For business planning and regulatory compliance, many healthcare organizations compare a physician’s total paid compensation to national and regional benchmarks to determine what percentile they are paying a particular provider. How should recruitment incentives be included with other cash compensation when making benchmark comparisons?
The three most common approaches are:
- Include the sum of all recruitment incentives in total paid compensation.
- Include a portion of the recruitment incentives—spreading the incentives out by the number of years associated with a clawback or repayment obligation.
- Exclude normal retention incentives from total paid compensation when making a comparison to benchmarks of total cash compensation.
The third approach is most consistent with how compensation benchmarks are typically collected and reported; it is also the one that is best suited to support successful physician recruitment strategies.
Determine the Right Approach
A health system client recently reached out to ECG for a second opinion because its third-party valuator (who was relatively new to the industry) advised that the first of the three approaches was “required for FMV.” In the valuator’s analysis, all forms of physician compensation were summed, including clinical and administrative compensation, any signing and relocation bonuses, and student loan forgiveness:
This total was then compared to benchmarks, resulting in a percentile of total cash compensation that exceeded what the client’s policy permitted. The health system was considering a redesign of its recruitment strategy to meet regulatory compliance mandates, which would likely have limited its ability to successfully recruit qualified physicians, a major issue given the current physician shortage.
The health system’s historical practice was to include one-third of its recruitment incentives in the total cash compensation figure used for comparing to benchmark figures. The client utilized this approach because all recruitment incentives were attached to a provision of pro rata forgiveness over a three‑year period. For example, if a physician departed after 18 months, they would be obligated upon termination to repay 50% of any recruitment incentives received, but not forgiven, since the date of hire.
There is often good reason to review and confirm FMV of the total compensation package, inclusive of recruitment incentives. However, there is a common misunderstanding of the market benchmark survey data that can lead healthcare organizations, and occasionally compensation consultants, to place unnecessary and unusual restrictions on common recruitment packages.
Understand the Data
The unnecessary conservatism described above is the result of a misperception that recruitment incentives are a form of stacking—however, regulatory guidance indicates they are not. The error stems from the following argument, which initially may appear quite reasonable:
- Compensation that is reported by surveys purports to be all forms of compensation, including base pay, incentives, call coverage stipends, and any other standard W‑2 compensation.
- Recruitment incentives, such as signing bonuses and relocation assistance, flow through as W‑2 compensation, and they would therefore be included in a survey’s total cash compensation statistic.
- Consequently, if standard compensation benchmarks are used to ensure FMV, then the apples-to-apples comparison is the necessary approach that includes all elements of actual pay that are included in the survey compensation.
- Thus, pay plus recruitment incentives must fit within the survey data.
Fundamental to the above argument in support of stacking is the assumption that the reported survey compensation includes recruitment incentives, which is not the case. This fact can be confirmed by reviewing the survey participant instructions or contacting any of the major survey publishers. Data from partial years is generally excluded from reporting because the first year of employment tends to be characterized by skewed productivity and an inability to accurately annualize partial-year results. Since most newly hired physicians do not start on January 1, their compensation is inherently excluded from surveys. Moreover, newly hired physicians are essentially the only ones who receive recruitment incentives; therefore, compensation data in surveys does not include any material amount of recruitment incentives. Thus, a comparison of paid compensation, inclusive of recruitment incentives, to standard compensation survey data is “apples to oranges” and irrelevant.
Evaluate Incentive Packages
There are several publicly available, proprietary surveys that can be used to perform a market-based, data-driven evaluation of recruitment incentive packages to confirm that the total recruitment incentive is consistent with FMV. If FMV can be separately established for the entire recruitment incentive, then the most appropriate and relevant approach to determine the percentile of compensation paid is one in which only the recurring portion of cash compensation (i.e., excluding all recruitment incentives) is compared to the standard compensation benchmarks. In scenarios where the recruitment incentive package exceeds what is typically provided to peers under similar circumstances, the exclusion of recruitment incentives from cash compensation in this manner may not be appropriate.
One counterpoint occasionally offered is that physicians who receive recruitment incentives are paid a lower base salary; thus, recruitment incentives are just a way to bring newly hired doctors in line with peers until they ramp up their practices. While there is some evidence that newly hired physicians tend to earn less than established doctors, there are also many market examples where employers do not differentiate pay based on tenure. Frankly, the data regarding wages for new hires is limited. Also, it is very uncommon for organizations or appraisers to apply different benchmarks to newly hired doctors, with or without recruitment incentives.
Use Comparable Data
The valuation process is generally intended to ensure that prudent business decisions are being made. Therefore, when a valuation approach appears to create a barrier to good and common business practices, the matter requires some investigation. Remember to examine the data and make sure you understand how surveys determine benchmarks. The guidance provided here should help you navigate such matters confidently.
The ECG Valuation team is often asked by our clients and colleagues to respond to challenging matters of healthcare valuation and physician compensation. While occasionally answers to these questions are clear and uncomplicated, frequently a nuanced and specific response is necessary. If you have any questions about the valuation process, contact the ECG Valuation team.