March 28, 2017
4 min read

Address partner compensation issues early and often

Seven guidelines can help practices stay on top of problems that may arise.

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“When somebody says it’s not about the money, it’s about the money.”
– H.L. Mencken

“Honesty is the best policy — when there is money in it.”
– Mark Twain

“I’d like to live as a poor man with lots of money.”
– Pablo Picasso

Clients call about boardroom struggles all the time. They complain about personality conflicts, poor physician leadership and lagging profitability. They grumble about surgical referral allocations, a lack of access to the latest technology and who gets the best technicians. But only rarely do they complain directly at the outset of our conversation about the practice’s owner compensation methodology, even when that is really their chief gripe.

Compensation disputes can simmer for years, camouflaged as something else. “I could earn a decent income around here if you would just give me techs who know how to work up a patient.” “It would sure help if I worked in one of our satellites with fewer Medicaid patients.” “If the board would approve this new laser, I wouldn’t be so held back in my production.”

Many surgeons’ protests about their practice situation, after some sleuthing, ultimately come down to one simple thing: money and how it is divided. Partner compensation is the most common headwater issue.

The typical conflict avoidance seen in genteel ophthalmologic settings can inhibit quite reasonable confrontations, which, while uncomfortable in the moment, are crucial to practice success. It is far better to:

  • Encourage surgeons to live within their reasonable means and not lock themselves into unsupportable debt and difficult-to-revise lifestyles.
  • Have a transparent compensation formula.
  • Not wait until complaints reach a crescendo. Review the compensation formula at regular intervals for both objective and subjective fairness.
  • Make dynamic changes in the formula as conditions change.

Here are seven practical dimensions to improving this all-too-common flashpoint in practices.

1. Physician know thyself. You cannot gauge the reasonableness of your income unless you know the unreasonableness of your personal expenses. A study I collaborated on some years ago showed a strong correlation between a male surgeon’s happiness and the percent of his income he lives on. Surgeons living on half or less of their income were materially better off on a standardized happiness and life satisfaction inventory than those surgeons living on a higher percent of their income. It is difficult to conduct a rational boardroom discussion about compensation when some owners are emotionally tortured by their poor lifestyle choices.

2. Know your compensation formula. Surprisingly, when I ask a surgeon who is complaining about his or her income to describe the current compensation formula, they will get it wrong, either because they simply have not paid attention or because the comp model is as braided as our country’s tax code and hard to decipher. It is very important that owners understand the nuances of their compensation formula. You should undertake periodic reminder sessions in the boardroom and combine this with one-on-one tutorial work with the practice administrator, bookkeeper or CPA.


3. Simplify, simplify. The formula should be understandable by a bright sixth grader. But sometimes, in a search for “perfect fairness,” practices will resort to complex, RVU-based or fixed and variable expense allocation formulae, which are a set-up for mistrust and arguments. Bottom line: In a majority of settings, it is perfectly satisfactory to split a minority of profits pro rata to ownership and a majority of profits pro rata to individual net collections.

An example of this is shown in the table below. Two equal partners, doctors A and B, use a formula in which 30% of profits are split evenly and the 70% balance is split pro rata to individual collections.

4. Make sure the formula is objectively fair. One test for the fairness of this approach is the percentile spread between doctors A and B. In this case, there is a 5% spread (43% minus 38%) between the two doctors. Anything more than this 5% figure (or 10% or 15%, depending on other conditions present) suggests a potentially unfair disproportionality, which could be adjusted by small changes in the methodology, such as increasing or reducing the percent of profits that are equally divided. In this case, the higher producer, doctor B, is mildly subsidizing the lower-producing doctor A. You would have to make your own judgement, in your own setting, as to whether this degree of subsidization, mild as it is, would be comfortable.

5. Make sure the formula is subjectively fair. Not only should the formula pencil out reasonably, but it should also feel fair to a majority of the owners. The criteria for this can be different from practice to practice, depending on your culture. I have seen highly diversified, multi-subspecialty practices (with retina surgeons generating $3 million per year and pediatric specialists generating $700,000 per year) be perfectly happy splitting profits equally. And I have seen cataract surgeons in contentious groups fight to the death for a $15,000 annual income shift.

6. Set up a regular compensation review process. In larger practices, establish a standing “compensation committee” that annually assesses the continued fairness of the comp model. This same committee can be on call throughout the year to hear grievances from any partners who believe that compensation should be revised. The simple existence of this committee and rules for its operation can dampen partner grumbles and clear boardroom time for more pressing issues.

7. Do not delay difficult discussions. Partners and associate providers alike should be able to raise questions and complaints about their compensation at any time without feeling inhibited or intimidated. By briskly addressing comp issues as a board when they arise — even if your answer back is, “Sorry, we can’t change the formula” — you will foster trust and open lines of communication for the next issue surfacing.