Blog Post August 26, 2020 Does Every Component of My Compensation Formula Need to Be FMV? Authors Adam Klein Some physician employers seek to demonstrate FMV for each separate component of their compensation formulas, often in response to either a written or an unwritten policy. There is a commonly held belief that each payment per unit (e.g., WRVU, hour, supervised APP) must fit within FMV; however, we disagree. Instead, when reviewing FMV for compliance purposes, we recommend that organizations regard only the aggregate compensation relative to the total work effort. It is unfeasible to accurately create the sub-ranges necessary to review compensation at the per unit level; and even if it were possible, doing so would not be advisable. When compensation is reported to surveys used for benchmarking, it represents aggregate pay for aggregate work effort—typically, full time. Furthermore, the reported pay includes consideration for all types of work, regardless of compensation formula, because the surveys generally report compensation that appears on a W-2 statement, which does not differentiate pay by category of work. Consider, for example, a physician whose duties include: Standard full-time patient care work.Supervision of residents and APPs.Administrative tasks.Research.Call coverageOne organization might pay a physician separately for each component, while another might compensate the same physician with only a fixed annual salary. Regardless of the payment methodology, all organizations providing salary data for these surveys are required to report only aggregate pay. Tables 1 and 2 below provide example data reported from three different organizations for a physician working for a hypothetical physician employer. Organization one has a strong culture of shared accountability and pays only a fixed annual salary. Organization two uses a complex reimbursement formula, where physicians are paid for each type of work performed. Organization three’s methodology is a hybrid of the other two organizations and incorporates some fixed and some variable elements. All three physicians have identical qualifications, duties, productivity, and outcomes. Although they all receive the same amount of total cash compensation, each is paid under a different compensation model, as illustrated in table 2. In this case, the survey would show all three physicians as being paid equally (i.e., $500,000 in annual compensation). Likewise, the effective compensation per WRVU would be reported as $71.42 (i.e., total compensation of $500,000 divided by 7,000 annual WRVUs). However, none of the organizations actually pay $71.42 per WRVU. The payment per WRVU reported in the survey was not an accurate indication of any of the organizations’ actual compensation per WRVU, to the extent they even paid in that manner. While this is a simplified example, it illustrates the challenge of accurately deconstructing survey results into components of pay. Consequently, developing an FMV range for each component of an arrangement assumes facts that are not explicit or even present in the survey data; further, it unnecessarily constrains flexibility in compensation design, which is needed to create incentives that can address organizations’ unique strategic priorities and the particularities of their markets. There is a drawback to evaluating FMV based only on the aggregate amount paid. An analysis of total pay requires a number of assumptions to be made about work hours, productivity, and other key inputs. If those inputs end up differing materially from what was assumed, the employer is not assured that compensation will still result in FMV. To overcome this challenge, it is a prudent practice to test a compensation formula for FMV based on worst- and best-case assumptions regarding physician performance. The resulting aggregate pay under both low and high scenarios should be within FMV. If it isn’t, the formula may need to be changed, or monitoring protocols may need to be put in place. Such an approach provides executives with greater flexibility to shift emphasis to those pay elements that can drive behaviors most in need of change. This approach can also help anticipate and avoid situations where FMV compliance issues may arise in the future.