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When A $155,000 Offer Is Really $134,000 In Disguise
Many doctors think "income" and "salary" are synonymous. Far from it. By focusing only on salary, these job applicants may take what they think is the richer of two offers-and wind up the poorer for it. Here's how to evaluate the true economic benefit of a compensation package.
Look at total compensation
You may be offered a flat salary or a salary and bonus. Think twice about accepting a flat salary. It offers you no incentive to work hard. That's why sophisticated employers offer bonuses: to encourage productivity. Typically, they offer a base salary; then, if you hit certain performance targets, they award a bonus.
While a salary-plus-bonus arrangement offers you security, it almost always has a limit. For example, you might receive a base salary of $150,000, plus a potential bonus of up to $25,000. But no matter how productive or how much of a rainmaker you are, your bonus won't exceed $25,000. So to determine whether such a compensation package makes sense for you, you'll have to be straight with yourself about how productive you are compared with regional or national norms. For primary-care physicians, a salary and bonus can be a pretty good deal, because you have physical limits on how many patients you can see in a given day. But for some hard-driving surgical specialists, a bonus cap, like a flat salary, can be a disincentive.
Another factor that could limit your compensation when you're paid a salary plus bonus: More and more employers are tying bonuses to patient-satisfaction scores. No matter how productive you are, you won't get the maximum bonus until you hit your patient-satisfaction numbers.
Beware of group bonuses
You want your bonus to depend on your own performance, not on that of the organization as a whole. A group bonus could make sense in a five-doctor practice where your individual productivity clearly affects the bottom line. But the profitability of a group of 50 or 100 doctors will have proportionately less to do with your personal performance.
Also, a bonus should be pegged to things within your control-the money you bring in, the size of your patient panel, and your expenses. This last item is especially important: No matter what type of medicine you practice, your bonus potential should always be tied to your expenses. Keep in mind that when your group accepts full-risk capitation, your expenses include specialty referrals, your use of ancillary procedures, and hospital care. In a fee-for-service environment, they include your use of ancillary personnel, space, and equipment.
Understand salary alternatives
Instead of a salary, you may be offered an income guarantee. It looks just like a salary-you may, for instance, receive $5,000 twice a month-but you receive it for a limited period of time. The typical guarantee lasts one or two years. As soon as your collections exceed the guarantee, you receive part of that extra amount. But, at year-end, if your collections fall short of your guarantee, you don't have to pay back the difference. After the guarantee period is up, you're on your own, with compensation based 100 percent on what you produce.
Another way employers structure an income guarantee is through an interest-free loan, paid to you twice a month. Loans are typically offered by small group practices or by non-profit hospitals that want to subsidize a new independent practitioner in town. They work like this: If your collections are less than the amount of the loan, you must repay the difference. Your employer, however, will cover your expenses. So while you're at risk for your compensation, you're not at risk for overhead. Even so, you could find yourself with a substantial shortfall at year-end.
Even though you may get as long as five years to repay any money owed, a loan is usually undesirable: If your practice doesn't grow as you hope-and in a new locale, it might not-you're on the hook.
Factor in the value of benefits
Don't take benefits for granted. Not every job offers such things as life, health, and disability insurance; a pension plan and/or matching 401(k) contributions; and dues, subscriptions, and CME allowance.
The cost of a benefit package isn't small change. According to a survey by the Medical Group Management Association, the median nationwide value of such benefits in 1995 was almost $21,100 for a family physician in a single-specialty group.
Here's the difference $21,100 in benefits can make: Say Employer A offers a $140,000 salary plus a $15,000 signing bonus, but no benefits; Employer B pays $120,000 plus $5,000 for signing, and a full range of benefits. Assuming you want those benefits, you'd have to deduct their $21,100 cost from A's offer, to arrive at a net value of $133,900. By the same token, add $21,100 to B's offer, which now becomes worth $146,100. Clearly, B's is the better offer.
How do you know the value of the benefits a given organization is offering? Raise the question during your interviews; you're entitled to an answer. The problem is: Most doctors don't ask.
Sometimes, however, it's complicated to calculate the value of certain benefits. If you're being interviewed by a large HMO or hospital system, for instance, you may be offered stock options, bonus points for seniority within the organization, and other forms of deferred compensation that are tough to assign dollar figures to. Such perks can be potentially attractive, or they may be worth nothing if you leave after a few years. Have your accountant project various scenarios to give you a sense of the potential profits at stake.
Calculate your spending power
To evaluate the net economic benefit of a job offer, you need to factor in the location's cost of living. There's a simple calculation you can do yourself. Just divide your total economic benefit (base salary plus incentives plus benefits) by the cost-of-living factor of the locale. You can find this number in the "Places Rated Almanac," available in libraries and bookstores (price: $24.95). You can also find the cost-of-living index on the Internet ( http://weber.u.washington.edu/˜gloftus/PRA/LC ).
Consider three locations: San Diego; Green Bay, Wis.; and Gadsden, Ala. At each, you interview for a job paying $150,000 in salary and incentives and $10,000 in benefits, for total compensation of $160,000. "Places Rated" assigns San Diego, which is an expensive place to live, a cost-of-living factor of 143.9. Divide $160,000 by 1.439 (the cost-of-living factor is relative to 100 percent, so you need to move the decimal point two places to the left), and you find the spending power of that $160,000 is really only $111,188. In Green Bay, the cost-of-living factor is 100.0, so the spending power of $160,000 is $160,000. In Gadsden, where the cost-of-living factor is only 75.3, the spending power of $160,000 is a whopping $212,483.
Maybe $212,483 worth of spending power isn't enough to lure you to Gadsden when you had your heart set on pricier San Diego. That's up to you. But, as with any major financial decision, the wise make it with a full deck of cards.
This article was published by Cejka Search and originally appeared in Medical Economics Magazine. Copyright by Medical Economics Company Inc. at Montvale, NJ 07645. All rights reserved.