Considerations for Structuring Incentive Compensation Programs

By Paul Welk, PT, JD

In general, people will do what they are incentivized to do.

This simple statement serves as the basis for establishing incentive compensation programs for employees, with physical therapists being no exception. In recent years, many compensation programs consisting solely of a base salary (i.e., an annual salary of $80,000) have been replaced with a variety of different incentive compensation programs. The onset of the COVID-19 pandemic, decreases in reimbursement, and other factors that have adversely impacted the financial position of physical therapy practices have accelerated the implementation of new incentive compensation programs. Implementing or modifying incentive compensation programs has been determined by many practice owners to be a necessary step to improve a practice’s bottom line and maintain financial viability. This article will explore some important issues, including compliance, contracts, and applicable employment laws, to consider when establishing incentive compensation programs for a physical therapy practice.

INFORMATION SHARING

In order to be successful, many incentive compensation programs require that proprietary information about the practice be shared with employees. By way of example, consider a physical therapist’s incentive compensation program that is based in part on the profitability of the location in which the therapist works. Under these circumstances the practice may need to consider sharing additional financial information with the therapist, so that the therapist can best understand the various metrics that affect profitability, and thus compensation. From a legal perspective, as more information is shared with employees, practices should consider whether a confidentiality agreement should be signed by the employees. Practices may also wish to consider the appropriateness of a non-competition covenant (when enforceable in the particular state) to protect the business under these circumstances. In general, providing confidential information to employees in connection with incentive compensation can be thought of as a balancing act. Practices must be cautious to not share too much information that may cause future detriments to the practice, for example if a therapist leaves to join a competitor, while still sharing appropriate information to allow the therapist to fully understand the compensation program and its variables.

COMPLIANCE CONSIDERATIONS

As noted earlier, people will do what they are incentivized to do. If a practice’s incentive compensation program is based upon billing and collected revenue, physical therapists may be incentivized to bill more to increase compensation. While increased billings may be appropriate if, for example, a therapist has historically underbilled for services, a practice must consider how it will audit and monitor individual therapist’s billings to assure that compliance is maintained. On a similar note, if incentive compensation is based upon patient visits, audit programs should be considered to monitor patient outcomes and quality of care. Including appropriate oversight procedures will help to ensure that an incentive compensation program does not adversely affect the care that patients receive.

DOCUMENTATION

When a change in compensation programs is desired, those physical therapy practices that utilize employment agreements or other similar documents will need to confirm that they have the contractual ability to modify compensation. By way of example, if an employment agreement provides a physical therapist with an annual base salary of $80,000, but the modified compensation program seeks to reduce base salary and incorporate an incentive concept, any adjustment to compensation must be compliant with the terms of the underlying agreement. As a practical matter, if an agreement does not allow the employer unilateral discretion to modify a compensation program, an incentive program that is attractive to an employee may lead to a mutually agreed upon modification of compensation. As an alternative, practices that are considering modifying therapist compensation may be able to renegotiate the compensation terms as the agreements come up for renewal.

In establishing an incentive program, practices must weigh the need for a well-defined, more rigid program against a program that allows the employer to make modifications to compensation when necessary. Calendar year 2020 has unfortunately brought to light some of the problems associated with a strict compensation program that is unable to be modified. Employer flexibility can range from providing the employer a broad unilateral right to amend the compensation program in its sole discretion, to a narrower right such as an employer’s ability to modify the program if certain financial targets at the practice level are not achieved. These modifications could be in a variety of forms including adjusting certain incentive compensation targets, modifying the time period in which an incentive must be achieved, or revising the compensation amount paid upon the occurrence of a particular event.

REGULATIONS

Finally, given the apparent current trend towards compensation programs that provide for lower base salaries but greater incentive opportunities, employers must remain cognizant of federal and state laws that may directly affect the ability to make certain salary modifications. By way of example, to qualify as a salary exempt employee, an employee generally must satisfy certain requirements, including being paid on a salary basis of not less than $684 per week. The rules governing salary basis, exemption, and other requirements are complex and outside the scope of this article, but the U.S. Department of Labor provides a good starting point for understanding the federal requirement,¹ which must be considered in addition to applicable state and local law.

With an increasing transition to incentive compensation programs, practices must be aware of the variety of legal and practical issues to be considered as part of implementing such a program. Hopefully, through careful consideration of the above issues and others, practices can develop successful incentive compensation programs that achieve an important objective: incentivizing staff in a manner that benefit the practice, its employees, and its patients. 

References:

¹US Department of Labor. Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA). https://www.dol.gov/agencies/whd/fact-sheets/17g-overtime-salary. Accessed February 5, 2021.

Paul J. Welk, PT, JD, is a Private Practice Section member and an attorney with Tucker Arensberg, P.C. where he frequently advises physical therapy private practices in the areas of corporate and health care law. Questions and comments can be directed to pwelk@tuckerlaw.com or (412) 594-5536.