Approved by the Board of Governors Dec. 5, 2023
Statement of the Issue
The ability to attract and retain proven executive talent is consistently one of the top priorities of healthcare organizations’ governing boards. Industry consolidation adds to the challenge as organizations grow in size and complexity. The demands on healthcare executives have never been greater, requiring competencies in change management, emotional intelligence, ability to influence, innovation, collaboration and critical thinking. To transform healthcare, CEOs and senior leaders must balance the need to improve current operations while strategically preparing for the future, e.g., how and where care will be delivered. Leaders must be strong stewards of current resources and willing to take prudent risks.
The American College of Healthcare Executives recognizes that providing executive employment agreements for the CEO and other critical members of senior leadership is one tool that a governing board can use to retain and recruit capable and unwavering leadership, as well as communicate its support of the CEO to stakeholders.
The use of employment agreements is consistent with good governance as they provide a level of security to both the organization and the executive. With an employment agreement that provides for employment protection or income security, the CEO is encouraged to navigate difficult political issues while continuing to make critical decisions to advance the organization, which may be necessarily disruptive. As a result, executive employment agreements can foster greater innovation and acceptance of the risks associated with leading complex organizations during periods of tumult and significant change.
The hospital CEO turnover rate has held steady at 16% from 2020 to 2022. Given the link that exists between leadership continuity and overall organizational performance, it is in the best interests of both the organization and the communities served to provide CEOs and possibly other key members of the senior leadership team with fair and market competitive employment protection or income security.
Policy Position
ACHE believes executive employment agreements for CEOs and other key members of senior leadership can benefit organizations and individuals. Executive employment agreements allow organizations to clearly define the executive’s leadership role and expectations and should form the basis for future performance evaluations. In exchange for the executive’s services, an employment agreement provides for a level of income security in the event the executive transitions to another organization due to a change of control or should the executive be terminated (without cause).
ACHE encourages all healthcare organizations to wholeheartedly pursue the following actions, outside of having organization-wide executive severance policies:
- Provide employment agreements to their CEOs with a goal of establishing conditions conducive to the exercise of strong and innovative CEO leadership.
- Provide consistent and equitable executive employment agreements to all other critical members of the senior leadership team to similarly promote strong and innovative leadership.
- Provide a balanced set of terms within the employment agreement that includes both organizational and individual protections, with provisions addressing issues such as the length of the agreement, renewal provisions, compensation, benefits, perquisites, professional development, participation in outside activities (e.g., serving on external boards), restrictive covenants such as confidentiality and ethical behavior expectations, and potential prohibitions or limitations covering a departing executive from accepting employment with a competitor or recruiting other key employees from the organization.
- Provide CEOs with the contractual assurance, when termination is without cause, of salary continuation for 18 to 24 months post termination and the continuation of select health and welfare benefits for the same duration. The length of the severance period may depend on the size of the organization and type of organization (hospital CEO vs. system CEO). Future employment mitigation is common within an executive severance agreement. The agreement should specify whether severance benefits are offset by earnings if the CEO obtains subsequent employment during the severance period.
- Provide other senior leaders with nine to 18 months of severance benefits (i.e., salary continuation and select health and welfare benefits) and ensure the agreement whether the benefits will be offset for future employment. Duration of the severance period may depend on the size of the organization and type of organization (hospital vs. system).
- Provide the CEO and/or other senior leaders with terms that address the type and length of employment/income protection to be provided should there be a change in control, and define when protection ends after a change of control, with clearly defined triggers for severance.
- Provide CEOs and other appropriate senior-level executives with comprehensive outplacement services in the event of termination without cause, including assistance in career plan development and job search assistance. To protect the organization, a dollar value can be assigned to this benefit and the organization can determine the vendor to supply the services.
Providing an executive employment agreement to the CEO and other senior leadership members can be a valuable tool for the board of a hospital or health system. In addition to retaining and recruiting leaders, an agreement can help establish an environment in which executives feel empowered to undertake needed innovation and reasonable risks to further the achievement of the organization’s mission.
Policy created: November 1993
Policy updated: December 2023