December 27, 2023
CEO/Practice Executive Compensation
- by Jordan Brinkman, JD, Senior Management Consultant
The role of a medical practice administrator/CEO is a critical one, bridging the gap between healthcare providers and efficient, well-run medical practices. These professionals are responsible for overseeing the day-to-day operations of medical facilities, ensuring compliance with regulations, and managing the business aspects of healthcare. One of the crucial factors that make this role appealing is the c-suite type of responsibility this position holds. In this blog post, we will explore why it matters to compensate your medical practice administrator more in line with a business executive rather than on par with other employees in the practice.
Job Responsibilities of Healthcare Administrators
Before delving into the specifics of medical practice administrator pay, let’s take a closer look at what the job entails. Medical practice administrators, also known as healthcare administrators or medical office managers, are responsible for the efficient functioning of a medical practice. Their responsibilities typically include:
- Financial Management: Handling billing, budgeting, and financial reporting.
- Staff Management: Recruiting, training, and overseeing administrative and clinical staff.
- Regulatory Compliance: Ensuring the practice adheres to healthcare laws and regulations.
- Patient Services: Managing patient appointments, records, and satisfaction.
- Strategic Planning: Developing and implementing policies and strategies for the practice’s success.
Why Executive Pay Structure Matters
Compensation is a fundamental aspect of any employment arrangement. Traditionally, practice administrators receive a fixed salary for their work. However, in recent years, executive pay (a type of incentive structure) has gained significant popularity as a more effective and motivating compensation model. We will explore the advantages of executive pay over traditional salaried compensation for your practice administrators and why it can be a game-changer in fostering motivation, performance, and overall job satisfaction.
Executive pay, often referred to as variable pay or performance-based compensation, is designed to tie an administrator’s earnings directly to their performance and the company’s objectives. By offering incentives, businesses can ensure that administrators are focused on achieving the goals and results that matter most to the organization.
Executive pay has a remarkable ability to boost motivation. Unlike a fixed salary, where the amount remains the same regardless of performance, executive pay offers a tangible reward for hard work and achievement. This creates a sense of ownership and drives administrators to put in their best effort, knowing that their performance will directly impact their earnings.
When administrators know they will be rewarded for their efforts, they are more likely to strive for higher levels of productivity and innovation. Executive pay encourages administrators to think outside the box, find more efficient ways to accomplish tasks, and contribute to the practice’s growth and success more like a CEO-type role.
Offering competitive incentive packages can help attract and retain top talent in your industry. High-performing professionals are more likely to be drawn to companies that offer the potential for significant financial rewards based on their contributions.
Salaried administrators receive a fixed compensation regardless of their performance, which can lead to inefficiencies and higher labor costs for the practice. In contrast, incentive pay allows businesses to tie compensation directly to output and results, effectively managing labor costs. Incentive pay is highly adaptable to changing business environments. In times of economic downturn or uncertainty, a company can adjust incentive structures to align with new priorities. This flexibility ensures that the employee remains agile and responsive to evolving business conditions.
Executive pay systems often emphasize recognizing and rewarding individual and team contributions. This recognition can boost morale and job satisfaction, making administrators feel valued and appreciated.
Example Of An Executive Pay Structure
Below is an example of a pay structure we helped implement in a current practice. The practice administrator had helped the practice achieve great financial success in a few short years, yet was compensated as a salaried employee, far below her market value. When it was time for her review and potential raise, she and the doctors had the following objectives:
- Have an owner compensation model that rewards owners for their work in the practice (% of collections).
- Have owner compensation that rewards the owners for owning the business (distributions).
- Have a CEO Compensation model that allows the CEO to be compensated based on the success of the practice.
- Have a CEO Compensation formula that is automatic and does not require conversation on an ongoing basis.
- Have a CEO Compensation formula that does not create animosity from the partners.
We arrived at the following structure to accommodate those desires:
Let’s assume the partners approve an $80,000 distribution. The mechanics would work as follows:
- Each partner receives $20,000 ($80,000 divided by the number of partners).
- A bonus payment would be processed at the same time for the CEO (practice administrator) at ½ of the partner distribution amount or in this situation $10,000.
- Note* This would not apply to partner distributions to cover taxes.
*For this example to work, the physician-owners need to take routine compensation that is fair market value (normally 35-50% of collections). If this is not the case, the owners and the practice administrator (CEO) will receive inflated pay because the physician owners’ pay will not be calculated as expenses in the business.
Drive Financial Success With Executive Pay
While traditional salary structures have their merits, executive pay for practice administrators has emerged as a dynamic and effective compensation model for practices looking to motivate their administrators, enhance performance, and align their administrators with company objectives. By offering financial rewards based on business performance and results, practices can create a motivated, accountable, and innovative structure that helps them thrive in today’s competitive medical practice landscape. Executive pay not only benefits the administrators but also fosters a culture of success that can drive your practice’s success, as well as the owner’s financial success, to new heights.
Designing effective compensation structures involves a nuanced understanding of various factors, including industry benchmarks, organizational goals, and individual performance metrics. Our team is well-equipped to provide tailored advice and solutions that align with your specific needs and objectives. Contact us to learn more.