Chapter 8 Compensation Practices, Planning, and Challenges The Strategic Role of Compensation Intrinsic Versus Extrinsic Rewards Determining the Monetary Value of Jobs Methods of Job Evaluation Variable Compensation Pay for Performance Special Considerations for Compensating Physicians Payment Methods and Practice Settings Future Directions for Physician Compensation Copyright 2011 Health Administration Press

The Strategic Goals of Compensation Reward employee performance. Achieve internal equity or fairness within the organization. Compete with relevant labor markets. Align employee behavior and performance with organizational goals. Attract and retain high-performing employees Keep the compensation budget within financial constraints. Comply with legal requirements. Copyright 2011 Health Administration Press

The Quartile Strategy for Pay Positioning First-quartile strategy: an organization choosing to pay below-market rates Reasons include a drive for cost savings and a worker surplus Second-quartile strategy: the middle of the market Organizations can control costs while still attracting and retaining employees Third-quartile strategy: employers pay above-market rates Organizations can better ensure that they can be selective and attract applicants with the required characteristics Copyright 2011 Health Administration Press

Copyright 2011 Health Administration Press Job Evaluation Job evaluation is a systematic approach to determining the monetary value of jobs in an organization. Benchmark jobs are well-understood jobs and are often used to establish the basis on which other jobs are evaluated. A number of methods of job evaluation are used: Ranking Job classification systems Pay bands and broadbanding Point systems Factor comparison method Market pricing relies more on what other employers pay than on the actual value of the job to the organization. Copyright 2011 Health Administration Press

Point Systems for Job Evaluation The assumption in a point system is that organizations do not pay for jobs, but rather pay for valued aspects of these jobs, known as compensable factors. Common compensable factors: Educational requirements Autonomy Supervisory responsibilities Physical and mental stress Compensable factors and the value assigned to these factors are specific to the organization. Compensable factors must be measurable. Jobs are assigned points on the basis of the relative content of each compensable factor. A salary is assigned to a job on the basis of the number of points “earned” by the job. Point systems must be reconciled with market pay rates The labor market may determine that we pay more, or possibly less, for a particular job. Copyright 2011 Health Administration Press

Job Classification Systems Developed by old US Civil Service System and copied by state and local governments Jobs classified according to a series of predetermined wage classes Wage classes usually based on such factors as knowledge requirements, physical effort, responsibilities, and working conditions US federal government’s General Schedule (GS) is composed of 18 pay grades Each pay grade is associated with a salary range Disadvantages: uses subjective judgments relies on job titles and does not always consider differences across organizations Jobs can be misclassified, or perceived to be misclassified Copyright 2011 Health Administration Press

Copyright 2011 Health Administration Press Broadbanding Broadbanding involves combining many pay bands into fewer bands to give managers more flexibility in rewarding employees as organizational requirements change. Allows managers to take into consideration the people doing the job in addition to the characteristics of the job itself. Authority for compensation decisions is decentralized to operating managers. Broader pay bands give managers more flexibility to recognize and reward performance. Broadbanding may limit traditional promotion opportunities. Broadbanding may be difficult to explain to employees. Copyright 2011 Health Administration Press

Variable Compensation Base compensation may be supplemented by additional compensation that rewards particular employee behaviors, or organizational or team performance Team-based incentives Skills-based or knowledge-based compensation systems Pay for performance Productivity-focused pay for performance Piece-rate incentives Commissions Bonuses Profit-sharing plans Gain-sharing plans Quality-focused pay for performance Copyright 2011 Health Administration Press

Criticisms of Pay-for-Performance Programs Programs are geared more to satisfying the manager than to satisfying the patient and achieving quality goals. Employees may be less likely to report errors and defects. When linked with goal achievement, employees may set goals that are easily achievable. Pay for performance may discourage risk taking, innovation, and improvement efforts. Rewarding one aspect of work may have a detrimental impact on another aspect of work. Paying physicians in the number of patients seen may negatively affect quality. Paying physicians on the quality of patient outcomes may encourage a physician to only see relatively healthy patients. Pay-for-performance programs almost always result in other unanticipated consequences. Copyright 2011 Health Administration Press

Common Physician Payment Methods Solo and group practice physicians: fee-for-service, salary, and incentives Independent practice associations: discounted fee-for-service and incentives Staff model HMOs: salary Hospital-based physicians Several approaches, including employee salaries, contractual arrangements, independent contractors, residents and fellows Faculty practice plan: a group practice that includes the faculty of a medical center—salaries are typical Locum tenens: temporarily employed physicians paid a fixed amount for services provided Physician managers: medical directors, consultants, administrators—usually salaried Copyright 2011 Health Administration Press