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FEATURE
Choosing a Pay Structure That Works for Your
Practice
A good compensation model can motivate staff and improve your practice's performance.
DALE W. SHIMKO, MA
! Fam Pract Manag. 2000;7(2):30-34
The underlying objectives of any compensation system are to attract, motivate and retain good staff. But
which compensation system is most likely to achieve that goal? The answer, not surprisingly, is that it depends.
There is no “magic bullet” — only a choice about what's right for your particular practice. There are literally
hundreds of variations to choose from, but they are all derived from just a few theoretical models, which can be
categorized as either base pay or performance pay. Most practices use some combination of the two categories
to leverage the strengths of each. This article will examine two models of base pay — paying for the job and
paying the person — as well as models that involve extra pay for performance — merit pay and practiceeffectiveness pay.
KEY POINTS:
The traditional pay model may offer consistency and the perception of fairness, but it can have
unintended, counterproductive results.
A competency-based pay structure requires practices to commit to ongoing staff training and can
entail higher costs.
In practice, merit-pay systems often fail to create a link between pay and job performance.
The practice-effectiveness model includes base salaries as well as variable pay based on the
practice's success.
Although no single model is right for everyone, the practice-effectiveness model does offer a number of
advantages. Because this formula combines base salaries with variable bonus payments that depend on the
performance of the practice, it helps control operating costs; rewards the right behaviors and builds unity; works
with a variety of payment structures; encourages self-management and innovation; and breaks down bureaucracy.
But before we analyze it, let's look at its rivals.
Paying for the job
Paying for the job is the “traditional” model that most people know. Each position is slotted into a grade level and
weighted based on the education and experience the job requires and the number of staff who report directly to
the person in the position. Pay raises are scheduled as an employee's tenure with the practice increases. The
traditional model is designed to serve as a cost-control tool and to establish each job's relative worth in a practice.
[For an example of how to apply this model and combine it with merit pay, see “How to Keep Salaries on Track
and Under Control (https://www.aafp.org/fpm/1998/0400/p61.html),” April 1998, and a discussion of the article
in Letters — “Rewarding Performance vs. Longevity (https://www.aafp.org/fpm/1998/0700/p21.html),”
July/August 1998.]
The traditional model has a number of advantages:
It facilitates centralized control. It gives an organization criteria with which to evaluate whether individual
physicians or managers are paying their staff too much. It also makes budgeting relatively easy and makes
salary expenditures predictable.
It's a useful tool for evaluating internal pay equity. Because compensation for all jobs in the practice is based
on one system, you can easily compare what staff across the practice are earning.
It facilitates market testing of your pay scale's competitiveness. It allows a job in one practice to be scored
using measures that are comparable with those used in other practices. With some of the widely used
systems, extensive survey data are available to help practices set their pay levels based on what similar
practices are paying.
It has the appearance of objectivity. Although quantification doesn't ensure fairness, it does make a pay
system consistent. Staff members may not be completely satisfied with their compensation, but at least
they won't see the pay system as arbitrary.
In short, the traditional pay model can be appropriate if your practice needs high levels of internal equity and
centralized control of compensation. But the traditional model has several disadvantages:
It can inflate the pay system's operating costs. After implementing a traditional base-pay system, a practice
may need to hire a consulting firm to provide ongoing compensation audits and survey data. In addition, the
traditional model is a high producer of records and administrative overhead because it requires that each job
be evaluated (with supporting documentation) and that the pay grades be revised annually.
It encourages point grabbing and inefficiency. Staff members become quite sophisticated in how to get their
jobs scored highly in compensation reviews. The traditional model rewards people for creating overhead and
higher costs because overseeing larger budgets and more subordinates leads to higher pay.
It compromises honesty in job descriptions. People quickly realize that the way to beat the system is to
create flamboyant and overly inclusive job descriptions. Over time, the practice can end up paying everyone
excessively.
It rewards the wrong behavior. Giving a person more money simply for taking on new responsibilities
rewards job changes rather than outstanding performance or development of needed skills.
It doesn't accurately reward the performance of talented staff. Because compensation is determined by an
employee's level and the job's rating, the model limits your flexibility to reward people based on their
individual performance. For example, no matter how well a first-year billing clerk performs, he or she will earn
less than someone who has been doing an average job for the last four years. This can hurt the motivation
of your best performers and encourage them to look for jobs elsewhere.
It reinforces a vertical career orientation. More responsibilities, especially supervisory and managerial, lead
to more money. This drives your best technical and clinical staff into roles where they may not be as
effective, and it does little to encourage the development of technical and clinical skills. This is especially
counterproductive in practices that are implementing total quality management (TQM), continuous quality
improvement (CQI) or other team approaches to improving problem solving, operational efficiency and
clinical outcomes.
It reinforces hierarchy and bureaucracy. By assigning value to jobs in terms of their hierarchical position and
level of control, the traditional model fosters unnecessary and undesirable pecking orders and power
relationships.
In short, the traditional model offers consistency and the perception of fairness in a practice's compensation
system. But be careful: Once implemented, it can become a dominant part of a practice's culture and have
unintended, counterproductive results.
