How Executive Incentives Compounded the VA’s Problems

The problems at Veteran Affairs Department hospitals are people problems. The VA’s information technology systems may need to be upgraded, but that’s not the reason scheduling records were manipulated. “Cooking the books” started years ago, based on media reports, and has been overlooked by what must be a large number of employees. That is solid evidence of a culture in trouble.

There appears to be broad recognition that the bonus system is at least part of the problem. That is not surprising. This is not the first time the Senior Executive Service pay and performance system has been the focus of criticism. A recent survey of SES members shows they are highly dissatisfied.

The pay and performance system has been tweaked several times, but in concept it has not been changed in any significant way for decades. It is decidedly different than the model commonly used for incentives in other sectors, including health care. It is the differences that contributed to the VA’s problems—and undermines the motivational value of awards in other agencies.

If nothing more, the situation highlights the power of financial rewards. That’s been demonstrated over and over in the private sector. The Wall Street collapse is the latest story. Poorly designed incentives can prompt dysfunctional behavior.

The VA should initiate an assessment of how rewards are used. Moving forward, rewards can help executives focus on and expedite needed changes.

SES Bonuses

No one is likely to turn down a bonus. But the payments have minimal incentive value. Bonuses almost by definition are an extra—paid over and above a recipient’s salary. They are based on subjective, after-the-fact decisions. I’ve even heard stories of employees taking turns.

The problem is compounded when bonuses are based on performance ratings. When 95 percent of employees in any group are rated “outstanding” or “superior,” the rating process borders on the absurd. No company would tolerate it. Companies with forced distribution policies limit the “outstanding” ratings to 15 percent. An outstanding performer should stand out from his or her peers.

The argument that SESers were selected because they are outstanding is valid. However, these jobs are supposedly among the toughest, most responsible in government. A rating of “fully successful” should signify an executive met a very high standard.

When bonuses are not based on objective or verifiable information, and there is a history of badly inflated ratings, it should not be surprising when leaders question whether awards were truly justified.

Industry has had a similar, although far less flagrant, problem with inflated ratings. It’s the reason forced distribution policies were introduced a decade or so ago.

The inflated ratings make financial rewards impossible to justify or defend. It is completely reasonable for members of Congress to ask, “Why are we spending this money?” In the business world, companies base awards on confirmed results.

Bonuses vs. Incentives

Executive incentives are universal in every sector, including health care. A key issue is the distinction between incentives and bonuses, although the words are used interchangeably.

Incentives are best understood as a formula, where the desired results are spelled out in advance and the payouts are linked to achievements. Plan participants know what they have to accomplish. There are no year-end surprises. It’s the linkage that gives meaning to individual accountability.

At the executive and manager level, planned incentives are an integral component of a cash compensation program. Cash compensation—the total of salary and incentives—is planned using market surveys. The totals are aligned with competitive levels. Incentives are not an extra for good performance.

Incentive planning starts by defining target awards as a percentage of salary. At SES salary levels the typical target awards would be 15 percent to 25 percent. But this is government, so they should be reduced.

Target awards are subtracted from planned cash compensation levels to determine planned salaries. For example, if the competitive total is $150,000 and the target is 20 percent, the base salary would be $125,000. Target awards are also referred to as ‘pay at risk,’ which has to be earned each year.

Actual awards depend on company and individual performance. Company—or hospital—performance is based on a composite of financial and nonfinancial measures that govern the funds available for incentive awards. In hospitals quality measures are increasingly important.

The industry model makes management incentives a team award system. When the organization performs at or above planned levels, all plan participants can expect an award.

Canada has adapted the idea to government. According to the guidelines, “corporate commitment” based on “the demonstration of [departmental] fiscal savings and efficiencies” governs the payment of 33 percent of each executive’s award.

Defining Individual Accountability

The universal practice for managing executive and manager performance in the private sector is the use of individual performance goals. It’s not perfect; some managers are good at setting goals they know they can beat. And for some jobs it’s difficult to set meaningful goals. But every executive and manager should be able to state what he or she plans to accomplish to contribute to agency performance.

In negotiating goals, the executive is making a commitment and confirming his or her accountability. Throughout the year progress in achieving goals influences management decisions.

The UK Senior Civil Service is committed to the use of SMART (specific, measurable, achievable, relevant and timed) goals. Executives are required to list the main actions to be carried out, deadlines when possible, and measures or targets to be used to assess performance. There is also a requirement that stipulates “360 degree feedback on the job holder must be collected as part of the review process.”

For award calculation, each goal is weighted and performance is measured at year end. The calculation of awards then becomes a spreadsheet problem.

But the problem is more immediate at the VA. There are several hospital systems that rival it in size. HCA and Community Health Systems are the two largest. Government would do well to clone the proven practices of these or other large hospital systems.

Howard Risher managed compensation consulting practices for two national firms. He has written four books, including Aligning Pay and Results (New York: AMACOM Books, 1999). He has an MBA and Ph.D. from the Wharton School.

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