Employee Compensation Models that Minimize Risk and Maximize Engagement
Exploring shared risk/reward compensation
By Jason Wambold, MSPT
The coronavirus pandemic has forced practice owners, administrators, and executives across the country to grapple with some of the most difficult business decisions many of us may ever face in our professional careers, and staff therapists have certainly not been immune to the events of 2020.
Many found themselves either temporarily or permanently unemployed, or with dramatically reduced hours. Compensation models have been altered or reduced, and new grads are finding a level of difficulty in securing employment the likes of which our industry has not seen since 1999. Those who are fortunate enough to be employed full time frequently verbalize a level of newfound gratitude. As the rehab industry shows signs of the very early stages of returning to “normal,” many practice owners are wrestling with whether employee compensation models should return to pre-COVID-19 structure. While we would never wish the experiences of 2020 on anyone, the difficulties of this unique year have highlighted just how important it is to offer employee compensation models that minimize risk and maximize employee engagement. Now may very well be an ideal time to introduce shared risk/reward compensation models. If you are considering revising your employee compensation structure, the following article details factors to weigh in your decision making.
Shared risk/reward models, by definition, guarantee only a portion of a full salary, but the remaining portion of employee total compensation is tied to individual performance. This performance-based pay represents the “risk” that the employee assumes. This additional income may be linked to a variety of variables such as number of patients, billed units, billed minutes, collected revenue, expected revenue, or some combination of these variables. Under any of these conditions, as volumes drop, employee compensation will drop. This will result in an automatic payroll savings for the employer. Most employees fully appreciate the unique challenges of the current practice climate and are therefore open to innovative models. Possible compensation models include the following.
Option 1: Fixed Scale Shared Revenue Models
Under this model, an employee would receive a flat percent of any income they generate. For example, a 30% revenue share model, assuming $100/visit, would pay $30/visit to the employee, and $70/visit to the employer. Practices utilizing this model must be careful to ensure that the percent of revenue shared is affordable, particularly at lower volumes.
Option 2: Sliding Scale Shared Revenue Models
This model is similar to option 1, but it offers an escalating model of percent revenue share as volumes grow, and a declining percent of revenue as volumes drop. This model, as compared to option 1, is potentially more likely to encourage employees to maintain higher patient volumes and/or charges.
Option 3: Fixed Scale Volume Model
An employee earns a flat dollar amount per unit of production (visits/units/minutes etc.). Practices utilizing this model must be careful to ensure that the amount paid per unit of production is affordable at lower volumes.
Option 4: Sliding Scale Volume Model
An employee earns an escalating dollar amount per unit of production (visits/units/minutes etc.) as volumes grow, and a declining dollar amount as volumes drop. This model, as compared to option 3, is potentially more likely to encourage employees to maintain higher patient volumes.
WHAT FACTORS DO I NEED TO CONSIDER?
Predicted vs Actual Revenue
Practices may choose to predict revenue using historical employee-specific averages per unit of production and pay providers a percent of that prediction. This approach tends to be more popular among employees because it minimizes the unknown of actual cash collections, but it does present inherent risks to the employer if predictions are inaccurate. Actual revenue models minimize practice risk by paying providers based on collected income, but these models are less popular among employees due to the typical fluctuations in collection amounts.
Exempt: Employees are exempt from overtime (OT) and qualify for the federal minimum weekly salary requirements according to the Fair Labor Standards Act. The current federal minimum is $684/wk. State minimum salaries may vary from the federal requirement and may also depend on the total number of employees.
Non-Exempt: Employees are eligible for OT, must track and report total hours, and total compensation must reach the equivalent of at least minimum wage for all completed hours.
This can vary dramatically and can be calibrated to ensure that compensation models are in line with practice metrics and geography. Base pay rates must be clearly communicated to the employee.
