Dr Eagle’s bonus and the Goldilocks Test

Ah, the joys of being a public figure…this week we learned that Dr Chris Eagle, the president and CEO of Alberta Health Services (AHS), got a bonus of $90,000.  That’s in addition to his base pay of $580,000.  And significantly less than what he would have received had he met more than 63% of his “pay at risk” targets.  Let me say that again in non-HR speak:  Dr Eagle’s total compensation package is $725,000/year.  It is made up of $580,000 in base pay and an additional $145,000 in “pay at risk”.

This news immediately brought to mind the Goldilocks test.  Not because of any resemblance between Dr Eagle and Goldilocks but because figuring out how much Dr Eagle should be paid boils down to one question:  is it too high, too low or just right.

As any HR comp specialist will tell you, setting executive compensation is like pirouetting through a mine field.  Consultants like Mercer and Towers Perrin provide benchmark data but every organization is different and every executive thinks he’s uniquely gifted and deserves to be paid more than his peers.  Introduce the added complexity of a CEO working in a quasi-public entity and you could have one heck of a mess.

Is Dr Eagle’s total compensation package of $725,000 too high, too low or just right?

Dr Eagle’s job is CEO of AHS.  CEOs are compensated for strategic leadership, for understanding the marketplace and leading the organization so that it achieves its objectives.  The CEO’s board of directors will be happy (they didn’t hire a dolt) and the shareholders will be delighted (share prices go through the roof).  A CEO who achieves this result is paid “just right”.  In fact he might argue he’s paid “too little” and demand a raise.

But there’s a snag in Dr Eagle’s case.  Dr Eagle works for Alberta Health Services.  AHS is a creation of government.  The former Health Minister, Mr Zwozdesky, described the relationship between the government and AHS as follows: the government (through the Dept of Health) is responsible for policy, strategy, global budgets and doctors’ pay.  This “…trickles down to our delivery arm, which is Alberta Health Services…[which] then puts it all into effect”.*

So unlike a corporate CEO, Dr Eagle is not a strategic leader and developer of policy but rather the delivery boy who delivers government strategy and policy through the vehicle of the AHS to the citizens of Alberta.  For this he will get paid as much as $725,000. Applying the Goldilocks test I’d say Dr Eagle’s total compensation is too high.

Is Dr Eagle’s “pay at risk” too high, too low or just right?

Turning now to Dr Eagle’s bonus.  There are 2 elements to the “pay at risk” equation:  how much of Dr Eagle’s total compensation is “at risk” and just how risky is it.  Only 20% of Dr Eagle’s pay ($145,000) is “pay at risk”.  This is significantly lower than corporate CEOs whose “pay at risk” is in the 50% to 60% range.  But to be fair, corporate CEOs are strategic leaders and we’ve already determined that Dr Eagle is not, so the 20% pay at risk target is probably “just right”.

The more important question is just how much “risk” is Dr Eagle really exposed to—how likely is it that Dr Eagle will achieve his performance targets?  Consider this.  Dr Eagle would have met his target for ER wait times if 60% of patients coming into ER were admitted within 8 hours.  That’s not 100% of patients in ER, just 60%.  Dr Eagle missed that target—only 45% of the patients coming to ER were admitted within 8 hours.

It’s unclear whether the AHS board gave Dr Eagle a partial bonus on this performance metric, however the AHS board says partial bonus payouts are “justified” because Dr Eagle’s targets are “stretch targets” (meaning they’re intentionally set high).**But this misses the point.  If a target is “met” you get a small bonus, if the target is exceeded you get a better bonus, but you don’t get a partial bonus for failing to meet a target no matter how “stretched” it is—at least not in the corporate (real) world.

Applying the Goldilocks test, the degree of risk for this target is “too low”.

The Goldilocks Test

Mr Horne, our new Health Minister, says Albertans need to “look at the big picture”.** Okay, here’s the big picture—the delivery of healthcare in Alberta continues to stumble,    Albertans are still stuck in ERs awaiting admission, wait times for surgical procedures continue to drag on, the elderly are still parked in hospitals awaiting continuing care, the culture of intimidation continues and we’ve heard absolutely nothing from the judicial inquiry into queue jumping.

Albertans are not living in a fairy tale.  They expect their government to do more than set fairy tale targets for improvement and then pay out $450,000 to executives who fail to meet them.  Notwithstanding what Mr Horne and the AHS board of directors believe these bonus payouts are nowhere near “just right”.

*Hansard Apr 13, 2011, p 645 

**Calgary Herald, June 8, 2012, A6

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4 Responses to Dr Eagle’s bonus and the Goldilocks Test

  1. Little Red Riding Hood (alias Wendy Armstrong) says:

    Dear Goldilocks

    Nice blog on an issue of long concern for me – – but having just read Bruce Livesey’s Thieves on Bay Street I think it may also be a bit of a stretch to say “you don’t get a partial bonus for failing to meet a target no matter how “stretched” it is—at least not in the corporate (real) world.” Even meeting these targets, or creating an appearance of meeting these targets, has proven problematic in the corporate world and is seen as a major factor in the 20008 global financial collapse.

