1. 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

2. 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.
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3. 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
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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

5. 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.
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6. 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
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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

8. 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

9. 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

10. 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