A Rigged Game with Other Peoples’ Money
Prof Mintzer’s arguments start with the assertion that executive bonuses are hopelessly rigged in favor of the managers who receive them. In particular:
- They represent gambling with “other people’s money,” in this case, “the stockholders [of large public corporations] not to mention the livelihoods of their employees and the sustainability of their institutions”
- Bonuses are given just based on the appearance of winning, for example, when a company’s stock goes up short term, regardless of long-term results.
- Bonuses are given even when the company may lose, for example, the “golden parachute,” or severance package that even executives forced to resign or retire may receive.
- Bonuses are given for actions that at best only provide potential gains for the company, for example prior to a merger, but before it is known that the merger will be successful
- Bonuses are given just for showing up, that is, “retention bonuses.”
Thus he contended that bonuses inspire executives to be gamblers in a game rigged in their favor.
Based on False Assumptions
Furthermore, he argued that the current system of executive compensation is based on false assumptions. These include:
“A company’s health is represented by its financial measures alone – even better, the price of its stock.”
However, as Prof Mintzer noted:
Companies are a lot more complicated than that. Their health is
significantly represented by what accountants call goodwill, which in
its basic sense means a company’s intrinsic value beyond its tangible
assets: the quality of its brands, its overall reputation in the
marketplace, the depth of its culture, the commitment of its people, and
I would note that this applies especially in health care, and more especially to organizations that provide direct patient care. No hospital system, for example, could function at all without a corps of dedicated health professionals, physicians, nurses, therapists, etc.
Furthermore, Prof Mintzer wrote,
All too often, financial measures are a convenient substitute used by
disconnected executives who don’t know what else to do—including how to
manage more deeply. Or worse, such measures encourage abuse from impatient CEOs, who can
have a field day cashing in that goodwill by cutting back on maintenance
and customer service, ‘downsizing’ experienced employees while others
are left to ‘burn out,’ trashing valued brands, and so on. Quickly the
measured costs are reduced while slowly the institution deteriorates
This is obviously particularly pernicious in health care, a field in which institutions are complicated, and dependent on the efforts of some very highly trained and specialized people well beyond the management suite.
“Performance measures, whether short or long term, represent the true strength of the company.”
Prof Mintzer pointed out the lack of accurate measures of the overall performance of a company or organization.
“The CEO, with a few other senior executives, is primarily responsible for the company’s performance.”
Prof Mintzer asked,
In something as complex as the contemporary large corporation, how
can success over three or even 10 years possibly be attributed to a
single individual? Where is teamwork and all that talk about people
being ‘our most important asset?’
More important, should any company even try to attribute success to
one person? A robust enterprise is not a collection of ‘human
resources’; it’s a community of human beings. All kinds of people are
responsible for its performance. Focusing on a few—indeed, only one, who
may have parachuted into the most senior post from the outside—just
discourages everyone else in the company.
Again, this is obviously particularly the case in health care organizations, especially those that provide direct patient care.
Leading to the Worst Possible Leaders and Leadership
Finally, Prof Mintzer argued that the current system is designed to promote the worst possible leadership, leading likely to the worst possible outcomes. He opened with
Executive bonuses—especially in the form of stock and option
grants—represent the most prominent form of legal corruption that has
been undermining our large corporations and bringing down the global
Our argument has been that the current leadership of health care is similarly bringing down our health care system.
He later noted that current compensation practices mainly function to select out the worst possible leaders:
executive compensation these days reinforces a class structure within
the enterprise that is antithetical to its effective functioning.
Because of its symbolic nature, executive compensation as currently
practiced sends out the worst possible signal to everyone in the
bonuses can serve one purpose. It has been claimed that if you don’t
pay them, you don’t get the right person in the CEO chair. I believe
that if you do pay bonuses, you get the wrong person in that chair. At
the worst, you get a self-centered narcissist. [Or even a full-fledged, if non-violent, psychopath, as noted here – Ed] At the best, you get
someone who is willing to be singled out from everyone else by virtue of
the compensation plan. Is this any way to build community within an
enterprise, even to foster the very sense of enterprise that is so
fundamental to economic strength?
Accordingly, executive bonuses provide the perfect tool to screen
candidates for the CEO job. Anyone who insists on them should be
dismissed out of hand, because he or she has demonstrated an absence of
the leadership attitude required for a sustainable enterprise.
