"Compensation And Your First Employment Contract"

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"Compensation And Your First Employment Contract"

It's more than just the paycheck.

Gil Weber, MBA

Reprinted with permission of the publisher.
Pathways, HMP Communications
March/April 2004


Searching for that first employment opportunity presents every young physician with a series of complex challenges. In all likelihood residency did not adequately prepare you for the business-related tasks at hand.

You'll need to negotiate a number of issues with any potential employer. Many of the most critical issues will be in areas other than compensation yet, quite naturally, compensation always seems to be at the top of every young physician's "priority totem pole." This article looks at some of the factors you'll need to understand and consider when thinking about a total compensation package. As you'll see, total compensation is more than just a paycheck every second week.

Compensation systems – some basics

Most practices pay established physicians based on production. Straight salary is rapidly going out of style, even in many academic settings and in most staff or group-model HMOs. With production-based pay, the more patients seen, the more procedures or services delivered, the more charges billed, the greater a physician's reward. And there's simply no question that larger paychecks motivate physicians to work harder and become more efficient.

But for young physicians in their first practices it's probably not reasonable to base initial compensation purely on production -- certainly not until they've been with their practices for awhile and gotten some experience delivering patient care in the real world of managed care. And so today most practices start out with hybrid systems for their young associates -- systems that combine base salary and a percentage of collections or are built on a structured transition from salary to production.

Typically during some initial period determined by the practice the young physician will receive a guaranteed salary. This helps get the physician through an early-stage "learning curve" when that new physician's schedule likely will be light compared to more experienced physicians. In addition, young physicians won't work with the speed of more experienced physicians, and they probably won't make as good use of support staff and other resources as their more experienced colleagues. With time the physician's speed and efficiency should pick-up.

The first transition step shifts compensation from straight salary to salary plus an incremental percentage of collections, whichever is greater. The practice closely monitors the physician's productivity, and if collections in the period exceed the threshold point then an incremental difference is added to the base salary. This is the young physician's first "taste" of the fruits of working harder.

Once the young physician regularly meets the productivity thresholds then payment typically shifts to the second transition step -- away from guaranteed salary or salary plus incremental production to straight production. Now the physician's paycheck is based entirely on how hard he or she chooses to work. (Note: the flip-side of this planned progression toward production-based compensation is that if the physician rarely or never meets the production goals then the practice may choose not to renew the employment contract.)

For any compensation system to work (i.e., for the system to properly motivate the young physician) there must be timely analysis and constant feedback with appropriate rewards. I recommend quarterly reviews and adjustments. Annual review/reconciliation is not often enough.

Clearly, the target threshold(s) must be obvious and achievable. It does no good to hold a big carrot in front of a young physician if such target is unachievable. So in any situation where compensation will be based in full or in part on production it's important to get a sense of how the practice set performance targets and to evaluate if they're realistic. No tilting at windmills!

For example, if other young physicians have joined that practice before you, ask how their production targets were set, and find out how quickly those who preceded you transitioned from salary to production. Try to determine how often those other young physicians achieved their target numbers. And ask if any who preceded you consistently failed to achieve production targets (and why).

If others in the practice are exceeding or previously exceeded their targets then you may get some sense of confidence that the numbers proposed for you are in line with reality. On the other hand, if your sense is that the employer just pulled the numbers out of the air, well then those numbers might be impossible dreams.

Here are just a few key factors that could significantly impact on your ability to grow (increase productivity) in any practice:

  • Will the senior physician(s) be willing to hand-over younger (or older?) patients to a new associate?
  • Do your skills expand the range of services offered by the practice (e.g., do you bring specialty skills to a general dermatology practice)?
  • Do you bring language skills that could attract an under-tapped patient population?
  • Will your name on the door be in the same size letters as the senior physician(s)?
  • Are you willing to promote yourself outside the practice?
Understanding percentage of collections

If any part of your compensation is to be based on a percentage of collections then it's essential that you understand what this means. Collections means money in the practice's bank account. It does not mean money the practice hopes to collect for third party claims submitted but not yet paid. It does not mean money that the practice must return to payers for any reason. It does not mean money owed by private-pay patients.

If you've seen a patient but there was a failure verifying eligibility, and payment was denied after the fact, you've worked for free. If you saw a patient without the required referral or authorization and payment was denied, you've worked for free. If you provided a service that turned out to be non-covered, or if the payer decided that your care was not medically necessary, then unless the practice can successfully appeal that decision or collect from the patient, you've worked for free.

None of these are happy prospects, but that's the reality of managed care. If the practice can't collect for your services then you can't expect to be paid. Remember, also, that claims payment lag-time can significantly impact on collections and, thereby, the timing of your compensation.

