Making An Offer Compensation Packages for New Doctors: What Should Your Practice Offer?

One of the ongoing challenges for group practices is putting together a financial offer to a new doctor candidate.

Many practices are going through this process right now, so you may only get one chance to put a competitive starting compensation package on the table. If you are below what your peers are offering, this may trigger one of two events: Either the candidate will be too turned off to pursue further discussion or, you will have placed the candidate in a position of having to negotiate for what everyone but you believe he or she is worth.

This is not a good way to begin a professional relationship.

This article is intended to provide some guidance in putting together a compensation package based on experience working with group practices.

First, you need to make an assessment of the market. Your peers in the immediate practice area are not likely to share with you what they are paying, but if you attend national or even regional association conferences within your specialty, you’ll find doctors and practice managers willing to share information. The Medical Group Management Association (MGMA), American Dental Association (ADA), and American Medical Group Association (AMGA) compile survey information that is available for a fee, and there are also some regional surveys available.

If your CPA specializes in health care, he or she should have access to market data and can be a valuable resource in guiding you through this process. Another source may be the career placement office of medical schools that track the placement of their graduates. Don’t hesitate to be up front with the candidate and ask what he or she is looking for before placing the offer on the table. This gives you the opportunity to know how far apart you are and maybe rethink your offer before presenting it.

When presenting your offer, be sure to include the value of all employee benefits included. It is important to talk up the value of the benefits package because this often equals 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} to 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of base salary. Be sure to specify other intangible benefits such as pre-tax flexible spending and child care accounts, education allowances and paid leave of absence. Your employee benefits package conveys a lot to your prospective associate about you, your practice philosophy, and culture.

A new association is a two-way street. It is equally important to make the candidate aware of your expectations. This includes presenting your expectation of what revenue the candidate is expected to generate in year one. If a new doctor knows what is expected, he or she will have a goal and will be able to track progress toward that goal.

To arrive at what that number is, first add to the first-year base compensation the cost of all benefits, including payroll taxes and all incremental costs associated with the new doctor. These will include, for example, malpractice insurance, medical assistants, supplies, professional dues and licenses. Costs such as occupancy, billing, equipment and general administration are not usually included unless it can be estimated how much, if at all, these will increase. Once you have the total first year costs of the new doctor, you have your break-even number. Next, based on the your current practice volume and FTE productivity, determine a reasonable number for first year revenue, giving allowance for patient demand, ramp-up time and accounts receivable turnover. Between these two numbers, you should be able to estimate a reasonable productivity target.

For most practice specialties, the offer is usually multi-tiered. The first year is usually a straight salary, with a non-specified discretionary bonus, if the doctor exceeds the production target. The second-year compensation will typically include a modest base compensation increase plus an incentive bonus based upon a percentage of income generated over a new second-year production target.

You may have to obtain interim bank financing to support the additional accounts receivable of the new doctor during the ramp-up stage. You should be able to begin repaying this with the new doctor’s second-year cash flow generation.

There are additional incentives you may use to sweeten the package, depending on the market demand, the candidate’s needs, and the practice budget. These include signing on bonuses, reimbursement of relocation expenses and reimbursement of board certification costs, to name a few. Consult your CPA on how to structure these on the most tax advantaged basis.

The final offer should be made in writing and should include, if possible, a draft of the employment agreement, to avoid miscommunication issues later. The employment agreement should specify that the first year employment is on an “at will basis” and may be terminated without cause. Some practices extend this provision to the second year. Most doctors will agree that you never really know if you are compatible until you have worked together for a year or two. The above provision gives either party an out without further consideration.

Some candidates will ask for provisions relating to a practice buy-in to be included in the employment agreement. It is usually recommended that employment agreements remain silent on this subject, except maybe to provide that the practice will notify the new doctor as of a certain date, such as, by the ninth month of the second year, as to whether the doctor will be offered an ownership interest at the end of the second year. The details of the buy-in are usually presented at that time. The candidate may be given an overview of the anticipated buy-in cost and details but no commitment should be made with the offer of employment.

There are many variables and intangibles to selecting the right associate for your practice. Once you believe you have the right one, the candidate has successfully sold himself or herself. It is now your turn to pitch the practice to the candidate and to do that you will need to have a well-thought-out proposal.

James B. Calnan, CPA is the partner-in-charge of the Health Care Services Division of Meyers Brothers Kalicka, P.C., Holyoke; (413) 536-8510