Paying the person
The alternative to job-based pay is to compensate staff according to the value of their skills in the market. The
most common approach is competency-based pay. This model is designed to motivate staff to develop the
competencies — knowledge and skills for performing specific work — that the practice needs to accomplish its
objectives. This model is most appropriate for practices that need high levels of intragroup teamwork, intergroup
collaboration and adaptability to change. (For tips on setting up a system of competency-based pay, see the box
below.)
Designing a competency-based pay system
Competency-based pay is a compensation model that focuses on paying the person rather than paying
for the job. It's intended to motivate staff to develop knowledge and skills that contribute to the practice's
success. There are five steps in designing such a compensation system:
1. Through job analyses, identify the work that needs to be performed and develop job descriptions.
[For more information on job descriptions, see “Use Evaluations and Raises to Strengthen Your
Practice,” October 1997, page 101, and “The Importance of Job Descriptions,” June 1994, page 79.]
Conducting a job analysis means identifying the critical behaviors, knowledge, skills, abilities and
other personal characteristics that will establish a clear link between a job's content, a person's
qualifications and optimal performance of that job. Several different job-analysis methodologies are
available, each with its own advantages and disadvantages. A systematic job analysis not only is
the basis of your pay system, it's the cornerstone of effective staff management because it gives
you accurate information on which to build your staff selection, training and performance-review
systems.
2. Based on the job analyses, identify the competencies needed to perform the work.
3. Develop assessments to measure staff members' performance of these competencies.
4. Price the competencies by analyzing compensation survey data. Be aware that many surveys are
designed for use with traditional compensation systems, so extrapolation is necessary to apply the
data to a competency-based system. Also, because support-staff salaries are driven by the local
market, you'll need to investigate local or regional data sources. The validity of all data varies widely.
5. Establish a salary for each staff member based on the set of competencies he or she uses on the
job.
Advantages of the competency-based model include these:
It can lead to a broader perspective for staff. When this model is combined with a participatory management
style, it encourages and rewards cross-training, learning and the assignment of responsibilities based on the
skills that staff possess (rather than their “positions”). In turn, staff learn more about how the practice works,
resulting in a big-picture understanding of what improvements are needed. This broader perspective allows
staff members to be more innovative in making the practice more efficient.
It reinforces a culture of improvement. The model delivers a tangible reward to staff for growing, learning
and developing new areas of competency. It is compatible with TQM, CQI and similar approaches to
improvement.
It facilitates self-management and enables leaner staffing. Because the model rewards staff members for
developing new skills, it prepares them to be more productive, take on greater responsibility and work more
collaboratively with other staff. It also reduces the need for physician oversight. Maximizing the staff's
potential can lead to leaner, flatter staffing configurations — and substantial overhead savings.
It improves staff retention. Because they can develop skills continuously, staff members have more control
over their pay. They are unlikely to find comparable jobs elsewhere because most organizations still use the
traditional model.
It builds acceptance for change. This model helps staff become more accepting of change because in it
change represents the potential for professional growth — and better pay. As staff learn to accept change,
the practice becomes better able to react to staff turnover, expansions, mergers or changes in the health
care environment.
There are several disadvantages of the competency-based model as well:
It produces high pay rates. As staff become more valuable to the practice and their tenure increases,
individual salaries will increase. This doesn't necessarily mean that total payroll costs will rise. In fact, they
can be lower than those generated in a traditional model, if the practice can use its fewer, but more
competent, staff more effectively.
It requires a large investment in training. Because peers train each other, productivity will decline initially.
Physicians must be committed to staff training as the means of competency acquisition, and they must be
patient early in the implementation process, giving the model a chance to produce the expected results.
Market comparisons can be more difficult. Since most survey data relate to the traditional pay model, staffsalary comparisons may not be straightforward. You can overcome this challenge by examining data about
what others pay for certain competency mixes rather than direct job-by-job comparisons.
Individuals can “top out.” Practices generally establish an income ceiling for staff who master all
competencies, but employees in the traditional model can also reach this kind of limit. In a competencybased model, this is less of an issue since staff have higher pay scales than traditional models offer.
Administrative involvement can increase. Keeping track of each person's competency assessments,
competency mix and pay rate requires time and effort. A computerized record-keeping system can help you
deal with this. A competency-based pay model requires practices to commit to ongoing staff training and to
developing an administrative infrastructure that will support the system. It may also require some mental
effort to step outside the box of traditional thinking.
Merit pay
Merit pay, or extra compensation for superior performance, is a widely used model because of the belief that pay
can motivate job performance and increase practice effectiveness. Research suggests that pay can do this when
it's linked to actual performance. But this is not the case in most organizations. Considerable research indicates
that merit systems fail to create a perceived relationship between pay and performance and fail to pay better
performers more in total compensation. Hence, this model generally falls short in delivering its desired results.
Here are some reasons why:
It creates an annuity when combined with the use of salary ranges. Employees who are above-average
performers for a few years can still bring home a good paycheck even if their performance is lacking in later
years because their past achievements have increased their pay rates. Those with the most tenure, no
matter their level of accomplishments, are often the highest paid in the practice. Merit-pay models that offer
one-time bonuses for merit can avoid this annuity effect, but developing objective criteria for awarding these
bonuses can be problematic.
