December 1998 (revised)
November 2003 (revised)
November 2008 (revised)
Statement of the Issue
Leading a successful healthcare organization has become increasingly challenging and fraught with risk. In response to changing external demands and mounting internal pressures, healthcare organizations require a senior management team whose members can confidently assume prudent risks, embrace opportunities involving significant change and lead with decisiveness.
The American College of Healthcare Executives (ACHE) recognizes that providing executive employment contracts for the chief executive officer and other key members of senior management is one tool that a governing board can use to retain and recruit capable and unwavering leadership during such an era of change and challenge. The provisions of an executive employment contract also can reduce legal and market risks to the organization when a senior executive leaves.
The hospital CEO turnover rate, ranging between 14 and 16 percent between 2002 and 2007, is one indication of the volatility resulting from the challenges faced by leaders of healthcare organizations. Given the link that exists between leadership continuity and overall organizational performance, it is in the best interests of both the organization and the community it serves to provide CEOs and other appropriate senior-level executives with well-defined protections. Ensuring income continuity and a reasonable transition process encourages prudent decision making based on mutually understood priorities and demonstrates a commitment to equitable and well-respected employment practices.
ACHE believes executive employment contracts for chief executive officers and other appropriate senior executives benefit organizations and individuals. Executive employment contracts allow organizations to clearly establish the executive’s leadership role, provide conditions for an orderly transition with continued governance focus on continuity of operations if termination occurs and provide a measure of income security for executives. As a result, executive employment contracts can foster greater innovation and acceptance of the risks associated with leading complex organizations during a period of significant change.
ACHE encourages all healthcare organizations to wholeheartedly pursue the following actions:
- Provide executive employment contracts or letters of agreement to their chief executive officers with a goal of establishing conditions conducive to the exercise of strong and innovative CEO leadership.
- Provide executive employment contracts or letters of agreement to all other appropriate senior-level executives to similarly promote strong and innovative leadership.
- Provide a balanced contract, including both organizational and individual protections, with clauses addressing issues such as compensation, benefits, perquisites, professional development, participation in outside activities (e.g., serving on external boards), confidentiality and ethical behavior, and potential prohibitions covering a departing executive accepting employment with a competitor or recruiting other key employees from the organization.
- Provide CEOs with the contractual assurance of a minimum of one year's total compensation (salary plus all benefits that can be legally continued) upon termination without cause with continuation of compensation for up to another six months if needed to find another comparable position.
- Provide other appropriate senior-level executives with a minimum of six months' total compensation (salary plus all benefits that can be legally continued) upon termination without cause with continuation of compensation for up to another six months if needed to find another comparable position.
- Provide chief executive officers and other appropriate senior-level executives with comprehensive outplacement services in the event of termination, including assistance in career plan development and job-search assistance.
Providing an executive employment contract to the CEO and other senior executives can be a valuable tool for the board of a hospital or health system. In addition to retaining and recruiting leaders, a contract 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.
Approved by the Board of Governors of the American College of Healthcare Executives on November 10, 2008.
American College of Healthcare Executives, “Hospital CEO Turnover 1981-2011,” www.ache.org/PUBS/research/ceoturnover.cfm, pulled September 16, 2008.
American College of Healthcare Executives, Contracts for Healthcare Executives, Fourth Edition (Chicago: American College of Healthcare Executives, 2002).
Additional information on contracts and contract provisions is available in the “Career Services for Members” section of ache.org.