Medical practices are businesses with unique needs and challenges. As such, the successful implementation of well-considered plans is critical to ensuring the practice achieves its goals. Owner-physicians, whose training likely did not include business management, depend on their administrators (i.e., managers, executive directors, and CEOs) to ensure their business is achieving its objectives and remaining operationally and financially sound.
Naturally, owner-physicians who recognize the significant role their administrator plays in the practice’s success want to reward these individuals accordingly. However, it can be challenging to create a performance-based program that compensates appropriately for a job well done and motivates the administrator to continue moving the organization forward. In many cases, physician-owners relieve themselves of this burden by tasking the administrator with drafting his or her own bonus program.
To create an incentive program that will be embraced, administrators in this position would do well to consider the perspective of the business owner while bearing in mind the purpose of incentives—focusing people on the achievement of goals. Given that each practice has a unique set of goals, it follows that there is no one-size-fits-all incentive program. Once in place, such programs should be reviewed/revised annually to reflect the evolving goals and standing of the practice.
Set Goals First
When designing an incentive program, the first step is to gain a clear understanding of the practice’s goals and the actions required to achieve them. While they differ from practice to practice, ultimately, goals will be focused on accomplishing one result: increasing shareholder value. Therefore, goals for an administrator should be nearly identical to the aims of the practice itself. Below are some common overlapping goals.
- Increase revenue by XX percent over the previous year.
- Increase profitability by XX percent over the previous year.
- Meet or exceed budgetary targets for net income for the year.
- Introduce a new service line or implement a specific program by MM/DD/YY.
Notice that all these goals are specific, measurable, achievable, relevant, and time-bound (SMART). Goals serve as a roadmap for where you want to go—specific goals provide clear direction, whereas vague or ambiguous goals are ineffectual. As Yogi Berra said, “If you don’t know where you’re going, you’re going to end up somewhere else.” Establishing SMART goals is a simple but effective roadmap for goal success.
Designing the Bonus System
When an administrator has a bonus component to his or her compensation, it is usually because the practice’s overall compensation philosophy includes performance-based incentives or profit-sharing. Therefore, the administrator’s bonus amount is commonly part of the total bonus pool available for distribution. The most common methods for creating bonus pools are:
1. A percentage of company profits;
2. A flat, predetermined amount based on budgets and volumes; or
3. A percentage of base salary.
For an incentive to influence behavior, the amount must be substantial enough to catch the attention of the recipient. A general rule of thumb, regardless of the methodology used to establish the bonus amount, is that the available bonus should be at least 10 percent of the base. Listed below are a few other considerations that should be accounted for when establishing bonus compensation and deciding how to disperse funds.
1. Clearly define profits. Since owners often have discretionary business expenses (e.g., meeting travel) over which the administrator has no control, it is important to clearly define expenses and profits for purposes of the bonus program. For example, if the administrator’s bonus is to be a percentage of all compensation available to doctors (and discretionary business expenses are included in the doctors’ compensation), then the percentage available for the administrator’s bonus would be lower. Meanwhile, if the bonus is based on profits after physician salaries are paid, a higher percentage might be in order. Figure 1 (below) demonstrates these differences; in the first case, a bonus of two percent is paid, and in the second, the percentage is seven percent.
2. Establish minimum expectations. When bonuses are strictly a percentage of profits, a minimum threshold should be set. Remember, a leader’s primary responsibility is to enhance shareholder value. Knowing this, does it make sense that the administrator can still receive a substantial bonus if the doctor’s compensation is down compared to the previous year? To address this issue, the bonus program might include the following stipulations:
- If profits are below 95 percent of the previous year, there will be no bonus.
- If profits are between 95 and 104.9 percent of the previous year, 50 percent of the available bonus amount will be distributed.
- If profits are at or above 105 percent of the previous year, 100 percent of the available bonus amount will be distributed.
3. Change the incentive program when significant changes are planned for the practice. Sometimes the practice plans for flat (or even decreased) profit levels based on future actions. Perhaps the practice has decided to replace equipment or invest in geographic expansion for long-term practice success, but either action will reduce short-term profits. Meanwhile, flat profits might be the result of a planned implementation of an electronic health record (EHR) system, which includes a significant increase in expenses and a decrease in productivity for a few months. Big projects such as these are very demanding on practice administrators, and it can be discouraging for them to put in the extra work and not have a chance to earn a reward. If the usual bonus program is a percentage of profits, owners may want to consider establishing a flat bonus amount for the year dependent upon the successful implementation of the goals they have set forth.
4. If using a flat bonus amount, define goals. Clear goals are necessary, as they ensure all parties clearly understand what must be achieved to earn the bonus. Many refer to this type of program as a Management by Objectives (MBO) program. In this type of incentive plan, specific objectives are defined for the administrator at the beginning of the bonus period (typically a year), along with a total potential bonus. At the end of the incentive timeframe, the objectives are measured, and the bonus is paid out based on the predetermined weighting of the different goals. A sample of an MBO bonus program is shown in Figure 2. As you will see, five MBO categories are identified and weighted based on importance to the practice. The administrator of that practice achieved some of the objectives but fell short on others, resulting in a payment of 60 percent of the potential $20,000 bonus.
5. Use budgets. As practice management consultants, we have observed that financial discipline, including the annual establishment of financial goals and a corresponding budget, is one of the attributes of successful practices. A good budget accounts for any projected changes in practice patterns or planned investments so it can address many of the issues related to administrator bonuses. When budgets are used, the administrator’s bonus may be largely based on meeting or exceeding budgetary net income targets.
6. Avoid simple, discretionary-only bonus plans. Question: When can a several-thousand-dollar bonus be a disincentive to an administrator? Answer: When the previous year’s payment was higher, and there is no perceptible reason for the lower amount. This situation often happens when bonuses are paid based on what the doctors “feel like paying” at the end of the year. Factors unrelated to the manager’s performance (i.e., stock market plunges or family health challenges) can affect the generosity of owner-physicians and result in a disappointed administrator. An end-of-year monetary “gift” to a manager is a nice present, but it should not be confused with a true incentive plan that rewards the accomplishment of practice goals.
7. Review the program annually. Incentive programs can quickly turn into entitlement programs if they are not revisited regularly and tied to specific objectives. For this reason, they should be reviewed—and if necessary, revised—every year to ensure they continue to meet the needs of the practice.
No one incentive plan is perfect for every practice situation, but thoughtful consideration, careful planning, and regular review of management’s bonus programs will align administrator and owner goals and increase the chances that both will be realized. In cases where the administrator is challenged to create the incentive program, it is incumbent upon him or her to do so from the perspective of the business owner(s) and with the goals of the organization in mind. Ideally, these performance-based programs will lead to positive results for the owners, the administrator, and the practice.
Always seek advice of a competent lawyer or other advisor before implementing an incentive or bonus plan in your practice.