Of course, this might thin the roster of candidates. Good. Most need
to be thinned, in order to be refilled with people who don’t allow their
own needs to take precedence over those of the community they wish to
It will be interesting to see if anyone attempts a logical refutation of Prof Mintzer’s arguments. My guess is that we will see little response, based on the usual public relations dictum that it is best not to acknowledge one’s detractors, even if they are right. Furthermore, I predict that what responses there are will partake heavily of logical fallacies.
Finally, it is worthwhile to think about Prof Mintzer’s points when assessing the arguments made in favor of particular executives’ outsized remuneration.
An Example – Continued Riches for Wake Forest Baptist Executives
Outsize Executive Compensation Continues
A few weeks ago, we noted that the leaders of this large medical center, while previously proclaimed as visionaries, and enjoying enlarging compensation, seemed to have lead the institution to a financial crisis due to difficulties with a poorly chosen or implemented electronic health record system.
One follow up story updated compensation information and provided the official management rationale for the ongoing largess. The redoubtable Richard Craver wrote in the Winston-Salem Journal,
Wake Forest Baptist Medical Center provided its top executive,
Dr. John McConnell, an 11.9 percent raise in salary during 2011 to
$983,777, although his total compensation dropped 18 percent, the center
reported Wednesday as part of an annual regulatory filing.
McConnell was paid $2.04 million in total compensation, compared
with almost $2.5 million for 2010. Although Wake Forest Baptist operates
on fiscal years that end on June 30, the pay for its top executives is
required to be listed on a calendar-year basis.
The main difference between the 2010 and 2011
compensation totals for McConnell was $461,575 he received as a one-time
payment that replaced the retirement benefits he forfeited upon leaving
the University of Texas Southwestern Medical Center in Dallas.
McConnell was required to work at Wake Forest Baptist for two years to
receive the one-time payment.
Keep in mind that in 2008-9x, Dr McConnell made a total of just over $700,000, so his compensation in 2011 was about three times that.
The benevolent board of the medical center saw to it that Dr McConnell got money for all sorts of reasons:
McConnell received $384,203 in bonus and incentives in fiscal
2010-11. The center said the amount reflects the achievement of clinical
quality, academic and financial goals set by the board of directors.
The bonus was down $115,797 from fiscal 2009-10 primarily because the
center reduced the potential percentage of the incentive compensation
from 75 percent of his base salary to 53 percent.
McConnell received $38,511 in other reportable
compensation, which the center listed: as $8,797 in annual dues for
Forsyth Country Club and Rotary Club membership, defined as for business
purposes; $16,500 qualified deferred compensation; $3,612 in after-tax
life-insurance deduction; and $9,602 in an automobile allowance.
He also received $619,002 in contributions to retirement plans,
including a supplemental executive retirement plan solely for
One wonders why, given his salary and bonus, Dr McConnell could not afford to pay dues to the country club and rotary on his own, or for his own car expenses, or to provide for his own retirement, for that matter?
Other executives also continued to do very well:
Donny Lambeth, former president of N.C. Baptist Hospital, received
$2.47 million in total compensation. Lambeth served as president of
Davie County Hospital and Lexington Medical Center before retiring last
year. He is now serving as an N.C. House representative.
Lambeth’s $495,595 in base salary represented an 8
percent decrease related to his reduced job responsibilities. His bonus
and incentive compensation was down 2 percent to $181,988. The bulk of
Lambeth’s compensation was $1.62 million related to a fully vested
deferred compensation upon his retirement.
Dr. Thomas Sibert, president of Wake Forest
Baptist Health and chief operating officer, received a 14 percent
increase in total compensation to $1.13 million, including $631,297 in
salary (up 15.7 percent) and $234,540 in bonus and incentive
compensation (up 41.3 percent). Sibert took over his role in September
Edward Chadwick, chief financial officer,
received a less than 1 percent increase in total compensation to
$979,420. His salary rose 4.6 percent to $527,216, while his bonus and
incentive compensation fell 5 percent to $189,929.
Russell Howerton, chief medical officer, was paid
$295,714 in salary, $300,786 in bonus and incentive compensation and
$657,025 in total compensation. Doug Edgeton, former president of
Piedmont Triad Research Park (recently renamed as Wake Forest Innovation
Quarter), received $490,485 in salary, $162,367 in bonus and incentive
compensation and $710,729 in total compensation.
