Like their peers everywhere, the managers of a large Northeastern health care system had suffered through what has become known as "The Change Drill": a heart-stopping restructuring, followed by a gut-wrenching downsizing and a mind-numbing reengineering. They had now gathered for yet another discussion of how to improve performance and better manage costs. Talk ranged from more drastic changes to deeper cuts. But it was the vice-president of patient care who finally put her finger on the issue.
"The bottom line," she said, "is that we?ve lost the loyalty and drive of our employees. We?ve eliminated many of them and changed the jobs of the survivors. We?ve made them learn new skills, forced a new set of values on them, and then demanded that they give us the performance of their lives.
"But why should they? What have we done to regain their trust and commitment? Now more than ever we need their hearts, their minds, even their muscle to move the organization forward. How can we recapture that?"
In the rush to transform chaos into a competitive edge, health care organizations continue to embrace every new management strategy in the book, still hoping, after all this time, for The Answer. Yet right under their noses, relegated to the closet of passe human resources programs, lies a proven strategy that can be highly effective: compensation.
A growing number of organizations are discovering that pay can be a powerful force for improving performance and supporting change, rather than merely a one-dimensional protocol for compliance and control. According to the 1996 Hay Hospital Compensation Survey, 59 percent of health care organizations going through major change initiatives are using or considering some form of individual incentives-often annual awards tied to performance-to help support those changes. Of those, nearly a third are using team or group incentives, which range from one-time bonuses to comprehensive profit- and gain-sharing programs. Although still in the minority, others are trying more contemporary strategies such as pay for skills and competencies.
Many have found that, when aligned with their business strategy, culture, and structure, compensation can be a key tool for helping them stay focused on critical changes-and then accelerating and sustaining those changes. They're also discovering that pay can be a powerful force in recapturing the hearts and minds of employees, and reinforcing the behavior and values needed to move the organization forward.
One pay proponent is Gerald Wages, executive vice-president of finance for North Mississippi Health Services, a large regional system in Tupelow. North Mississippi created a performance-based incentive program for its 4,800 employees two years ago. "We realized that the marketplace was changing and we had to change with it," he says. "We looked at all our systems and processes. But ultimately, we knew that if we were going to differentiate ourselves in the marketplace, it would be through our employees-through their everyday actions and behaviors. If the organization is really going to change, they're the ones who will change it."
New cultures, new strategies
As Wages quickly learned, creating an effective compensation strategy requires far more than simply dusting off the old base-'n'-merit pay programs. Pay today must be viewed as a key strategic initiative. In taking such an approach, health care executives must understand how their organization is changing. "Today, more than ever, compensation must be aligned with the organization's other strategies, processes, and structures," says Barbara Estes, Kaiser Permanente's vice-president of compensation and performance management, based in Oakland, Calif. "If an organization is committed to creating a compensation strategy that will truly speed change and help it effectively reach its goals, it first must articulate what its critical success factors are, and determine whether it has the right structure and culture to ensure the success of those factors."
Kaiser, which is developing new compensation approaches for its various regions, began by assessing its corporate culture-how work is organized, how people behave, interact, and relate to the organization, and what values and attitudes employees and the company embrace. In so doing, Kaiser discovered a variety of diverse work cultures operating within its regions. The shape of these cultures largely depends on the work and roles. Regional leaders, for example, tend to emphasize speed, flexibility, and the ability to create and optimize the use of networks, while employees involved in the direct delivery of care focus more on their functional responsibilities. "We found that most aspects of work cultures really transcended geographical or regional boundaries," Estes says.
Other health care organizations are discovering that while a number of cultures may be at work, the primary culture driving the organization depends on the stage of market evolution. Organizations in the early stages of evolution, where fee-for-service still dominates and there is little or no managed care, tend to cling to traditional cultures in which work is organized around narrowly defined functions and roles. Such organizations typically have deep management hierarchies and rigid chains of control.
Organizations in more developed markets are striving for more flexible cultures that focus on reducing the time it takes to respond to market changes, on processes for improving quality of care and cost effectiveness, and on the creation of partnerships and alliances. These newer cultures require more powerful, performance-based reward strategies. The ones that emphasize speed, flexibility, and teamwork, for example, tend to be best supported by strategies that reward team as well as individual performance, and reinforce the importance of personal flexibility and the development of cross-functional skills.
Later-stage, network-driven organizations may require a variety of pay strategies, each of which is aligned with the values and goals of the employee group it is supporting, but which are closely linked to shared risk and return based on performance-especially at the very top of the organization.
New roles, new responsibilities
The epidemic of restructuring has also led to the elimination of many traditional roles and jobs, and the creation of many new, more multiskilled ones. Just how rapidly roles are evolving can be seen in the results of industry surveys. According to Hay's research, more than 90 percent of those hospitals that have reengineered work have also created new, team-based patient care delivery roles. More than two-thirds of those have created multidisciplinary roles at both the technical and basic care level.
This role revolution is not limited to the delivery of care, nor to a certain level of employee. Indeed, new jobs and roles are popping up throughout the industry. Nearly half of the organizations surveyed, for example, reported creating multiskilled roles at the clerical level. And, according to other Hay health care surveys, there is an explosion of new professional, technical, managerial, and executive positions, especially those in rapidly expanding areas such as managed care marketing, information systems, and systems integration.
A growing emphasis on competencies
In the past, compensation for new jobs was typically based on the level of technical skills they demanded. Skills are certainly still important. But given the new, more complex nature of the roles, people at all levels are finding that they must also develop a different set of competencies-the attributes and behaviors that separate the outstanding performance from the rest of the pack. These include the ability to work in teams, the attitude needed to deal effectively with customers, and the flexibility required to handle a variety of cross-functional tasks.
