Bonus Setup

[nomindforfinance]

My partner is in his last year of ob/gyn residency, and he's about to sign a contract.  Since he's still very much entrenched in residency, I'm trying to help him sort out some of these financial issues.  He's getting a two year salary guarantee.  As part of his contract negotiation, his new employer (a sole provider) has agreed to the idea of some sort of performance bonus in the event he goes above a certain collections amount.  Since he will be their first physician employee (new, small group), they don't know what method is the best for calculating it and asked him what he would like to see.

Another job offer he had (but declined for other reasons) worked like this: for any collections above the targeted collections amount (which is what creates his base salary), a 25% bonus is paid to the physician.  This one seemed like a bad deal to me, because the target collections amount was 2.5x the salary, so in my mind the collections above the target collections were more of a benefit for the employer than the physician, as they got to keep 75% of it.  Example: assuming a salary of 200,000, target collections would be 500,000 (2.5x200,000); for any collections over 500,000, he would get only 25% of that amount.  You're getting 1 over 2.5 or 40% of collections to get to your base salary, and once you hit the total for that it goes down to 25%?  This is the only bonus setup that was every explained in any of his other offers.

Does anyone have any other suggestions?  I was thinking bonus collections above his target should be more like 40% (collections divided by 2.5, in line with how the base salary is created), but maybe I'm overlooking something in the bigger picture of running a practice. Thoughts?

 

 

[Zaphod]

It seems like you're interchangeably using collections, billings and actual net salary. First you should nail down exactly which you're discussing as the impacts of using the wrong one can look amazing and end up never materializing, for both sides.

What you want to do is incentivize both parties. The owner wants him to work more for his benefit and should lure him with some type of bump, because this is mutually beneficial. If presented and structured in such a way then it will be happy days for all.

[wolverine41]

I cannot speak for ob/gyn world, but in orthopedics, it typically is structured as 2x base salary in collections = bonus pay.

A good bonus pay is from 40-50% after 2x salary.

Ex: 200K base -> after 400K in collections, you get 40-50% of those collections.

50% Bonus pay is basically covering all your overhead. A well run office will tend to have around 50% overhead in my specialty. So you get to keep the rest, and no one else is making money off your hard work.

25% seems really low, but its hard to say it different locations with different practice models.

Agree with Zaphod in that you need to understand what they are taking about with collections vs RVUs vs billings. All are different entities.

[pulmdoc]

I am not normally of the mind that the employee should look out for their employer (saw way too many job offers attempting to screw over new docs on the interview trail), but I think your spouse joining a solo practitioner should make a bonus based on collections.  Why? Because both billing and wRVU models impose a level of risk on the employer that they will be able to collect on their billing.  Too much bad debt/medicaid and the employer may lose money on the bonus, and in a previously solo practice that could sink the practice's finances. Depending on the practice model/efficiency/size of the practice, 50-60% of collections may go to overhead.  Therefore, a fair bonus structure starts at least 2x any base pay.  What % of collection above that 2x pay becomes a bonus is negotiable, but I would expect 25-50% as a reasonable range.  That way your spouse is incentivized to work hard for a bonus, and the employer (who does not sound savvy, reasonable given solo practice) makes some extra money for loaning the infrastructure and goodwill of the prsctice.

[SwanSong]

I am in a specialty with probably the lowest overhead in medicine in psychiatry. Not the highest earning field, but my bonus structure drew me to the job (amongst many other things) at 1x + 50% for the first 50k extra, then 65% for the next 50k and then 75% thereafter. The tired structure is nice in that there is extra incentive to work harder, even as taxes start to take a real bite.

[SwanSong]

Should read tiered, not tired. Though perhaps I am.

[Zaphod]

pulmdoc wrote:

I am not normally of the mind that the employee should look out for their employer (saw way too many job offers attempting to screw over new docs on the interview trail), but I think your spouse joining a solo practitioner should make a bonus based on collections.  Why? Because both billing and wRVU models impose a level of risk on the employer that they will be able to collect on their billing.  Too much bad debt/medicaid and the employer may lose money on the bonus, and in a previously solo practice that could sink the practice’s finances. Depending on the practice model/efficiency/size of the practice, 50-60% of collections may go to overhead.  Therefore, a fair bonus structure starts at least 2x any base pay.  What % of collection above that 2x pay becomes a bonus is negotiable, but I would expect 25-50% as a reasonable range.  That way your spouse is incentivized to work hard for a bonus, and the employer (who does not sound savvy, reasonable given solo practice) makes some extra money for loaning the infrastructure and goodwill of the prsctice.

Click to expand...

