The number is already built

How senior executive pay gets set, and why the architecture pushes it upward no matter who holds the seat.

By the time the compensation committee sits down, the number that anchors everything is already built. A consultant has spent weeks assembling the benchmark, measuring the chief executive’s pay against a hand-picked group of peer organizations and a target percentile, and the figure that reaches the board arrives as a recommendation with the work already shown. The committee is a few board members, usually with backgrounds in business or finance, and much of the meeting’s energy goes to the design of incentives and annual goals. The base number underneath it all is settled before the room convenes.

I have spent more than two decades moving between the clinical rooms and the administrative ones, and the compensation committee is among the quietest of the closed rooms and one of the most consequential. It rarely produces a scandal or a raised voice. What it produces is a figure that helps decide how much room a budget leaves for everything not strictly required, on floors the people in the room will never work a shift.

I want to be careful about the argument I am making, because it is easy to hear a different one. I am not arguing that a given number is too high. That is the argument everyone already has, and it goes in circles, because it turns on a judgment about one person in one year that reasonable people will never settle. The argument worth having is about the features of the room itself: the ones that keep the number out of view, and the ones that push it upward regardless of who holds the seat. I made the same distinction writing about the anesthesia subsidy hospitals fight over, where the subsidy is the symptom and the case leaving the building is the disease. The number is a symptom. The architecture is the subject.

Start with how the number gets built, because the mechanism is more telling than the result. The consultant assembles a peer group, a set of supposedly comparable organizations, and the board sets a target within it: pay the executive at the median of that group or somewhere above it. On its face this is prudent and defensible. It is also, when every board does the same at once, a machine for escalation. If most organizations aim to pay at or above their peer median, and pay rarely moves down once set, the median itself has to climb every cycle, because each board that reaches above average lifts the average the next board measures against. Economists borrowed a name for it from Garrison Keillor’s town where all the children are above average: the Lake Wobegon effect. Each board votes for something reasonable. The aggregate climbs anyway.

The peer group is where the quiet discretion lives. Reputable consultants screen for comparability, usually by revenue band, so the choice is not unbounded. But a board inclined to be generous decides where that band is drawn and which organizations sit at its edges, and can lean toward larger, better-paying systems without ever saying so out loud. The percentile target gets all the attention. The composition of the group beneath it does much of the work, and it does that work before anyone in the room votes on anything.

There is a reason nonprofit health systems lean on this method rather than more independent judgment. Federal tax law rewards them for it. Under the intermediate-sanctions rules, a nonprofit board can establish a rebuttable presumption that its executive pay is reasonable if the arrangement is approved by board members without a conflict of interest, the board relies on data about comparable organizations, and it documents that it did so. Set those three conditions beside the room and the safeguard starts to look thin. The conflict-free body is that same handful of finance-background members, and the comparability data is the benchmarking exercise itself. The rule written to keep nonprofit pay reasonable functions, in practice, as an instruction to benchmark. The very safeguard meant to discipline the number institutionalizes the mechanism that ratchets it. I would challenge us to sit with that inversion for a moment, because it is the clearest case I know of a structural feature producing the opposite of what it was built to do.

Congress has noticed more than once. In 2017 it placed a twenty-one percent excise tax on nonprofit pay above a million dollars, a measure that reads as a check on excess. A tax on the level, though, leaves the architecture that sets it untouched, the whole problem restated as tax policy.

The second feature is what the number lets the rest of us see, and what it does not. For a nonprofit system, the figure that eventually reaches the public sits on a Form 990, a tax filing few people outside the field ever open, and it appears only for a handful of the highest-paid people in the organization. Even that figure can understate the total, because incentive plans, deferred compensation, and other legitimate vehicles move real value into years and forms where it is harder to read in any single snapshot. There is a structural version of the same effect. A large system is rarely one organization but a family of them: some nonprofit and filing a 990, others taxable or for-profit affiliates that file no public return. Pay can be spread across that family in ways that are hard to add up, and for the parts that operate for profit there is no 990 at all. None of this is hidden, exactly. The 990s that exist are public and searchable, and the studies I am about to cite were built from them. It is disclosed the way a thing is disclosed when the disclosure is technically complete and practically unread. The opacity is not a conspiracy. It is the byproduct of an arrangement that was never built to make the community it serves a reader of the number.