Linking merit pay to performance presents inherent measurement problems. Practices awarding merit pay
must decide what the basis of an award will be. If a practice's managers base the awards on the practice's
level of success, they face the challenge of determining who is responsible, and to what degree, for that
success. Since a practice's success depends primarily on teamwork, it's problematic to use individual
performance as the basis for awarding merit pay. Certainly measuring performance based on individual
criteria is at the heart of the pay-for-competency model as well. But rewards in that model are based on an
individual's performance of a competency, not on business outcomes that may result from it.
It can cause distrust among the staff. Because it's difficult to identify how individual performance
contributes to overall success, those who rate performance tend not to use valid, objective measures but
rely instead on subjective judgments. Staff members often view this as invalid and unfair, which undermines
the practice's credibility in the staff's eyes.
It decreases teamwork. Allocating a budget to a supervisor and asking him or her to divide it on the basis of
merit creates a competitive, not collaborative, environment for staff.
It masks the effect of management on performance. Because variation in staff performance is largely
dependent on a practice's management systems, it's difficult to compare individual performance effectively.
Practice-effectiveness pay
One way to combine fixed and variable compensation is with the practice-effectiveness model. It involves setting
base salaries plus establishing a formula that will provide bonus payments based on certain practice-performance
criteria. (For suggestions about how to implement this model, see below.)
Implementing practice-effectiveness pay
Practice-effectiveness pay combines base salaries with bonuses that are based on the extent to which
the practice achieves success in predetermined areas. Implementing this model involves six steps:
1. Conduct a job analysis to determine the behaviors, knowledge, skills, abilities and other personal
characteristics needed to perform the work involved in each job.
2. Develop job descriptions.
3. Establish a base salary for each staff position by analyzing market data.
4. Identify key indicators of practice effectiveness. These might include clinical outcomes, patient
satisfaction, resource utilization and profitability.
5. Measure and evaluate the practice's success in each of the areas you identify. For example, if you
wanted to use patient satisfaction as an indicator of practice effectiveness, you would conduct
patient-satisfaction surveys and decide what levels of satisfaction indicate that your practice is
doing a good job of meeting patient expectations.
6. Develop a formula for determining bonus distributions based on the practice's success. Be careful
not to fall prey to the downfalls of the merit-pay structure when developing these bonuses; reward
teams rather than individuals. Your bonus system should prioritize your indicators of effectiveness,
such as clinical outcomes, patient satisfaction and profitability. Because your practice's goals can
change, it's important to examine these indicators at least every year. Watch out for “one size fits all”
and “flavor of the month” bonus formulas. The guidelines each practice adopts should reflect its
own culture and needs.
The practice-effectiveness model offers several advantages:
It helps to control operating costs. A portion of each staff member's salary is tied to the practice's
performance. In addition, the model itself has low overhead in that much of the administrative work related
to it involves data collection that should already be taking place as a part of sound practice management.
For example, all practices track their profitability, and an increasing number are monitoring their clinical
outcomes, patient satisfaction and resource utilization.
It rewards the right behaviors and builds unity. Staff members are reinforced only for actions that clearly
benefit the practice's performance, which focuses everyone on the most important work and promotes a
culture of “we're all in this together.” It builds an environment of change and adaptability and is compatible
with TQM and CQI.
It is readily adaptable to changing practice needs. As business conditions such as payer mix, reimbursement
schedules and market competition change, a practice can focus on different indicators of effectiveness.
It encourages self-management. Increased understanding of a practice's business interests improves staff
members' motivation to perform. It also encourages employees to coordinate their work with others more
effectively and to make decisions that reflect the best interests of the practice.
It encourages innovation. Finding ways to lower overhead and improve operational efficiency produces
tangible rewards for staff.
It breaks down hierarchy. Since everyone is pursuing the same practice performance outcomes, pecking
orders take a back seat to intragroup teamwork and intergroup collaboration.
There is at least one disadvantage of the practice-effectiveness model: Proponents of traditional merit pay argue
that this model lacks a strong performance-pay connection in the eyes of staff. (This is a disadvantage of
traditional merit pay, too.) In other words, it may be hard for staff to see the direct connection between their
individual effort and their reward for it. This is less of an issue in a small to medium-sized practice than in a large
one.
What's right for you?
Of course, there's more to implementing an effective compensation system than simply picking a model.
Regardless of the model you select, the starting point is to develop job descriptions based on a thoughtful job
analysis.
Here's the bottom line: The right model for your practice may not be the right model for the practice down the
street. But each one requires that you identify what each staff position is designed to do, understand the model's
advantages and disadvantages, affirm that it's compatible with the practice culture you want and ensure that it
aligns with your business objectives.
Author Information
Dale Shimko is president of Performance Alignment Systems, a Nashville, Tenn.-based organizational psychology
management consulting firm.
Copyright © 2000 by the American Academy of Family Physicians.
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