Equal Sharing
Some groups base shareholder compensation on an equal sharing methodology. There are some variations, but generally in an equal sharing arrangement, profits are shared equally among shareholders.
Of course, this methodology does not reward high producers in the group or hurt low producers. It may work for certain groups, but generally it results in disagreements over time when one or more of the shareholders is not carrying their weight.
A very important consideration is the calculation of profits. Determine if profits are shared before or after physician salaries and bonuses. That is, are the amounts available for physician salaries and bonuses shared, or are the amounts after physician and salaries shared? If the profits remaining after physician salaries and bonuses are shared, then physician salaries and bonuses should be equal in an equal sharing arrangement.
Sharing Based on Ownership
Some groups share profits based on ownership in the group (see the Physician Buy-In section in this component of the ToolKit as well as the Practice Structures Model component of the ToolKit). In this arrangement, if a shareholder owns 25% of the group, that shareholder receives 25% of the profits of the group. Again, as discussed in the Equal Sharing arrangement, it is important to determine if the profits to be shared are profits before or after physician salaries and bonuses.
Sharing and Productivity Based Combination
Some groups have a combination of sharing and productivity based factors in the calculation of shareholder compensation (i.e. 50 % / 50 %; 30% / 70%, etc.). Generally, a combination is preferred. By combining a sharing component, the group has incentive for additional physicians to join the group (group growth incentive). By including a productivity component in the calculation of shareholder compensation, individual physicians in the group have incentive to be productive (physician productivity incentive). The greater the productivity component (i.e. percentage contributing to compensation), the greater the physician productivity incentive. In this type of arrangement, groups vary in the sharing of expenses. Some expenses may be shared among shareholders, and some expenses may be directly attributed to an individual shareholder in the calculations.
Productivity Only
Some groups base shareholder compensation entirely on productivity. The treatment of group expenses varies among groups. In a shareholder compensation model based exclusively on productivity, all direct shareholder expenses (e.g. professional liability insurance, professional memberships, exclusively assigned employees, etc.) and any agreed upon shared expenses (e.g. office space, practice manager, etc.) would be deducted from all direct shareholder net revenues or collections.
While many physicians consider productivity only based compensation formulas to be most fair, it fails to take into account some important considerations. Some physicians in the group may devote more time to group matters in management, physician recruitment or in areas outside the group that directly benefit the group. If such activities are valued by the shareholders of the group, then these physicians should be financially compensated for their efforts. Another important area often neglected in a productivity only model is the growth of the group. It is becoming increasingly important for groups to have greater size to negotiate with health plans. In a productivity only based model, shareholders often see the addition of another physician as cutting into their current (and / or potential) patient base. It is increasingly important for shareholders to focus on making the group pie larger with the goal of making their slice larger as well. Group growth through the addition of new physicians in vital to growing the pie in contract negotiations with health plans.
Fixed Salary
It is likely that you will be offered a fixed salary during your first year of employment. Depending on your specialty, the amount of incremental expenses that result from your practice and whether or not an income guarantee is in place, the group may just hope that you reach break-even during your first year. What will be expected of you during the first year? Will you have equal call? Are there any circumstances where you would have to pay back any of the first year salary to the group?
Fixed Salary with incentive bonuses
In some cases you may be offered a fixed salary with incentive bonuses. This proposal could reflect that the group expects you to build your practice very quickly and wants you to benefit or it may mean that the group seeks to lower the guaranteed base and to assure that you are as productive as expected before achieving a higher level of compensation. Compare the offer to others that you have in the area or speak with your peers and or others knowledgeable regarding the starting offers in the geographic region. If the salary component is lower than other offers that you have, consider the potential to reach the incentive targets. Utilize the financial assessment component of the ToolKit to assist you. A lower guaranteed base offer with incentive targets may in fact lead to a better economic opportunity in the short term, and depending on the results of your research utilizing the ToolKit, it may be a better economic opportunity than shareholders have!
Compensation Formula Only
If the group offers a compensation formula only with no guaranteed minimum salary, make sure that you understand the financial risks. Make sure that you fully understand and are comfortable with the compensation formula proposed and that any expense allocations or overhead sharing that may be built into the formula are reasonable. For a physician beginning a practice, this would be an unusual proposal unless the formula built in some risk minimization components to assure acceptable compensation during the start-up period.
About the Author:
Wesley D. Millican, MBA, is CEO and Physician Talent Officer of CareerPhysician, LLC, the national leader in child health faculty and executive search and leadership development. In partnership with the Child Health Advisory Council, a diverse group of emeritus and current national thought leaders in academic pediatrics, Mr. Millican provides critical career and professional development content to residents and fellows to help foster their effective transitions from training into academic and/or private practice roles. For more than 20 years, Mr. Millican and CareerPhysician’s Launch Your Career® Series has served as the trusted go to career training and ACGME Competency resource for U.S. residency and fellowship program directors, and most importantly for residents and fellows seeking to maximize their return on the personal, professional and economic investments and sacrifices made during training. Through Launch Your Career® Series onsite and visual programs and associated web-based content, Mr. Millican believes that residents and fellows are the future of academic pediatrics and that meaningful early investments in their career journey will have a monumental positive impact on their long-term professional satisfaction and their service to children.
For more information about the Launch Your Career® Series and/or to schedule a program for your residency or fellowship program, contact us.