Using Benchmarking to Create a Practice Staff Compensation Plan. The State-Level Medical Group Management Association Salary Surveys

Transcription

1 Using Benchmarking to Create a Practice Staff Compensation Plan The State-Level Medical Group Management Association Salary Surveys As a Resource for Small to Mid-Size Practices Exploratory Submitted August 28, 2006 By Jan Krause In partial fulfillment of the requirements For fellowship standing In the American College of Medical Practice Executives 1

2 Note to reviewers: When the original outline for this paper was prepared and submitted for approval the plan was to use specific values from the state MGMA survey reports in practical applications. Not all responding states represented in this report granted full permission to use published values from their reports, so a slightly different perspective was used to develop this exploratory paper. The paper uses a broad viewpoint to examine the fundamentals in developing the practice compensation plan, and then explores hands-on use of the state MGMA survey reports as the primary tool. Some actual values are included (with permission), but the benchmarking tools and principles are the heart of the research.

3 Using Benchmarking to Create a Practice Staff Compensation Plan The State-Level Medical Group Management Association Salary Surveys as a Resource for Small to Mid-Size Practices Introduction This exploratory research discussion outlines the importance of using state-level staff compensation surveys for benchmarking to support important compensation strategies such as attracting and retaining staff, reducing turnover, and maintaining equity and parity in staff compensation ranges for the small to mid-size practice. The research here briefly covers two widely used resources, and then focuses on the state Medical Group Management Association (MGMA) salary survey, an excellent benchmarking tool available to medical practices. A survey was delivered to all state MGMA representatives asking general questions about the survey. In addition, information was extracted from survey reports to compare compensation on a state by state basis. Several examples of benchmarking methods are explained and actual information from the state MGMA surveys is used to compare staff compensation levels. Further, an original compensation tool was developed by the author as part of the research for this paper, and can be used to set compensation ranges within small to mid-sized practices. All of these tools can be used to create a compensation plan for the medical group practice. Finally, the paper also looks into the future through the eyes of recognized human resource futurists to understand the importance of preparing for the next decade. 1

4 Background: Assessing the usefulness of comparable benchmarking sources Before assessing the utility of benchmarking sources it is necessary to define two key terms that will be used frequently in this paper to describe compensation internal benchmarking and external benchmarking. Benchmarking overall is a process of comparing yourself with others, measuring your practice's compensation levels or performance and systematically comparing them to the performance of others in order to seek best practices. The process enables the identification of areas where improvement is possible, how it might be achieved and what benefit it might deliver. Internal compensation benchmarking is a comparison of compensation within the practice. When benchmarking compensation externally, practices seek compensation information from other practices for comparative analysis. External benchmarks are generally considered to provide the greater advantage however, internal benchmarking can be useful where no external benchmarks are available. To be useful to employers, surveys should accurately reflect the appropriate market. In addition, job titles with accompanying job descriptions should be available along with reliable statistical analyses of the data. Other key components to consider are: Publishing organization: How is the organization s expertise in surveys rated, and how widely used is the information? Methodology: How were the data collected, and what was the response rate? Did the publisher go through an editing (validating) process, and what types of jobs and compensation are presented (full-time, part-time, temporary, salaried or hourly)? 2

5 Definition of terms: Does the survey define the statistics used and explain how they are calculated? Publication date: How current are the data? Participant base: What practices are included? Differences in participation from year to year can result in variances. Trends: Does the survey track information from year to year and report on how results have changed? Does the survey actually represent the same practices used in trending, or do they differ? Two other widely used staff benchmarking resources, in addition to the MGMA state salary surveys, are The Bureau of Labor Statistics (BLS), located on the Internet at and Salary.com at The Bureau of Labor Statistics is the primary Federal Government research agency for labor economics and statistics. A sophisticated, statistical approach derives salary estimates for specific job positions based on a point system using four job factors -- knowledge, job controls and complexity, contacts (with whom is the employee in contact), and physical environment. Where insufficient information is available to publish estimates, modeled estimates are created from more in-depth statistical techniques. A major benefit to this database is that many thousands of individuals are represented. The BLS retains confidentiality of the names and nature of the residents in the database, so little is known about how comparable the information is to medical group practices, and not all commonly found practice staff positions are listed. 1 Salary.com reports on their web site that nearly all of the individual jobs in the online tool named the Salary Wizard list market compensation based on more than 3

