Health Care Organizations Use Variable Pay to Raise the Bar on Employee Performance

By Christine Woolsey

Employers in the health care industry say that improving employee performance -- rather than controlling payroll costs -- is the key driver of their variable pay plans, according to a new survey of U.S. health care organizations.

And, employers whose variable pay plans focus on improving organization and employee performance, rather than cutting costs, report greater satisfaction with the overall effectiveness of those programs.

William M. Mercer Inc. surveyed 145 health care organizations -- primarily hospitals and hospital systems -- on their practices and opinions regarding variable pay for non-management employees. Variable pay generally includes performance-based awards, such as profit sharing, team/group incentives, project/milestone incentives, individual employee incentives and cash or non-cash awards, that are earned during specific time periods.

About 23% of health care organizations surveyed have or are in the process of implementing variable pay programs, according to Mercer. Of those with such policies, 89% said a key objective of the program is improving employee performance. Seventy percent of those companies rated their plan as effective or very effective in meeting that objective.

Also, 89% of organizations said aligning employees' interests with organizational goals is a key objective of their variable pay program; 60% of these employers rated their plan as effective in meeting this goal.

The Mercer survey revealed that variable pay programs that have cost containment as the primary goal are less prevalent and organizations with plans that focused on that objective are rated less effective. Sixty-four percent of organizations reported cost containment as a key objective, but only 45% rated the policy as effective in meeting that goal.

More than half of the organizations -- 54% -- said a key objective of variable pay programs is to increase compensation or market effectiveness without raising base pay. Very few organizations -- only 18% -- said a key objective for variable pay plans was improving customer satisfaction, according to the survey.

"Health care organizations, like their general industry counterparts, see the primary value of variable pay as 'raising the bar' on both employee and organizational performance," summed up Charles Pascual, a compensation consultant in Mercer's Tampa, Fla., office.