30 AE Summer 2012 grams will differ from practice to practice. Furthermore, incentive programs should be reviewed every year and changed depending on the annual goals and situation of the practice. Set goals first For any incentive program, the first step is to clearly understand the practice goals and the actions required to achieve those goals. In some ways, defining goals for organi- P hysicians rely on their administrators (managers, executive directors, CEOs, etc.) to implement plans that will help the practice achieve its goals. Most owner-physi- cians are happy to share in the suc- cess of the practice but often wonder how to reward the practice leader for a job well done and create a per- formance-based program that will motivate the leader to continue to move the organization forward. Often, administrators must draft their own bonus program. In doing so, an administrator would do well to take the perspective of a business owner to create a program that the owner-physicians will accept and embrace. This article outlines the process for creating an effective incentive program. Keeping in mind the uniqueness of practice situations, there are many different “right plans.” Since the pur- pose of incentives is to focus people on the achievement of goals and each practice has a unique set of goals, it follows that incentive pro- Establishing Incentives for Practice Administrators Running the Practice Management Derek Preece, MBA, and Maureen Waddle, MBA zational leaders is often less complex than creating a performance-based program for other departments with- in the practice. This is because whether you are the head of a Fortune 500 company or the admin- istrator of an ophthalmic practice, you are ultimately responsible for the same thing: to increase share- holder value. Therefore, goals for an administrator should be nearly iden- tical to the goals for the practice itself. Here are some examples of commonly articulated goals: • Increase revenue by XX% over the previous year • Increase profitability by XX% over the previous year • Meet or exceed budgetary targets for net income for the year • Introduce a new service line or implement a specific program by MM/DD/YY Notice that these goals meet the “SMART” rule: Specific, Measurable, Attainable, Relevant, and Time- Table 1: Bonus paid based on percentage of ALL available amounts for physician compensation Practice Net Collections $2,100,000 Practice Expenses (58% expense ratio) ($1,218,000) Amount available for doctors' compensation $882,000 Administrator bonus 2% $17,640 Bonus paid based on profits available after physician compensation Practice Net Collections $2,100,000 Practice Expenses (58% expense ratio) ($1,218,000) Net Profit $882,000 Allocation for doctor salaries* (e.g.,30% of collections) ($630,000) Profit for owner distribution $252,000 Administrator bonus 7% $17,640 *Salaries might include production bonuses
Transcript
30 AE Summer 2012
grams will differ from practice topractice. Furthermore, incentive programs should be reviewed everyyear and changed depending on theannual goals and situation of thepractice.
Set goals firstFor any incentive program, the firststep is to clearly understand thepractice goals and the actionsrequired to achieve those goals. Insome ways, defining goals for organi-
Physicians rely on theiradministrators (managers,executive directors, CEOs,etc.) to implement plansthat will help the practice
achieve its goals. Most owner-physi-cians are happy to share in the suc-cess of the practice but often wonderhow to reward the practice leader fora job well done and create a per-formance-based program that willmotivate the leader to continue tomove the organization forward.Often, administrators must drafttheir own bonus program. In doingso, an administrator would do wellto take the perspective of a businessowner to create a program that theowner-physicians will accept andembrace. This article outlines theprocess for creating an effectiveincentive program.
