earned total compensation of $2.6 million. He was followed by Dr. Scott Pham, also a cardiologist, who earned total compensation of $2.4 million and Dr. Corey Teigen, an interventional radiologist, who earned almost $2.3 million.
Physician compensation, as with executive pay, is based on benchmarked national surveys, Kunkel said.
"Highly compensated physicians perform at top levels that are directly related to their work efforts and resulting productivity," she said. "Many of these physicians have expertise and skills that are unique and scarce in our region."