3 Compensation Structures for a More Successful Transaction
Eighty-seven percent of hospitals are considering alignment with another hospital or system as a part of their overall strategic planning, according to Dixon Hughes Goodman. This interest is primarily attributed to structural factors in the industry, including the shifting reimbursement environment and issues related to new healthcare regulations that place independent hospitals at a competitive disadvantage.
The business of governing acute care hospitals and health systems has become increasingly complex.
At the same time, there is tremendous opportunity due to the expanding range of strategic alternatives available to independent hospitals. Despite these market realities, many boards have failed to implement protective structures that incentivize senior management to objectively assess opportunities free of personal contractual distractions. This article reviews the types of safeguards that hospital system boards should have in place to promote senior management objectivity.
Hospital systems should position themselves to evaluate strategic alternatives on their merits without succumbing to the unintended consequences of misplaced management incentives. Organizational alignment is among the most significant career inflection points that hospital executives can face. Boards that recognize these competing factors and structure contracts that promote management objectivity will position their hospital system to make thoughtful decisions for their stakeholders based on board directives — without distraction or misalignment with senior executives.
Properly structured incentives can improve transaction outcomes by promoting continuity before and after a partnership is consummated. By putting these incentives in place, boards promote open communication and trust with management. Trust is always important in the principal-agent dynamic between management and the board, but it is of particular consequence in transactions where management may feel vulnerable. By putting the right incentives in place early, objectivity is promoted and heat-of-the moment decisions are avoided. As more organizations consider strategic alternatives with other systems, we have seen an increase in failed transactions due to unaligned board objectives and management incentives. The effect is magnified when experienced transaction advisers and transaction counsel are not involved at the outset.