Keeping in mind the uniquenessof practice situations, there are manydifferent “right plans.” Since the pur-pose of incentives is to focus peopleon the achievement of goals andeach practice has a unique set ofgoals, it follows that incentive pro-
Establishing Incentives for Practice Administrators
Running the Practice Management
Derek Preece, MBA, and Maureen Waddle, MBA
zational leaders is often less complexthan creating a performance-basedprogram for other departments with-in the practice. This is becausewhether you are the head of aFortune 500 company or the admin-istrator of an ophthalmic practice,you are ultimately responsible forthe same thing: to increase share-holder value. Therefore, goals for anadministrator should be nearly iden-tical to the goals for the practiceitself. Here are some examples ofcommonly articulated goals:• Increase revenue by XX% over theprevious year
• Increase profitability by XX% overthe previous year
• Meet or exceed budgetary targetsfor net income for the year
• Introduce a new service line orimplement a specific program byMM/DD/YY Notice that these goals meet the
“SMART” rule: Specific, Measurable,Attainable, Relevant, and Time-
Table 1:Bonus paid based on percentage of ALL available amounts for physician compensationPractice Net Collections $2,100,000Practice Expenses (58% expense ratio) ($1,218,000)Amount available for doctors' compensation $882,000Administrator bonus 2% $17,640
Bonus paid based on profits available after physician compensationPractice Net Collections $2,100,000Practice Expenses (58% expense ratio) ($1,218,000)Net Profit $882,000Allocation for doctor salaries* (e.g.,30% of collections) ($630,000)Profit for owner distribution $252,000Administrator bonus 7% $17,640*Salaries might include production bonuses
AE Summer 2012 31
bound. (For more on SMART goals, see“S.M.A.R.T. Practice” in the Fall 2011issue of Administrative Eyecare.)
Designing the bonus systemWhen an administrator has a bonuscomponent as part of his or hercompensation, it is usually because
the practice’s overall compensationphilosophy includes performance-based incentives and/or sharing inthe profits of the company.
Target
Goal Measurement Weight
Increase net collections by 5% over previousyear
(Current year collections less previous year’s collections) divided byprevious year’s collections
30%
Keep operating overhead percentage at orbelow 60%
Total expenses (exclusive of physician compensation and physicianbenefits) divided by net collections
30%
Achieve positive results on patient satisfaction surveys
Average practice ratings for 90% or more of survey questions areabove the national benchmarks = 50% of this measure; more than95% of respondents answer yes to the question “Would you recom-mend us to a friend or family member?” = 50% of this measure
20%
Maintain healthy practice environment Staff turnover rate is at or below 15%. Staff satisfaction surveys indicate above average in at least 90% of the ratings. (Both requiredfor credit on this measure.)
10%
Performance review Physician feedback rating averages at least 3.5 points on ratingform.
10%
Results
Goal & Target Actual WeightPossiblePoints
PointsEarned
Increase net collections by 5% over previousyear
Results: Net collections increased 3.5% (did nothit target)
0.3 30 0
Keep operating overhead percentage at orbelow 60%
Results: 58% (goal reached) 0.3 30 30
Positive results on patient satisfaction surveys90% or better on rated questions95% or better “Yes” answers
Results:85% (did not hit target) = 0% of points97% (goal reached) = 50% of points
0.2 20 10
Maintain healthy practice environmentStaff turnover <15%Staff satisfaction surveys above average inat least 90%
Figure 1: Administrator MBO Bonus ProgramFor the fiscal year ending 12/31/11
continued on page 32
32 AE Summer 2012
is paid and in the second the percentage is 7%.
2. Establish minimum expecta-tions. When bonuses are strictly apercentage of profits, you shouldprobably set a minimum threshold.Remembering that a leader’s primaryresponsibility is to enhance share-holder value, does it make sense thatthe administrator can still receive afairly substantial bonus if the doctor’s compensation is down compared to the previous year? Toaddress this issue, the summary ofthe bonus program might includesomething like this: If profits arebelow 95% of previous year, there willbe no bonus available. If profits arebetween 95–104.9% of previous year,50% of the available bonus will be dis-tributed. If profits are at or above 105%of the previous year, 100% of the avail-able bonus amount will be distributed.
3. Change the incentive program when significant changesare planned for the practice.Sometimes a practice plans flat oreven decreased profit levels. Perhapsthe practice has decided to replaceequipment or invest in geographicexpansion for the long-term successof the practice, either of which willreduce profits in the short term. Ormaybe the flat profits are the resultof the planned implementation ofan EHR system, which includes a significant increase in expenses anda productivity slowdown for a fewmonths out of the year. Big projectssuch as these are very demanding onpractice administrators, and it can bediscouraging to put in the extra workand yet not have a chance at earninga reward. If the usual bonus program
Therefore, the administrator’s bonusamount is commonly a part of thetotal bonus pool available for distribution. The most commonmethods for creating bonus pools are1. a percentage of company profits;
2. a flat, predetermined amountbased on budgets and volumes;
3. a percentage of base salary. Keep in mind that for an incen-
tive to influence behavior, theamount must be substantial enoughto catch the attention of the recipi-ent. The general rule of thumb,regardless of the methodology usedto establish the bonus amount, isthat the available bonus should be atleast 10% of the base salary.
