Incentive pay plans boost managers' performance.

Incentive compensation, which has become commonplace in highly competitive industries, is gradually being introduced in health care settings. Although it has not been used extensively in not-for-profit hospitals, its advantages make it a natural tool for administrators who want to retain their best managers and to achieve important special objectives. Management incentives--awards based on the accomplishment of special objectives--enable boards of trustees and senior managers not only to meet difficult hospital objectives but also to attract and motivate key managers and to promote participative management and teamwork. An effective management incentive compensation program requires five support systems: strategic and operating plans; annual objectives for each manager derived from the strategic and operating plans; measureable performance standards; management action plans, which incorporate the objectives and performance standards and are used in directing each manager's efforts; and a performance evaluation system that forces tough yet reasonable evaluations. In addition to these systems, senior managers must exhibit commitment to change, and objectives must go beyond simply managing individual units well, targeting such goals as improvement of outpatient care utilization, recruitment of specialized staff physicians, and the creation of preferred provider and health maintenance organizations.