The Chief Information Quietly Departs, with Some More Money
Meanwhile, Mr Craver also reported the quiet departure of the executive who presided over the troubled implementation of the EHR,
The chief information officer for Wake Forest Baptist Medical
Center is stepping down, effective May 31, the center confirmed Friday.
Sheila Sanders has served in that role, as well as vice president
of information technology, since being hired in 2009 to direct the
center’s overhaul of its IT system.
She is leaving at a time when the center is
struggling financially and operationally with implementing the Epic
electronic health records system — one of the largest overall projects
Wake Forest Baptist and most health care systems have undertaken in
Note that Ms Sanders was well rewarded for her questionable efforts,
Sanders was paid $333,961 in salary, $89,145 in bonus and incentive
compensation and $464,543 in total compensation in 2011, according to a
regulatory filing that Wake Forest Baptist made public Wednesday. The
center’s executive-compensation data typically is about 18 months old
In terms of salary, Sanders ranked sixth among the center’s 27 listed management officials.
It was clear that Ms Sanders ought to have been directly responsible for the EHR implementation,
The center said Sanders’ duties included clinical information,
administrative, business, academic and research support systems, as well
as core IT functions that include a central IT help desk, email,
computer desktop support, IT security and telecommunications.
Nonetheless, the extremely well-paid top leadership did not seem to have hard feelings.
Dr. John McConnell, the center’s chief executive, said in a statement
that Sanders decided in January to take ‘a brief career break’ after
completing major portions of the overhaul. He said Sanders is relocating
to Florida to spend more time with her family.
Wake Forest Baptist spokesman Chad Campbell
stressed it was Sanders’ decision to leave her positions, and it was not
related to Epic, which went live in September on the center’s main
‘We are deeply grateful to Sheila for her numerous contributions that
will serve the medical center for years to come,’ McConnell said.
McConnell said senior IT officials will manage day-to-day IT operations
with his oversight while the center conducts a national search for her
But to reiterate,
The center said May 2 it had launched another round of ‘multi-million
dollar’ cost-cutting measures that will last through at least June 30,
the end of its 2012-13 fiscal year, related to fixing Epic revenue
Perhaps any attempt to saddle the chief information officer with
responsibility would point out the lack of responsibility imposed on
even higher level and better paid executives for apparently approving
and authorizing her previous work.
The Usual Talking Points
Instead, the official statement from hospital system management about top executives’ compensation trotted out the usual talking points in defense of all this lavish pay,
Wake Forest Baptist said in a statement explaining its executive
compensation packages that as an academic medical center, it requires
management with ‘a special set of skills and experience to manage
relationships with physicians and researchers, the university, its
patients and community. … It takes proven talents possessed by a small
group of health care executives.’
‘Compensating executives, as we do all of our
employees, competitively and appropriately, is crucial to the success of
Wake Forest Baptist and to Northwest North Carolina.’
Baptist said its executive compensation is based primarily on
comparisons with 32 academic medical centers, including Duke University
Hospital and UNC Hospitals.
With regard to Dr McConnell’s special retirement plan,
‘This is a common benefit for executives at academic medical centers and
health systems to encourage retention and provide competitive
retirement benefits,’ the center said in its statement.
We first listed the talking points here, and then provided additional examples of their use here, here and here. The official administration discussion above does seem to include:
– We have to pay competitive rates
– We have to pay enough to retain at least competent executives, given how hard it is to be an executive
– Our executives are not merely competitive, but brilliant.
Left out was any evidence about the executives’ performance, much less their degree of responsibility for their institution’s performance. Why the few top paid executives should continue to get credit for the institutions’ supposed, but unspecified successes, while escaping any accountability for its failures (including the looming problems with its commercial health care information technology) was of course not mentioned.
So here is a great, current example of how top health care executives are gambling with other peoples’ money, in a game rigged so that they always win. As long as we continue such perverse incentives in health care, they will continue to inspire leaders to line their own pockets at the expense of our health care institutions, and ultimately to the detriment of patients’ and the public’s health.
So let me conclude with Prof Mintzer’s conclusion,
All this compensation madness is not about markets or talents or
incentives, but rather about insiders hijacking established institutions
for their personal benefit.
Too many large corporations today are starved for leadership—true
leadership, meaning engaged leadership embedded in concerned management.
And the global economy desperately needs renewed enterprise, embedded
in the belief that companies are communities. Getting rid of executive
bonuses, and the gambling games that accompany them, is the place to