Here are a few issues to considerwhen establishing bonus amountsand deciding how to disburse thefunds.
1. Clearly define profits.Because owners often have discre-tionary business expenses (e.g., travelto multiple meetings), and theadministrator has no control of suchitems, it is important to clearlydefine expenses and profits for pur-poses of the bonus program. Forexample, if the administrator’s bonusis to be a percentage of all compen-sation available to doctors (and thediscretionary business expenses areincluded in doctors’ compensation)then the percentage that is availablefor the administrator’s bonus wouldbe a low percentage. On the otherhand, if the bonus is based on profitsafter physician salaries are paid, ahigher percentage might be in order.Table 1 demonstrates these differ-ences; in the first case a bonus of 2%
Running the Practice Management
is a percentage of profits, the ownersmay want to consider establishing aflat bonus amount for the year thatis dependent on the successfulimplementation of the goals theyhave set forth.
4. Use budgets. As practice management consultants, we haveobserved that the exercise of finan-cial discipline is one of the attributesof successful practices�and thisincludes the annual establishment offinancial goals and a correspondingbudget. A good budget accounts forany projected changes in practicepatterns or planned investments,and so can address many of theissues relating to administratorbonuses. When budgets are used, theadministrator’s bonus may be largelybased on meeting or exceeding budgetary net income targets.
5. Review the program annual-ly. Incentive programs quickly turninto entitlement programs if they arenot revisited regularly and tied tospecific objectives, so they should bereconsidered and revised each yearto make sure they continue to meetthe needs of the practice.
6. If using a flat bonusamount, define goals. This is neces-sary so that all parties clearly under-stand what must be achieved inorder to earn the bonus. Many referto this type of program as aManagement by Objectives (MBO)program. A sample of an MBO bonusprogram is shown in Figure 1. Inthis type of incentive plan, specificobjectives are defined for the admin-istrator at the beginning of thebonus period (typically a year), alongwith a total potential bonus. At the
continued from page 31
Often, administrators must draft their own bonus program. In doing so, an administrator would do well to take the perspective of a business owner to create a program that the owner-physicians will accept and embrace.
end of the incentive timeframe, the objectivesare measured and the bonus is paid out basedon the pre-determined weighting of the variousgoals. In the example cited, there were fiveMBO categories, and each was weighted basedon its importance to the practice. The adminis-trator achieved some of the objectives but fellshort on others, resulting in a payment of 60%of the potential bonus of $20,000.
7. Avoid simple discretionary-only bonusplans. Question: When can a several-thousand-dollar bonus be a disincentive to an administra-tor? Answer: When the previous year’s paymentwas higher and there is no perceptible reasonfor the lower amount. This situation often hap-pens when bonuses are paid based on what thedoctors “feel like paying” at the end of the year.Factors unrelated to the manager’s performance,such as stock market plunges or family healthchallenges, can affect the generosity of theowner physicians and result in a disappointedadministrator. An end-of-year monetary “gift”to a manager is a nice present, but should notbe confused with a true incentive plan thatrewards the accomplishment of practice goals.
ConclusionNo one incentive plan is perfect for every prac-tice situation, but thoughtful consideration,careful planning, and regular review of manage-ment’s bonus programs will align administratorand owner goals and increase the chances thatboth will be realized. In those cases where theadministrator is challenged to create the incen-tive program, it is incumbent upon him or herto do so from the perspective of the businessowners and with the goals of the organizationin mind. Such performance-based programsshould lead to positive results for the owners,the administrator, and the practice. AE
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Derek A. Preece, MBA (801-227-0527, [email protected]), andMaureen Waddle, MBA (916-687-6135, [email protected]), are senior consultants for BSMConsulting.
