As professionals, when our clients ask us this question as it relates to helping them design a “Compensation Plan” for their businesses, we recognize the sensitivity of the topic and before we can answer them, we understand there is a fact-finding mission that must be undertaken. During this assignment, we know that the measurement of quantitative metrics will come into play, but we are also keenly aware of the fact that qualitative inputs fit into the equation and those inputs can’t be measured in a traditional manner, similar to the quantitative efforts of employees. Thus, as we go through our consulting engagement, we always have to keep in mind and be cognizant of the human emotions that may ultimately be encountered when helping to formulate this Plan. In the following sections, I would like to outline how we would go about discussing this topic with our clients, and how it can be boiled into a bonus payment plan within a professional business environment.
For any professional business it would be fair to say that human input often times translates into a revenue cycle. However, I believe it true that not all employees or owners for that matter, deliver the same or equal amounts of input. Moreover, I think it would also be accurate to note that most companies not only require human and non-human inputs to create a successful product, but also a fair amount of qualitative input as well to sustain that process. Some of the quantitative inputs necessary to generate revenue in a professional environment would be billable hours for attorneys and possibly clinical shifts or patient visits within the medical industry. As for the qualitative inputs within the equation, successful businesses require leadership, advanced knowledge both in and outside of the day-to-day operations, think-tank or committee participation, and training, to name just a few. However, if employee strengths are single-focused, meaning all quantitative or all qualitative, then what compensation scheme can be implemented in order to ensure that all contributions of that employee are recognized and compensated? Furthermore, what do you do if employees/owners split their time between the operational side of the business, but also participate significantly in the management of the company? Thus, the question may not be “To Share or Not to Share”, but rather “How to Share” within a Compensation Scheme in a professional business environment.
From working with our clients and through our life experiences, we’ve learned that it is human nature to assign more value to one’s own contributions to an enterprise than what they may actually merit in reality. Therefore, what often happens is that the Owners and/ or the Management Committee, as the bylaws may dictate, will attempt to form a consensus on the design of compensation arrangement in which both forms of input can be fairly measured and fairly rewarded through a direct pay system. Thereafter, once profitability is determined, a bonus plan can then be coupled with the Plan’s direct pay system. Once the Plan is agreed upon, then the question becomes how to measure the inputs that differentiate the individual parties’ contributions. Furthermore, as I mentioned above, when measuring inputs one must be sensitive to the feelings of the employees who are delivering those services, because in most cases those folks are the key employees of the company. The last thing a thriving business would want is to splinter the ranks through a Plan that doesn’t reward the physical and mental inputs of their most valued employees.
Examples of factors that would be considered by a compensation committee for a medical practice would be how to pay employees for their clinical hours and then what criteria would be used to bonus out the profits of the Company. Interestingly, many different factors come into play when determining direct compensation and bonus compensation. For example, compensation for an Emergency Department staff would beg some of the following questions: What should be the value of the average pay per clinical hour and how is that rate determined given the fact that the higher the rate, the more the profits are diluted and visa-versa? Are all shifts equal? Is the flow of patients fairly constant throughout the day? Is extra staffing necessary for some shifts but not others? If added employees are necessary, are their efforts (production) shared with those supervising their work, or not? Can the production of the non-supervising staff (advanced care providers – ACP’s), be captured through the billing system, and, if necessary be allocated to the correct supervisor? Would the ACP’s be considered a profit center unto themselves, and would their net outputs be considered as profit to the full company or just those overseeing their efforts? How are profits to be shared by the stakeholders? Are they to be distributed proportionate to ownership share, or based on production (direct input), or through some hybrid model that takes both of these factors into account?
Again, as I alluded to above, it is not only imperative that all efforts of the key stakeholders be considered when designing Compensation Plans, but it may also be essential that each of those folks be given a say in how those efforts are to be measured and the weighting of those factors. Also worth noting is the fact that Plans, once put in place, are not stagnant. They should be fluid, and follow up with the Stakeholders should be ongoing in order to determine that the goals of the management team that designed the Plan are being met.
At this time, I also think it worth noting that in many instances, all parties may not be aligned in their view towards how compensation is shared. As a stakeholder, it’s important that those subtle or not so subtle divisions be understood. For example, many professional practices, as well as closely held business, have a split between older and younger stakeholders. Each believes its take on the weighing of the factors determining fair compensation is best, and I believe it’s human nature for people to vote their pocketbooks. Thus, in some instances, certain individuals may want to overweight production as a compensation driver given that their production is the highest amongst the stakeholders. Conversely, some of the older employees, who are also owners and who have slowed a bit in production, may vote for a Plan the leans more towards a lower direct pay scheme in favor of a Plan that shares a larger portion of the profits proportionate ownership. Ultimately, a shrewd negotiator understands that a lot of legwork goes into developing any plan and that the votes on the structure of the Plan should be garnered in advance of any closing meeting. Furthermore, an experienced negotiator knows that there are times to draw lines in the sand and times to acquiesce for the sake of the Company, with the understanding that fluidity is your friend and that alliances will change over the years.
In conclusion, I hope that the above discussion has provoked your interest and if so, our doors are always open to take this discussion to the next level. Also, in next month’s article I plan on introducing metrics that would detail a few ways that a medical practice would measure direct inputs for implementation into the bonus share of a compensation plan.
This article contributed by Thomas J. Freund, CPA.