Aligning Leadership Compensation with Performance: A Strategic Approach for Nursing Facilities

The long-term care industry faces a severe workforce crisis, particularly at the leadership level. Nursing home administrators and clinical leaders are experiencing high turnover rates, burnout, and increasing regulatory pressures, making it difficult for facilities to attract and retain high-caliber leadership. In response to these challenges, many nursing facilities are rethinking their compensation structures, including adopting profit-based incentives to ensure financial sustainability, regulatory compliance, and high-quality resident care.

In this article we explore the rationale for compensating nursing facility administrators and clinical leadership based on facility profitability, the industry trends supporting this model, potential regulatory and operational risks, and recommended safeguards to align financial incentives with quality outcomes and compliance standards.

The Case for Profit-Based Compensation

1. Competitive Market for Leadership Talent

The skilled nursing industry is experiencing an intensifying leadership shortage, making it increasingly difficult to retain top talent. Several factors are contributing to this crisis:

• Administrator Burnout & Turnover: Studies have highlighted that nursing home administrators are citing regulatory pressures, staffing shortages, financial constraints, and emotional exhaustion as primary reasons for exiting the field.
• Rising Salaries & Bonus Trends: According to the HCS Nursing Home Salary & Benefits Report, the average salary for nursing home administrators rose 3.8% in 2024 to $135,744, with bonuses averaging 16% of base salary.
• Shift Toward Structured Incentive Plans: Industry reports from McKnight’s Long-Term Care News confirm that facilities are moving away from one-time hiring bonuses toward performance-based compensation models.

Given these challenges, profit-based incentives provide a strong recruitment and retention tool by offering financial upside to high-performing administrators while ensuring budgetary sustainability for facilities.

2. Aligning Financial Performance with Quality Care

Traditionally, federal models for nursing facility compensation have relied on fixed payments, with limited performance-based incentives. However, federal and state healthcare programs are actively shifting toward value-based reimbursement models that reward providers for delivering high-quality, cost-effective care. Key trends include:

• Medicare Shared Savings Program (MSSP): Nursing facilities participating in Accountable Care Organizations (ACOs) are eligible to share in savings from improved coordination and reduced hospitalizations.
• CMS Value-Based Purchasing (VBP): Skilled nursing facilities are now financially rewarded or penalized based on rehospitalization rates and quality metrics.
• Anti-Kickback & Stark Law Revisions: The OIG and CMS have introduced safe harbors to allow for compensation models that promote quality over volume.

By adopting profit-sharing tied to regulatory compliance and quality measures, nursing facilities can ensure their financial incentives align with emerging reimbursement models and industry expectations. Profit-based compensation models create incentives for leadership to:

• Enhance operational efficiency without compromising resident care.
• Optimize census and resource utilization to sustain financial health.
• Meet regulatory and quality benchmarks to maintain eligibility for performance-based pay.
• Improve staff retention and satisfaction to ensure stable, high-quality care delivery.

Potential Compliance & Operational Risks

While profit-based incentives offer many advantages, they also introduce potential risks that must be carefully managed. Without proper safeguards, profit-driven compensation can create perverse incentives, leading to cost-cutting measures that compromise resident care or regulatory compliance.

1. False Claims Act (FCA) Exposure

• Overutilization or Unnecessary Services: Administrators may feel pressured to increase Medicare billing by upcoding therapy services or ordering medically unnecessary treatments.
• Understaffing & Reduced Care Quality: Cost-cutting measures that lower nurse-to-resident ratios can lead to claims of “worthless services” under the FCA.
• Fraudulent Billing & Misrepresentation: If bonus structures prioritize profits without oversight, facilities may face whistleblower lawsuits and DOJ investigations.

2. Personal Injury & Negligence Lawsuits

• Resident Neglect & Safety Violations: Plaintiffs in wrongful death or elder abuse cases may argue that profit-driven leadership decisions directly contributed to harm.
• Internal Communications as Legal Evidence: Emails or memos that explicitly link cost reductions to bonuses could be used to support punitive damages claims.

Recommendations for Implementing a Compliant Profit-Based Compensation Model

To mitigate risks while maximizing the benefits of profit-based incentives, nursing facilities should integrate comprehensive safeguards and oversight mechanisms into their compensation models.

1. Tying Bonuses to Quality & Compliance Metrics

Facilities should condition profit-sharing bonuses on meeting specific performance benchmarks, including:

• Regulatory Compliance: No immediate jeopardy deficiencies or major CMS violations.
• Patient Outcomes: Positive CMS Five-Star Ratings, resident satisfaction scores, and low rehospitalization rates.
• Staffing Levels & Retention: Maintaining adequate nurse-to-resident ratios and reducing turnover.

2. Implementing Robust Audit & Compliance Programs

• Regular Billing & Claims Audits: Prevent fraudulent billing or medically unnecessary services.
• Resident Care Quality Reviews: Ensure that cost-cutting measures do not compromise patient safety.
• Email & Documentation Oversight: Conduct legal reviews of financial discussions to prevent miscommunication risks.

3. Structuring Bonuses to Prevent Harmful Cost-Cutting

• Exclude Staffing & Care Reductions from Bonus Calculations: Profit-sharing should not be based on reductions in clinical staff, medical supplies, or essential services.
• Cap Savings-Based Incentives: Limit how much of a bonus can be driven by cost savings to prevent aggressive budget cuts.

4. Leadership Training & Ethical Oversight

• Annual FCA & Compliance Training: Educate leadership on billing integrity, ethical financial decisions, and fraud prevention.
• Ethical Leadership Programs: Reinforce that profitability should never come at the expense of resident well-being.

A well-structured profit-based compensation model attracts top leadership while ensuring financial sustainability, regulatory integrity, and high-quality care through compliance safeguards and performance-based incentives.

Silverbridge Strategic Advisors can help your organization craft something that may give you a tactical advantage in today's competitive marketplace.