Kaiser Permanente used a detailed approach in determining key regional leadership attributes, such as the ability to lead through major change and the ability to develop future leaders. Other health care organizations have used a less research-based approach. North Mississippi, for example, went back to its mission and values, and from those extrapolated a series of somewhat general yet relevant organization-wide attributes on which individual performance is measured. These include teamwork, leadership, customer service, the ability to control costs, the motivation to continually improve, and the desire to set and achieve goals. While not as specific as Kaiser's, they are still effective in creating a sense of focus. "They tie the whole system together and link it back to our mission, vision, and commitments," says North Mississippi's Wages. "And they continually reinforce the message that it's not only what you do but how you do it."
How much should compensation be tied to the development of competencies? That depends on the individual organization and its emphasis on learning and development. Most health care organizations are now incorporating competencies as just one element of a complete program that also looks at development of technical skills and performance.
An emphasis on performance
It is this last measure, of course, that truly sets today's compensation strategies apart from the traditional programs of the of the past. Indeed, one of the most effective ways of supporting and reinforcing performance is by accurately measuring and fairly rewarding it.
Performance-based pay can rapidly propel the organization beyond the rhetoric of mission statements and create a very real sense of what are known today as ownership and empowerment. Once the exclusive property of those privileged few at the top of the organization, performance-based rewards are slowly gaining a more populist focus. Although many health care organizations are still reluctant to use them, the ones that do are making them part of every employee's pay package.
At North Mississippi Health System, all 4,800 employees are eligible to earn from 1 to 5 percent of their annual salary if their business unit achieves certain patient satisfaction and cost-per-discharge goals. "We wanted a compensation program that reinforced the kinds of behaviors we needed to make the company successful, and at the same time created a sense of ownership," says Rodger Brown, vice-president of human resources. "And we wanted to get away from the 'us versus them' syndrome. After all, we're all in this together."
North Mississippi took a simple approach. There are two plans, one for employees, which is based on business unit goals; and one for executives, which is based on the same two patient satisfaction and cost-per-discharge measures applied systemwide, plus additional goals for market share and bottom-line performance. As the program moves up through the organization, the reward potential increases. Department heads, for example, can earn up to 15 percent of their annual compensation, while the president can get up to 30 percent.
As a result, the organization's leadership team-from managers to senior executives-has aggressively led the charge, communicating on an ongoing basis how performance is measuring up, and working with the employees so that they clearly understand how their individual performance contributes to helping North Mississippi achieve its goals.
Broad as the program may appear, that line of sight is apparent in the efforts of individual departments. Using the incentive to change the behavior of its employees, environmental services was able eliminate a chronic absentee problem, saving North Mississippi hundreds of thousands of dollars. Although the savings were smaller, employees in another department, aware of the goals, convinced their managers not to fill a vacancy. It wasn't necessary, they said. Indeed, the remaining team members took up the slack, saving the department the cost of one full-time position.
Such efforts have paid off. In two years North Mississippi has flattened its cost-per-discharge, raised its patient satisfaction rate to the 95-plus percentile, and seen its JCAHO rating rocket to unprecedented heights.
Although its approach is more specific, Kaiser Permanente is also seeking to create a sense of ownership and at the same time rapidly improve the performance within each of its regions. Because of the cultural differences inherent in the various roles and variety of work, Kaiser created a series of six "pay templates" for key areas: leadership, operations and patient care management, patient care delivery, sales, shared services (such as information systems and human resources), and internal consulting.
Each template has its own unique mix of base and incentive pay. Base programs typically are linked tightly to the market, with movement through grades or bands fueled by the development of critical skills and competencies. Depending on the template, incentive programs include short- and long-term rewards, with key measures frequently a mix of individual, team, and organizational goals.
While the templates vary greatly in terms of both mix and pay strategies, in each case there is a clear link between the performance measures and the role or job. Whatever template they are paid under, employees can see how their individual and team efforts effect the achievement of the pre-established goals-be they measured in terms of quality, productivity, or financial results.
"No matter what performance-based reward strategy is used," observes Barbara Estes, "two criteria are necessary for it to be successful. There has to be a clear line of sight and goals that can be clearly articulated and accurately measured."
Team versus individual rewards
With the growing emphasis on teamwork, many organizations are struggling to determine whether performance-based incentives should be tied to the individual or group. Some, like North Mississippi, are focusing primarily on a team approach, while Kaiser and others are striving to create an effective combination of both group and individual incentives. As with other compensation issues today, there is no one, right answer. The type and mix of team rewards really depends on the organization, the degree to which it uses and emphasizes teams, and the type of teams.
A major force in change
In her book, Fad Surfing in the Boardroom, Eileen Shapiro talks about the courage to manage in a fad-saturated business environment and the need, as she puts it, "to assess situations, set an overall course or focus, think though options, develop plans, take action, modify plans, learn, and go forward." There are no panaceas, she states, just techniques, some new, some repackaged, that are passed off as panaceas.
Which is exactly how pay in today's organization should be viewed. Certainly it is no cure-all for the many organizational and market issues facing health care today. But performance-based pay can create clarity of purpose and commitment to change. It can reinforce the behaviors needed for rapid and sustained change, enhance performance, and go a long way toward helping recapture what we so desperately need: the hearts and minds of employees.
Robert H. Sachs, Ph.D., is national practice leader for rewards and human resources with the Hay Group's health care consulting practice. He is based in Los Angeles. Scott W. Spreier is Hay's Dallas-based national practice leader for communications within the health care consulting practice.
This article first appeared in the on September 5, 1996 in HHN Magazine online site.