Thus, your compensation is tied to the business office staff's efficiency and good work. In reality you're totally dependent on the appointment scheduling, billing, and accounts receivables departments to get it right. Do not make the mistake of treating any of these people shabbily.

Understanding performance targets

Compensation based on productivity can sometimes be a two-way street. When you meet/exceed the threshold target, and when incremental payments show up in your paycheck, it's wonderful for both physician and practice. But some production systems may also penalize physicians for not achieving thresholds. Let's look at an example to see the ups and downs of production-based compensation. (Note: these numbers are only for demonstration purposes.)

  • Assume collection target threshold = 2.5 X base salary,
  • Assume base salary = $120,000 per year,
  • Assume threshold bonus = 35% of collections exceeding threshold,
  • Assume threshold penalty = 5% of annual salary if threshold not met.

So if your collections were $400,000 for the year you would receive a $35,000 bonus ($400,000 – [$120,000 X 2.5] X .35). That added to the base salary would result in annual earnings of $155,000. Hopefully you'd be rewarded with productivity bonuses paid no less often than every three months.

On the other hand, if your collections totaled only $270,000 then you would be penalized 5% of your annual salary ($120,000 X .05 = $6000) and receive only $114,000. And you might also find that under the terms of your employment contract the base salary for the following year would be reduced by that same amount. So you'd start the next year earning a base of $114,000 but still needing to achieve the same $300,000 collections threshold to garner a production bonus and, also, to restore your base salary to the original $120,000. (Again, these numbers are only for demonstration purposes.)

Now that's just a small taste of what can go into the wage component of a compensation package. Obviously in total it's more involved than this brief overview. But given that overview let's move on to the next part of this discussion – benefits and "percs" that are provided in addition to the paycheck.

Beyond the paycheck: benefits

In addition to discussing salary and productivity figures you'll also need to negotiate benefits with any employer.

While you may be reluctant or nervous about negotiating, remember that it's a necessary part of any job search. When negotiating always keep these points in mind:

  • You don't get what you deserve; you only get what you ask for.
  • Never expect the other party to offer you the sweetest possible deal at the beginning.
  • An initial offer is just that – an initial offer.
  • You'll want to come to the table with a wish list – a mental mile marker from which to begin your negotiations.
  • Remember that successful negotiations result when both sides get most of what they want. This means both sides must be ready and willing to establish a happy middle-ground, and not to get hung up quibbling over small issues or pushing the other party to the wall over any issue.

Remember, too, that as a general rule larger practices tend to have "standard" contracts for benefits (to maintain uniformity across all physician staff), but deeper pockets for salaries. And smaller practices may be more flexible discussing benefits but likely will have less "wiggle room" when it comes to salary.

What's typically offered?

Here is interesting data on benefits typically offered to young associates. As you can see, some items are almost always part of the deal while others are offered less often.

Vacation time 95.8%
Health insurance 92.6%
CME time/cost 85.9%
Medical society dues 85.8%
Pension/profit sharing 82.1%
Hospital staff fees 75.7%
Sick time 68.7%
Subscriptions 64.2%
Disability insurance 53.5%
Auto 26.1%

The Health Care Group's
2001 Physician Starting Salary Survey

Some valuable benefits not shown on this list are:

  • time off for teaching/lecturing,
  • the right to keep any honoraria generated by such activities,
  • an office.
Benefits: what's reasonable?

Obviously there is no precise answer, and things will vary from situation to situation. You'd be wise to do some research prior to any employment offer and/or negotiations to determine what's reasonable for others seeking similar positions in the same general practice setting and location.

Let's look at a few specifics.

1) Malpractice insurance – It would be unusual if this were not provided to you. At a minimum, coverage should be set to the levels required by the state and all third party plans in which you'd participate. Your key concern should be the "tail" coverage.

Tail coverage is essential for both the physician and practice, and comes into play upon your leaving the practice. It provides coverage for suits filed (perhaps long) after you've lost the coverage that was in place while employed. An employer might agree to provide tail coverage until you've found employment elsewhere, or for a defined period – perhaps a year. In any case, you'd be responsible for paying the tail coverage premiums extending after the initial term.

Negotiations issue: Who picks up the initial premium when you leave, and if it is the employer, will the cost be funded from your accounts receivable (i.e., from money owed to you for services delivered prior to your departure but not yet collected)?

2) Major medical, disability, and life insurance – It's also likely that you'll be offered all three. The amounts of coverage typically are fixed by the Corporation's rules and regulations. Expect to see wording along these lines:

During the term of this Agreement the Employee shall be entitled to all fringe benefits offered generally to the Corporation's physician-employees, including participation in the major medical and hospitalization insurance, disability insurance, and life insurance plans established by the Corporation.