    I personally think we need to rethink some of the assumptions we’ve all been marketed and embraced over the past twenty years.

    For example, the whole notion of economic rewards as the sole and/or most effective driver of human, corporate and social endeavors is a child of the neo-classical economic thinking that swept the corporate world and certain international organizations in the 1980s and was introduced to government and traditional public services/goods in the 1990s. Called New Public Management (NPM) http://en.wikipedia.org/wiki/New_public_management or Reinventing Government, the focus is on disaggregation, delegation and incentivization though various performance-based funding models. Canada is considered a “core” NPM country.

    Now, the irony is that this new (now old) model hasn’t worked out all that well in many corporate sectors, let alone in the realm of human services and historic public goods. One of my favorite explanations of the problem with the adoption of such strategies in certain areas of social endeavor is Barry Schwartz’s TED talk on wisdom. http://www.ted.com/talks/barry_schwartz_on_our_loss_of_wisdom.html

    Yet the notion of the use ever greater financial incentives and disincentives to influence the behavior of individuals, business and society appears to have remarkable traction among the public, politicians and policy-makers in Alberta – on the left, right and centre. It seems to have become a knee-jerk reaction to any identified problem. Little thought seems to be given to context or likely consequences of various applications to very different kinds of problems, the kinds of performance measures we create and who creates them, or alternate solutions. I struggle a lot with this trend and am interested in any thoughts you or others may have on this. . .

    Finally, in support of the important point you make about the separation of policy creation and implementation, while the provincial government has now reportedly abandoned incentive bonuses for bureaucrats within government in response to public outcries, according to a meeting with some representatives of the Auditor-General’s office a couple of years ago, Alberta Health and Wellness has no authority to do anything about the “at-risk” bonuses for the top 100 in Alberta Health Services. This is because AHS is a delegated authority (NPM model) tasked with implementing policy and therefore it’s up to them to decide how to do it.

    All the best,
    Little Red Riding Hood (aka Wendy Armstrong)

  2. Dear Little Red Riding Hood (may I call you Red?)
    Thank you for your thoughtful comments and the link to Barry Schwartz’s Ted talk. Barry makes the excellent point that an excessive reliance on incentives actually demoralizes the work force and destroys their desire to do the right thing.

    How very true. It is very difficult to be virtuous under an incentive based compensation system, especially for a CEO at the top of the pay scale with most of his compensation tied to specified targets. Let’s not forget that most executives get two forms of bonuses—short term bonuses that are tied to annual targets and long term bonuses (option grants or other mechanisms) that are typically earned over 3 years. By the time you add up a CEO’s base pay, short term bonus and long term bonus his total bonus pay will be well in excess of his already generous base pay.

    In my view there are two reasons why incentive pay is counterproductive. Both spring from the base human characteristics of greed and fear. Most CEOs think they deserve their bonuses. Consequently they’ll do whatever it takes to get them, even if that means working toward a target which is no longer meaningful (if it ever was in the first place). Second, the only way to change an incentive target is to go back to the board of directors and ask for a new one. However this is very risky for the CEO because the board may conclude that he’s inept and has misjudged the marketplace or his corporation’s ability to reach to the target. Once a board loses confidence in a CEO it’s simply a matter of time before he’s shown the door (albeit with a nice fat severance package, but that’s a whole other conversation).

    Red, you noted that incentives and disincentives are remarkably entrenched in business and society. I can only speak to incentives in the business world. In my view incentives will continue to be a large part of executive compensation (and drive the aberrant behavior we just discussed) because of the magnitude of the dollars at stake. The corporate elite will not give up incentive pay without a knock down drag out fight.

    However there may be hope on the horizon. A good friend of mine has given this problem a lot of thought. She says this situation is changing because shareholders are starting to hold executives and directors accountable for their ineptitude or misbehaviour. They’ve vetoed overly generous pay packets and have forced underperforming executives out of their jobs. She may be right, but this change will take some time to fully materialize. In the meantime we’re stuck with the situation you described. Heaven help us!

    Thanks again Red for sharing your thoughts…very much appreciated!

    Yours,
    Goldilocks

  3. Rose Marie MacKenzie-Kirkwood says:

    $750,000 !!! $580,000 !!! 90,000 !!! My only comment on this entire matter is that can someone please tell all these people that the patients sitting in the waiting rooms for 8 hours (on whom all this statistics are based to determine how much MORE money he will receive for not succeeding) make less then $50,000 per year.
    Looks like I am going to have to put my faith back into the flip of the coin and thank God that I have a great family doctor who cares more about me than the numbers.

  4. Rose Marie, you mentioned your great family doctor and I immediately thought of the Ted Talk that Red (also known as Wendy) passed on. The whole point of Barry Schwartz’s talk is that doctors, teachers, and yes even janitors, should do their jobs well–not because they’ll get an incentive for doing so but because it’s the right thing to do and they know it. Obviously your doctor understands that and will go the extra mile for you because it’s the right thing to do. As a result you feel safe and well cared for. Wouldn’t it be lovely if we all had that level of comfort?
    Thank you for your comment and for reminding us that notwithstanding all of the inappropriate behavior driven by misguided incentive schemes there still are a lot of good doctors out there.

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