The Issue

Hospital board members and other leaders should consider market characteristics, base salaries and incentives, and the structure of the compensation package when developing a physician compensation plan.


Healthcare reform is a game changer for hospitals and health systems, with new rules and new objectives for participants. A game-winning strategy for hospitals and health systems should include compensation structures that engage physicians in the mission of the health system and enable them to work toward goals that support the mission, vision, and goals of the organization.

Developing a meaningful compensation structure—encompassing salary, incentives, and benefits—involves taking an in-depth look at the organization’s culture, mission, and underlying philosophy and considering their value in relation to each of these areas.

The expectations of employed physician groups may vary from group to group. Some groups will be expected to cover their expenses, while others will be expected to generate a positive margin. Some will contribute in ways that go beyond their financial ROI. The best way to arrive at a meaningful physician compensation structure is to consider these and other issues and to seek ways
to reward physicians based on outcomes that are rooted in the organization’s strategic mission.

Action Steps for Providers

Hospital board members and other leaders should ask three critical questions in determining the right approach to physician compensation.

How will market characteristics influence physician compensation? When defining the physician market, the following factors should be carefully examined:

  • Geographic pay issues
  • Pay by specialty level
  • Salary versus total cash (i.e., incentives)
  • On-call pay practices
  • Special benefits (e.g., supplemental retirement, long-term disability)
  • Whether the organization should take private practice pay into consideration

To what extent should base salaries and incentives be used to compensate physicians? Currently, even for physicians who are employed by health systems, there is very little variable component of compensation beyond base salary. Potential elements of compensation include not only cash and benefits, but also intangible benefits that come with working at a hospital or health system. For physicians, these benefits could mean anything from a flexible work schedule to opportunities for research, pro bono projects, conference presentations, independent contracting, or other work in the community. 

How should the organization’s physician compensation package be structured? Just as salary levels provided by hospitals and physician groups differ, benefits provided in private practice are typically not the same as those paid by hospitals. There are a number of variables to consider, such as retirement plans and supplemental executive retirement plans, annual incentives and long-term incentives, and long-term disability.

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Publication Date: Monday, October 01, 2012

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