Set the mechanism aside and look at the result. At twenty-two major nonprofit medical centers, the pay gap between hospital chief executives and registered nurses widened from twenty-three to one in 2005 to forty-four to one in 2015, while inflation-adjusted nurse pay barely moved (Marcus and colleagues, Clinical Orthopaedics and Related Research, 2018). A 2024 study in PLOS One found that most of the growth in nonprofit chief-executive pay tracks the size of the organization a leader runs more closely than the quality of the care it delivers, and it tied that growth directly to hospital consolidation. That second finding matters, because it means the incentive rewards getting bigger more reliably than getting better, and getting bigger is what the last decade of mergers and acquisitions delivered. A state-level analysis put it in human terms: a North Carolina report found the 2019 pay of eleven nonprofit hospital chief executives equal to the combined salaries of 572 registered nurses. Three numbers, and the last one is the one I cannot unsee.

Here is the objection I take most seriously, because I have watched the work up close and know it is real. Running a multibillion-dollar health system is genuinely hard. The people who do it answer for outcomes across dozens of facilities, they carry a financial weight that can sink an organization and everyone who depends on it, and they are recruited from a small pool by boards competing for the same few names. The leaders I am describing seldom touch a bedside, but they set many of the conditions every clinical team works under, and setting those conditions well is skilled, demanding, consequential work. So is the work on the floor. The nurse who catches a deteriorating patient two hours before the numbers would have, the hospitalist holding twenty admissions in her head at once, the tech who notices the thing on the monitor the protocol missed, each carries a weight measured one life at a time, and it is every bit as real as the enterprise kind. I am not arguing these leaders deserve little, or that the seat should be paid like the bedside. The market for that talent is real, and pretending otherwise would be its own kind of dishonesty.

That objection, though, defends the level of the pay. It does not defend the architecture. A person can be worth a great deal and the process that sets their number can still be a ratchet the community never voted for and rarely reads. Those are two different claims, and the room tends to answer the second by relitigating the first. The difficulty of the job is true. It is also, most of the time, the change of subject.

There is a tell in that phrase, voted for. A public company answers to shareholders who now hold an advisory say-on-pay vote, a chance to register that a number has run ahead of performance. A nonprofit health system has no such vote. The community underwrites its tax exemption, absorbs the consequences of its budget, and staffs its floors, and it holds no seat and no ballot on the number at all. That absence is not an oversight. It is the design.

I have spent the last few issues on a related question, who owes for the cost of a hospital staying ready to take the hard case at two in the morning. This room is the same problem from the other direction. The readiness a system underfunds and the number it protects are set by the same architecture, one that decides behind a closed door what the institution will carry and leaves the rest to the people who were never in the room.

So I keep coming back to the base number. It will shape a Tuesday-night floor eighteen months from now, and it is settled before the committee meets. The ratification, when it comes, can take less time than working up a single complicated admission. To test any of this from outside, the place to look is narrow and public: the peer group a system chose, which surfaces on its 990, and whether those organizations are truly its peers or a flattering reach upward. The board that sets the number rarely sees the three-in-the-morning version of the hospital it governs, and the hospital at three in the morning rarely learns what the number was or how it was set. Both are features of the same arrangement, and the arrangement is working as designed. That is not a reason for outrage. It is a reason to describe the room as it is, so the people who live with the number can at least see how it was built.

This is the fifth of the seven rooms I have been mapping; the map that holds them all lives here.

From the room you can’t see, the voice you need to hear.