Agree, as this is a totally different setup and if one were to rake the practice over the coals then maybe the whole thing goes under, which obviously not good. Same applies to the owner, though they sound reasonable and not savvy/greedy, which is also a plus. Definitely needs to be structured so everyone feels they are winning and putting the practice in a position to grow and not be strained.

[eyeballboy]

Agree, it will depend heavily on the overall practice overhead. They are not going to give you a bonus percentage that is better than what the partners get, but hopefully not more than 5-10% more. Remember, they're taking a risk on you as well. If they are giving you a high guarantee than they are going to want to keep a higher percentage after you hit the bonus kick in mark.

[nomindforfinance]

We stayed conservative, and they agreed to his first ask for 30% of the excess collections amount above 2x base salary.  All the conversations we have ever had with this group focus on COLLECTIONS, not billings or RVUs, so collections means money actually received.  I think they're just making sure they are covered for their overhead and risk, and we can't complain about that.  It's only a two year contract, and since it's the first job out of residency, our understanding is that the likelihood of collecting enough to make a bonus in those first two years is probably unlikely (especially since the base pay seems very generous from the MGMA data we have seen), but we wanted to at least make sure he had the opportunity/incentive if things go well.

[abds]

wolverine41 wrote:

I cannot speak for ob/gyn world, but in orthopedics, it typically is structured as 2x base salary in collections = bonus pay.

A good bonus pay is from 40-50% after 2x salary.

Ex: 200K base -> after 400K in collections, you get 40-50% of those collections.

50% Bonus pay is basically covering all your overhead. A well run office will tend to have around 50% overhead in my specialty. So you get to keep the rest, and no one else is making money off your hard work.

25% seems really low, but its hard to say it different locations with different practice models.

Agree with Zaphod in that you need to understand what they are taking about with collections vs RVUs vs billings. All are different entities.

Click to expand...

Please explain this to me. We'll use your example numbers for my question. At 50% overhead and $200k salary, once a new employee collects $400k, he has paid $200k of overhead. With so much of overhead fixed, $400k therefore covers the vast majority of his overhead (office rent, RN, MA, malpractice, health ins, etc) regardless of collections for the year, as well as his base. So why does he then only get 50% of collections over $400k?

Let's say collections are $600k total. Getting 50% of the additional 200 is obviously $100k. Even in a variable overhead model (where higher producers pay more for schedulers, billing/coding, maybe even rent, for example), there is still a good portion of the other $100k that is going to the practice/partners. If one is busy in this model in the second year before partnership and collects over $1M, he could be leaving $300k plus on the table (a nice bonus to the practice of course). Unless I'm missing something...

 

 

[pulmdoc]

You're missing the downside risk to the employer. If overhead is $200k, guaranteed salary is $200k, and the employee collects $350k, where do you think the shortfall comes from? There is obvious risk involved in a new physician hire, particularly if they are not already established, may not know how to bill properly, see 5 patients a day due to working slowly, quit 6 months in, etc etc. The upside revenue is the reward for taking that risk. Bonus arrangements are intended to align the financial interests of the employee and employer.

[abds]

pulmdoc wrote:

You’re missing the downside risk to the employer. If overhead is $200k, guaranteed salary is $200k, and the employee collects $350k, where do you think the shortfall comes from? There is obvious risk involved in a new physician hire, particularly if they are not already established, may not know how to bill properly, see 5 patients a day due to working slowly, quit 6 months in, etc etc. The upside revenue is the reward for taking that risk. Bonus arrangements are intended to align the financial interests of the employee and employer.

Click to expand...

Where the shortfall comes from depends a lot on how the contract is structured. Assuming the new guy stays with the group, he would have to work his way out of that $50k hole. I'm sure they exist but I don't personally know of any contract where the numbers just reset at day 366.

If he leaves the group at some point before reaching that break-even threshold, he may have to pay back the difference (partially offset by his outstanding accounts receivable). It's not terribly complicated. Maybe that risk is less desirable to some people as new hires to a group, but I also know people in surgical specialties where the example I referenced (guaranteed $200k with 40-50% bonus over 400, for 2 years) easily left multiple 100s of thousands of dollars on the table. You're naive to think that that structure is simply "protecting downside risk" and isn't a nice little paycheck for the partners.

[pulmdoc]

No, it's absolutely a nice paycheck for the partners. They take the risk of the new hire not being profitable, they keep the excess profits. This isn't a complicated concept, it's no different than any other business. The business owner makes a bet that the cost of hiring an employee will be less than the increase in profits by having that employee. If I was ever offered a physician contract that had a clawback on a "guaranteed" salary, I would run, not walk away.