6 100 individuals per job. Their published information is based on broad national data; reported exclusively by human resource departments of tens of thousands of employers from all sizes, industries and locations the results are most similar to the data from companies with approximately 1,000 employees. 2 Individual state MGMA surveys perfectly compare to the medical practice, however they have far fewer responses than these two previously listed icons of salary reporting. With fewer responses the published values are not as reliable as those are with larger numbers of responses. Job positions listed are those found in medical practices, and thus the need for using job point factors to determine comparability is reduced. The database of respondents, includes real individuals in known geographic locations, and has reliability dependent on the data contributors, practice managers or administrators. No one of these resources provides the perfect scenario, and the administrator should diligently verify as many resources as possible in setting compensation. How are the state MGMA surveys produced and what do they contain? In most states one can locate a state-level MGMA, and find that a staff compensation survey of medical group practice staff is conducted annually. The surveys are important benchmarking tools for the medical practice as staff salaries are heavily influenced by geographic location. State-level survey data provide practices with relevant benchmarks of quantitative information to develop the practice s overall compensation plan and to set staff compensation. 4

7 As the state MGMAs are independent associations, they are uniquely structured and conduct business in various ways. Individual state MGMA surveys are managed by various entities such as volunteers, accounting firms, staffing agencies and consulting firms, and reports are provided to the state members at no cost or at a reduced price. Some compensation values shown here were gathered from publicly available published literature or by permission from selected state MGMAs. More information is shown about how individual state salary surveys are currently conducted in Table 1. For 21 states accounting firms manage or participate in managing the staff compensation survey. Other entities that manage surveys are staffing agencies, health consortiums, volunteers, or consulting firms. In conducting research for the purpose of this paper, questionnaires were created and sent electronically to representatives of all active state MGMAs asking for basic information about their surveys. The six questions included were: 1. Does the state conduct a salary survey? 2. How frequently is the survey conducted? 3. Who actually conducts the survey? 4. What does the survey include? 5. What percentage of the membership usually participates? 6. Who is eligible for free copies of the survey? Responses from states, plus information about states available to the public via the Internet, are all listed in Table 1. Nebraska, Oklahoma, Oregon and Kansas all reported the highest participation levels with at least 50% of the membership participating. Ten 5

8 states reported that participants obtain a free copy of the report, and three states make free copies available to all members. Other uses for the state MGMA salary surveys In addition to benchmarking resources, the state MGMA staff salary surveys serve other purposes as well. At a recent Colorado MGMA conference one of the officers reported that he was able to use the state survey report as a negotiating tool to increase his initial compensation offer by 20 percent! In another example, a Colorado administrator was able to pair the state MGMA survey report with the national MGMA Management Compensation Survey in negotiating his existing salary, also receiving a 20 percent increase. The reports are also used frequently as job description guides for newly added positions. Throughout the remainder of this paper the state-level MGMA survey reports will be used to illustrate extracting information for specific benchmarking needs and also to describe practical uses for the medical group practice. The importance of benchmarking compensation for the medical practice In general, benchmarking your practice allows you to determine your practice s health at a point in time to objectively compare your practice to other similar practices in order to realize strengths and opportunities for improvement. There are at least four major reasons that benchmarking compensation is important to the medical practice: 1) managing overall staffing costs, 2) obtaining maximum cost benefit from investment in staff, 3) to offer competitive compensation and benefits for staff recruitment and retention, and 4) to fully understand the localized geographic market influences. 6

