Variable Pay – Predictable Results
The nature of an incentive (a variable type of compensation) is to align the goals of the organization with the efforts and focus of the professional administrator. About 50% of the senior leaders responding to the MGMA compensation survey indicate they have an opportunity to earn incentive compensation. Our experience at MedMan is similar. The annual financial opportunity in the MGMA data ranges between 5% and 20% of base compensation – meaningful, but not overweighting total annual earnings potential with the variable portion.
Variable pay through individual bonus programs or incentive plans include a combination of practical and philosophical considerations. Consider our financial reality. Incomes for physicians in private practice have been under pressure with declining revenues and escalating costs – if extra money shows up, it goes to the owners. Another practical reality is that our environment is in a constant state of change, so when organizational planning gives way to the priority du jour – setting targets in this environment is difficult. Even when the goal is clear, measurement systems can me murky. In contrast to straightforward production-based physician incentive plans, measuring the performance of an administrative professional is less straightforward. Think about teamwork. Whereas much of a doctor’s work is one on one, administrators lead teams of people to produce results. When the team is successful, is that directly attributable to the leader, or the efforts of the team, or both? There is also a kind of cognitive dissonance at play with Administrators needing to act in the long-term interests of the organization, with projects that can span months or sometimes years, when incentive systems are mostly designed for the short term. Moreover, an administrator is vested with the responsibility to make decisions that could be construed as self-serving, risking the appearance of impropriety and erosion of trust. Thus, incentive systems exist, can be effective, but require vigilant oversight and clear communication.
Despite the challenges, for the right practice, and with the right circumstances (strong value-based leadership, reliable reporting systems, clear goals and objectives) an incentive plan can help align individual effort to organizational goals. What goals? Performance has been tagged to many and varied things – Net Promoter Scores, practice overhead rates, profitability, timely payroll and others. Each has its challenges.
Our bias as a management company is to take a balanced view of performance. Our strategic planning process itself stresses the importance of a balanced plan with goals related to people, service, quality, growth, as well as a financial focus. As a result, we believe that incentive programs should recognize both strategic and financial performance – performance compared to the annual plan as well as financial results.
Note a couple other related points. First is that a reward system should place the reward as close to the performance as possible, so annual programs are arguably less effective than those measured at more frequent intervals. Second, imperfect goal settings and measurement systems argue for a system to recognize partial achievement, with a pro-rata portion of the incentive potential. Two or three measures, keep it simple, keep it balanced, reward your people, get things done.