The importance of net operating income (NOI) in senior housing cannot be underestimated.
From annual financials to quarterly goals, monitoring NOI is critical to keep the financial health of your operation on track.
In addition to these high-level goals, NOI plays another important role in the senior housing industry.
More often than not, operations base executive director (ED) occupancy performance on NOI…and use this figure as the determining factor for census compensation structures. In fact, it’s not an overstatement to say this is the industry norm.
Despite the popularity of this compensation plan, at Bild & Co, we see a disastrous pitfall in its approach.
Basing ED occupancy compensation on net operating income may be common, but we know from experience that it’s a danger…
And that’s especially true if you have properties struggling with poor occupancy.
In today’s article we’re addressing NOI-based compensation structures and why you should reexamine how you incentivize ED performance for driving occupancy.
Net Operating Income Is Reliable…Somewhat
To begin with, net operating income is an important benchmark because it plays a critical role in the valuation of senior housing properties.
Your net operating income can make—or break—how lenders rate a community. So it makes sense to judge ED performance by how he or she improves (or diminishes) a community’s value.
On top of that, NOI has a reputation as a reliable metric in the world of investors. Investopedia notes…
Net operating income is considered less vulnerable to manipulation than some other figures because it can only be increased by raising rents and associated fees or by decreasing reasonably necessary operating expenses.
Given these facts, basing executive director occupancy incentives on NOI may seem practical, logical, and even necessary.
But there’s a big problem…
How Communities Can Fudge on NOI
Net operating income isn’t as reliable as it looks.
It paints an incomplete picture of executive director success.
It only tells half the occupancy story.
Don’t get us wrong—increasing your NOI is crucial. What we’re saying is that you can’t base an ED’s occupancy compensation solely on this number. Here’s why…
At Bild & Co, we’ve seen communities struggling with occupancy.
However, the severity of their struggle wasn’t reflected in their NOI.
Instead of having a healthy balance of operational efficiency and robust revenue initiatives, they were saving on costs but hindering long-term growth.
NOI was solid. However, these communities weren’t investing in marketing or sales—a temporary money-saver that ultimately stunts the ability to sell apartments.
It’s all too easy to conserve resources by cutting that outreach event from the calendar. After all, sales and marketing initiatives aren’t free. But when resident acuity rises—and there are no fresh leads in sight—a community will feel the pain of skimping on sales and marketing activities.
We’ve also found communities where resident satisfaction is strong, but leaders aren’t investing in improvements to attract new residents. Again, a decision that will conserve costs but decrease census levels.
In our industry, it’s easy to get in a rut with satisfied customers. However, dismissing the value of investing in initiatives future residents want isn’t the solution. It only leaves us with a tighter operational budget…due to the lack of incoming sales.
Whatever the situation, you’ll find EDs are able to achieve NOI goals by limiting costs…while making poor occupancy decisions.
Even though a property can’t easily manipulate NOI, it can use NOI to paint a false picture of occupancy success and still be rewarded. And that’s why it’s a dangerous incentive for your executive director performance.
Resident Satisfaction Also Paints an Incomplete Picture
Given that net operating income doesn’t provide all the information on ED success, you may turn to other measures—such as resident satisfaction.
Like NOI, resident satisfaction is also important.
After all, it only takes some negative comments on a senior housing review site (or even Yelp) to lower a community’s competitive edge.
But let us give a word of caution.
When it comes to ED compensation structures, resident satisfaction is no better than net operating income for indicating occupancy success.
Your residents may be satisfied, but you can’t tie that fact to future census growth.
Here’s what we’re talking about…
At Bild & Co, we regularly provide occupancy audits for senior living communities.
We’ve seen situations where, on the outside, all appeared to be well, and residents were happy. But something was contributing to subpar occupancy.
We’ll discover that communities sometimes leave apartments in a state of disrepair and neglect; they simply aren’t rent ready. Instead of making strategic decisions to fuel top-line growth, these executive directors cut costs by neglecting apartments.
Even if leads see the happy residents and decide to move in, substantial occupancy growth simply isn’t possible…by sheer logistics.
The bottom line: Resident satisfaction can’t predict an occupancy increase.
If you’re serious about your profit margins, don’t measure ED sales performance on resident satisfaction either.
Your resident population isn’t sitting in strategic meetings. They aren’t inspecting vacant apartments behind closed doors. They don’t pull the trigger on decisions that impact—for better or worse—a community’s long-term success.
Structuring Compensation to Fuel Operational Health and Future Growth
Ultimately, both your operational health and long-term success depend on strong occupancy.
At Bild & Co, we recommend basing your ED census compensation on occupancy indicators in addition to NOI or resident satisfaction.
We’re not minimizing the importance of high-caliber care, strong operations, and happy residents.
What we are underscoring is this: you must incentivize your ED to drive revenue. In turn, you’ll have the cash flow to invest in…
- Needed upgrades to your building.
- Better talent and qualified team members.
- Improvements, such as technology, that streamline operations.
Because of this, make direct occupancy metrics a priority in your pay structures.
At the end of the day, your executive directors are just one piece of increasing occupancy for your operation.
Let’s discuss your greatest growth priority together. Click here to let us know when the best time is to hop on a call together.