Lead for demand and lag for supply: The use of pay level to predict hospital performance

In an era of increasing demand for healthcare coupled with decreasing availability of highly skilled healthcare professionals, healthcare administrators are increasingly concerned with how they might recruit and retain talent. Increasingly, they are focusing on compensation strategies to support their recruitment and retention objectives. This article investigates the organizational efficiency and financial performance implications for hospitals of using a hybrid relative wage strategy to compensate their nursing professionals. Considering three types of nursing professionals, registered nurses (RNs), licensed practical nurses (LPNs), and nurse assistants (NAs), we investigated the effectiveness of paying market leading wages to higher skilled nurses and market lagging wages to lower skilled nurses. On the basis of prior utility analyses of the importance of pay practices at particular organizational levels, we hypothesize positive performance consequences as a result of pursuing these relative wage strategies. Using data from 352 short-term stay acute care hospitals in California, we found that a lead pay policy among RNs and a lag pay policies among LPNs and NAs were associated with higher Return on Assets (ROA) (i.e., financial performance) and shorter Average Length of Stay (ALOS) (i.e., organizational efficiency).