Due to financial, operational, and workforce pressures, managing a health system is more complex than ever before. Effective leadership and accountability are crucial for an organization's long-term success, and utilizing the right pay practices and policies to reward and retain key talent is essential. Long-term incentive plans (LTIPs) can serve as an important tool to provide rewards for meeting multi-year objectives.
According to SullivanCotter’s Executive Compensation Pulse Survey (May 2024), approximately half of health systems with revenues greater than $1.5B sponsor an LTIP. While short-term incentive plans ensure progress on operational metrics and annual financial outcomes, LTIP goal setting has evolved to focus on key transformational and strategic objectives that promote resiliency and sustainability. The current uncertain and volatile environment complicates LTIP goal setting.
As a guide, SullivanCotter has developed the following framework for organizations to approach LTIP goal setting by identifying key objectives and setting performance levels that drive progress. Below is a summary of the framework. A more comprehensive overview is also available.
LTIP Goal-Setting Framework
Step 1: LTIP Guiding Principles
External market factors and the overall performance landscape are critical in identifying long-term priorities. These fall into two main categories:
Tactical: Organizations struggling to meet short-term performance objectives may utilize LTIPs with more tactical goals pursued over multiple years to accelerate performance improvement.
Strategic: Organizations looking to move beyond short-term operational objectives may require a defined process to achieve multi-year outcomes goals.
Guiding Principles for LTIP Goals Include:
- Align with strategic plans or ‘stubborn’ operational challenges
- Limit goals for increased focus
- Minimize overlapping goals with annual incentive plans
- Utilize metrics with the greatest impact and data availability
- Add process measures as needed
- Consider meaningful line-of-sight for participants
- Motivate the right behaviors
- Be aware of any unintended consequences
Step 2: Strategic Plan Alignment and Gap Analysis
Organizations that regularly review and assess progress toward strategic objectives are well-positioned to identify key priorities for future LTIPs. Start by evaluating the organization’s strategic plan and mapping the plan’s pillars to past and future LTIP performance cycles to identify gaps and assess prioritization over the length of the LTIP cycle (three years being the most prevalent).
Step 3: Measure Selection
Organizations should consider the balance of metrics across incentive plans and the pillars within the strategic plan. This approach can help to standardize how progress is measured and to identify if priorities are too narrow or if they position the organization to make meaningful progress within the defined performance cycle time frame.
Outcomes-Based Measures: Outcomes can be measured by an objective metric that reflects progress towards the goal. When considering outcomes, organizations should understand the performance drivers and whether they have the necessary infrastructure, resources, and ability to focus on these objectives appropriately.
Transformational/Strategic Measures: These measures often include imperatives for which the organization still needs to develop a tactical plan. These may be more appropriately aligned with priorities that require disciplined and longer-term incremental progress. Some of these priorities may require advancing process steps in the early years.
Step 4: Goal Calibration
The approach to LTIP goal calibration varies based on goal types:
Outcomes-Based Measures - Historically, LTIPs have included objective measures based on a specific outcome the health system is targeting. Organizations often define long-term aspirational performance levels while considering the resource investments required to achieve the desired progress.
Transformational/Strategic Measures - Many organizations deploy LTIPs as tools to drive accountability for identifying and advancing key transformational and strategic measures. Successful LTIPs have a flexible calibration process to recognize that some goals initially require the achievement of milestones. This may include setting up the infrastructure to advance a key strategic measure and then identifying the desired target and maximum outcomes during the performance cycle. This approach is effective for calibrating highly innovative goals or where the intended outcome may not be known at the onset of the performance cycle.
Monitor Progress
Organizations that monitor progress and performance throughout the performance cycle can determine if a shift in focus is required by following a consistent framework for identifying LTIP goal priorities and measurement. Monitoring progress quarterly or bi-annually is more appropriate for LTIP goals, given their multi-year longitudinal focus.
Conclusion
LTIPs are an effective way to retain and reward key leadership talent while advancing strategic objectives beyond annual performance metrics. Despite market uncertainty, a consistent framework—including guiding principles, strategic alignment, measure selection, and goal calibration—helps identify priorities and shape long-term success. LTIPs enable organizations to focus on transformational efforts and strategic priorities that meet the long-range needs of the communities they serve.
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Dive deeper with a more comprehensive overview of this framework.
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SullivanCotter partners with health care and other not-for-profit organizations to drive performance and improve outcomes through the development and implementation of integrated workforce strategies. Our proven approach helps our clients align their business strategy and performance objectives. SullivanCotter, Inc.