Negotiations issue: Unlikely to be any, certainly not as a new associate.

3) Profit sharing, pension, and retirement plans – The terms and conditions (dollars and cents) of these plans are also likely controlled by the Corporation's rules and regulations. At least initially you won't be in much of a position to negotiate here. However, approaching partnership you may be able to renegotiate.

Negotiations issue: Even as a new associate don't overlook any opportunity to negotiate when you become eligible for participation in these plans. Consider the following variances for young associates going into new practices:

Immediately 5.5%
1-6 months 3.1%
1 year 59.3%
2 years 26.6%
3 years 4.7%
5+ years 0.8%

The Health Care Group's
2001 Physician Starting Salary Survey

4) Professional development (CME) conference fees – Typically you'll be provided with some allowance. I've seen agreements that covered reasonable costs (tuition, airfare, room, board, etc) for specific events such as the state society's annual meeting. I've seen others that provided a physician with a fixed pool of dollars from which he or she could draw to attend meetings and events approved by the employer.

Negotiations issue: The number of conferences and the costs to be covered by the employer.

5) Dues, staff (hospital) fees, subscriptions – You should be covered for specific expenses or, perhaps, be provided with a pool of discretionary dollars. Expect to see wording along these lines:

Employer will pay all usual and customary license fees, professional dues, journal subscription fees, and other costs as mutually agreed by the parties up to a maximum of ("$X") each employment year. All additional expenses for such fees, dues, and other costs shall be borne by the Physician.

Negotiations issue: What is a reasonable amount for "$X"? How much does that employer want to have you on board?

6) Vacation/paid time off, sick leave – You're likely to be offered from two to four weeks paid time off (PTO) during the year. You're normally free to use your days as you wish, but when you use them will be subject to the employer's approval.

Negotiations issue: Be certain that both parties are clear on the definition of "week" for PTO purposes. For example, some practices may define "week" as the number of days you're in the office. So if your regular work schedule is 4 days per week and you're entitled to 3 weeks of PTO, the employer may interpret that to mean you get 12 days of PTO, not the 15 days you're thinking.

Negotiations issue: Be sure to clarify if unused PTO days can be rolled-over into the next year, or if unused days are forfeited.

Negotiations issue: Can you receive payment in lieu of unused PTO days?

7) Automobile – As a new physician you're typically expected to provide and maintain your own vehicle. If you're offered an auto allowance consider yourself lucky.

8) Office/facilities/support – Many employment agreements provide an office for the new physician. Some provide for special equipment or services. And some will provide administrative support. These are all sweeteners to the deal.

9) Cell phone/pager – These are expenses that you can expect will be covered by the practice.

10) Moving expenses – Coverage for moving expenses may be the greatest test of your negotiating skills, and a profound measure of how much the practice wants you over other qualified candidates who may live closer to the practice or who may not even need to relocate. If you're offered a moving allowance it's unlikely that all of your expenses will be covered in full. Rather, you may be offered a flat allowance ($X) and you'll need to spend it wisely. Or, the employer may cover moving costs but not packing. Or the employer may cover storage costs but only a limited number of months while you look for a new home.

Negotiations issue: Obviously, where will "$X" be set if moving expenses are part of your package?

Negotiations issue: Will the employer provide a short-term allowance for temporary housing while your household goods are in transit or while you look for a new home?

11) Miscellaneous "benes" – Here the sky is the limit depending on your interests and talents and the goals and aspirations of the practice owners. If the senior physicians have special interests outside of direct patient care, and if your interests parallel those of the owners might they consider additional PTO days for your activities in support of those interests?

For example, suppose the practice is looking at electronic medical records (EMR) or software for the business office, and you have special skills in computer programming. You might be able to negotiate additional PTO days for time you spend developing or refining software for the practice.

Negotiations issue: Can you get additional PTO days for this work on behalf of the practice? While the work does not generate direct income today, it could have profound influence on profitability in the future. So how much does that practice want you on board compared to other candidates?

Peeling back the layers of an onion

Negotiating an employment agreement is like peeling back the layers of an onion. You have to get down through layer after layer to get to the heart of the matter. Don't allow yourself to be distracted or overwhelmed by any one issue. In the end, both sides must be comfortable with the whole deal even if they're not entirely happy with some part(s) of it.

Still, if after a careful appraisal of the complete offer, and after a realistic examination of what you bring to the table you're not happy with the short and long-term prospects, then maybe that's not the practice for you.


Gil Weber, Skin and Aging's Contributing Editor, is a nationally recognized author, lecturer and practice management consultant to physicians and the managed care industry, and has served as Director of Managed Care for the American Academy of Ophthalmology.

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