Quality Care/Ethical Practice
Practices who wish to introduce alternative compensation models must first ensure that their ability to track key quality measures is robust, accurate, and regularly communicated to each treating provider. (Paul Welk, PT, JD, covered this in the May 2021 issue of Impact in his article, “Considerations for Structuring Incentive Compensation Programs.” Read it at bit.ly/3u70036.)
KEYS FOR SUCCESS
Today’s workforce values freedom, flexibility, and work/life balance. Rather than offering only one compensation plan with a standardized productivity expectation, consider offering multiple compensation models from which your employees can choose. Each model may offer a different relative level of risk/reward. A riskier plan would offer a very low base guarantee but high performance-based pay, while a conservative model would offer a much higher base pay guarantee with much lower performance-based pay. A provider enrolled in a risky model, working alongside a provider enrolled in a conservative model, should earn considerably more if both are functioning at the same high level of productivity. This approach may enable your providers to set their own productivity standards, and your compensation structures will safeguard your profitability regardless of which plan your employees choose.
Consider Annual Re-enrollment
You may wish to allow your providers to switch plans on an annual basis. As life circumstances change for your employees, this feature is sure to be a very popular one and may very well serve as a powerful retention tool.
Establish a Grace Period
It is wise to provide a pre-determined time during which your providers can acquaint themselves with their new compensation structure options. A grace period, by definition, is the distance in time between when you introduce your new models, and when you actually begin to pay your providers according to those new models. A longer grace period is likely to ease team anxiety associated with the change but will also delay the changes in professional behavior that almost always occur as a result of introducing these types of models.
Consider Mandatory Enrollment
It may be tempting to make your new compensation models optional for your existing employees. While this approach will certainly reduce conflict and anxiety for those who have grown accustomed to a more traditional compensation model, it may also result in 2 competing cultures in your practice between those who opt in vs. out. If you do choose to avoid mandatory enrollment, one approach to consider is to offer optional enrollment for existing staff and mandatory enrollment for new hires moving forward.
Recognize Experience and/or Clinical Certification
Third party payors pay the same regardless of who delivers care, but employees understandably want to feel rewarded for longevity, loyalty, and clinical expertise. Consider replacing your negotiated merit raise program with preset and predetermined increases in base pay associated with years of experience and/or clinical certifications. It is advisable to cap your experience-based program at a set number of years, after which seasoned employees must find alternative ways to grow their income (special programs, leadership roles, increasing productivity, etc.).
The most effective way to reduce anxiety associated with the introduction of shared risk/reward compensation models is to show your employees how much they would have earned had they been enrolled in the model over the past months or even years. This exercise is worth the effort and will pay dividends in arming your employees with the information they need to embrace your new programs.
Change is always difficult. Change related to compensation structures is even more difficult. Employees will experience a wide range of emotions and reactions to the introduction of your new models. This is to be expected and embraced. The key is to provide a safe and constructive forum where employees can express their concerns and air their grievances. Once your employees have lived with their new compensation program for at least 6 months, the anxiety of the unknown is sure to be replaced with an enthusiasm for the freedom and flexibility these models provide.
HOW DO I DETERMINE THE BEST DECISION FOR MY PRACTICE?
Each circumstance is unique, and current realities vary dramatically according to geography and practice environment. As your practice evolves to a more “normal” state, you may wish to permanently convert your employees to shared risk/reward compensation models. Consider what is motivating you to do so. Are you looking to safeguard your practice profitability? Motivate your employees? Reduce management headaches? Introducing one or a combination of the options we have discussed is a very compelling alternative to the traditional full salary + bonus model, and the right combination of these principles may be the most powerful tool you have toward accomplishing your goals. Regardless of which approach you choose to take, your employees will very likely be grateful for the additional earning potential and personal/professional freedom and flexibility that these models provide.
Jason Wambold, MSPT, treated patients full-time for 17 years and has 22 years of leadership experience in the rehab industry. He is co-founder of OnusOne, an online portal system that designs and administers compensation models specifically geared toward the rehab industry. He may be reached at firstname.lastname@example.org.