When a salary guarantee expires

The end of Doctor Able's first year at our clinic was closing in. As with most new doctors, he had signed a contract that provided him with a guaranteed income for his first year of employment. Although his practice had grown steadily each month, it was apparent that, despite his best efforts, he was going to take a significant salary hit once his first-year guarantee expired.

Able discussed the situation with our clinic administrator, and proposed extending his salary guarantee for a second year, hoping that by then his productivity would have increased to a level that would more than cover the guarantee.

The administrator took Able's request to the clinic's management committee for a decision. On reviewing Able's record, the committee members agreed that he was a competent practitioner, and that he seemed to fit in well with his colleagues. In short, he was a definite asset, and someone the clinic would like to retain.

In cases like Able's, however, when the clinic wants to retain a new doctor, some compromise between the salary guarantee and straight productivity is called for. The solution we came up with is the "base compensation" option. It provides the physician with a "floor" (a guaranteed minimum salary), and has a built-in incentive for the physician to work harder. It also gives the clinic some downside protection if the doctor's billings stagnate.

The math for this model is simple. The "base" is calculated by taking 80 percent of the doctor's "shortfall" from the first year. (That figure isn't chiseled in stone.) That base is then added to whatever salary the doctor generates through his productivity during the second year. For example, suppose Able's guarantee for his first year was $140,000, but he only covered $80,000 of that amount with his actual productivity. His base for the second year would be calculated as $140,000 - $80,000 = $60,000 × 0.8 = $48,000.

In his second year, Able would start with a base of $48,000, adding to it whatever he generates from his practice. This is where the motivation to work harder comes into play-an incentive that wouldn't exist with a simple guarantee extension. If he earns $100,000 ($20,000 more than he did in year one), his second year wage-including his base-will amount to $100,000 + $48,000 = $148,000.

In this example, the base compensation option ended up costing the clinic $8,000 more than it would have paid Able under an extension of his original $140,000 guarantee contract. But the plan has the advantage of motivating him to become a more productive physician. It also provides a downside protection for the clinic: If Able's second-year production remains at $80,000, his total salary will be $48,000+ $80,000, or $128,000. At that level, the clinic would take a loss of $48,000; but that's $12,000 less than it would have lost under a straight contract extension at $140,000.

Under this system, the physician signs a brief agreement that specifies certain work expectations during the period covered by the base compensation contract. In the happy event that he becomes much more productive than he was in his first year, his total salary has a maximum cap. In Able's case, the cap was $150,000 including the $48,000 base. If by hard work he manages to produce $120,000 in his second year, then his pay would be calculated as $120,000 + $48,000 = $168,000. In that case, the salary cap would kick in, reducing the total to $150,000, saving the clinic $18,000.