9 Deborah H. Wells, CPA, MBA, representing Alpern Rosenthal, a prominent CPA firm, states that analyzing strengths and weaknesses based on external benchmarking provides an opportunity to target weaknesses and leverage strengths to build a stronger, healthier medical practice. She further endorses benchmarking staff compensation in her article entitled, Give Your Medical Practice an Annual Physical, and articulates that benchmarking is used in many different industries as a basis for business growth, to increase productivity and to create a sound financial position. Alpern confirms that an essential component of understanding the practice s current financial position is the expense of staff compensation. 3 Support staff costs in a medical practice represent a significant portion of overhead expenses. Resources such as the MGMA Cost Survey also show that staffing costs are approximately 33 percent of total medical revenue for multispecialty not hospital owned practices. 4 Other specialty types costs vary somewhat from this number, but in all cases staffing continues to represent a significant expense. It is important for any business, particularly the medical group practice; to obtain optimum value of services for the dollars expended in compensation. By investing in staff with the appropriate skills to support overall productivity, the practice will strengthen and prosper. There is no perfect, universal ratio of staff to full-time equivalent (FTE) physician because of the uniqueness of each medical practice, such as physical space, available technology, payer and patient mixes, and practice and individual physician specialties. 5 7

10 The Medical Group Management Association (MGMA) publication, Rightsizing Appropriate Staffing for Your Medical Practice, by Deborah L. Walker, MBA, FACMPE and David N. Gans, MSHA, FACMPE uses MGMA survey data to discuss the dynamic relationship between staffing levels and medical group productivity, revenue, expenses and profit. Walker and Gans show that significant variances in staffing levels suggest substantial differences, both in tasks the staff execute and procedures formulated to accomplish necessary work activities. The solution is to have the right number of staff doing the right things at the right time, with the right resources to achieve optimal practice performance. 6 Knowing who the right employees are and what are the tasks they should be doing can be accomplished by benchmarking present staffing levels, analyzing the operations strategy and its interpretation and implementation for staffing, and scrutinizing the existing policies and procedures. According to MGMA s Performance and Practice of Successful Medical Groups: 2004 Report Based on 2003 Data, generally better-performing multispecialty practices have more total support staff per FTE physician than corresponding practices in the same specialty grouping (5.72 compared with 4.95). The same applies to primary care single-specialty practices (5.02 compared with 4.37). 7 Among better performing practices staffing costs per individual FTE physician are actually higher. However, these same practices have lower support staff as a percentage of total medical revenue. This lower cost hints that better performers have the right number and skill mix of staff doing the tasks to support physician productivity and, consequently, overall greater revenue after operating cost. 8

11 Unique staffing strategy models are frequently determined by the practice and modified independently for individual physicians. For example, a medical assistant may be assigned to one physician only, or there may be a team of medical assistants who work for any physician as needed. Business processes must be as simple as possible, and well understood by all directly involved in order to function in an efficient, cost-effective manner. Benchmarking staff compensation also keeps the practice in touch with competitive rates in the immediate area. Practices that do not pay competitive compensation risk losing their best people to other employers. This also translates to increased hiring and training costs, lost productivity and increased stress on those remaining. These costs can easily cost the practice more than simply raising existing staff compensation. Small practices that are not able to compete with the top-dollar compensation offered by larger organizations might be able to offer schedule flexibility or other benefits that help to attract and retain good talent and skills. Other factors can also influence compensation variability, such as compensation strategy and available perquisites. Compensation strategy should evolve from the practice s overall mission, vision and values, and become embodied in the compensation philosophy. For example, a practice may determine the need to grow quickly, by recruiting new physicians to handle an overwhelming patient panel. If unemployment is low in the immediate competitive market for employees, the practice may have to offer a larger starting salary than they usually would, or even offer a starting bonus as an enticement to join the practice. To keep overall staff costs in line, 9

12 in turn, there may need to be adjustments to other employee costs such as a reduction in benefits, or reviewing planned compensation increases. Geographic and demographic location heavily influence staff compensation, and those who are lower on the pay scale are more likely to live and work in the same general area, simply to keep commuting expense reasonable. Practices located in metropolitan demographic areas must be aware that they compete not just with other medical group practices, but with hospitals and other healthcare facilities. These areas are unique to the location of the practice, and it is critical for the administrator to be aware of the competition. Overall, the MGMA state salary surveys cover these areas very well. For example, the Kentucky Medical Group Management Association 2005 Compensation and Benefit Survey provides information on Lexington, Louisville, Western, small city/rural, suburban and urban areas. 8 The labor market for higher-level management positions is often national, while the market for entry-level positions is primarily local. In defining the local labor market, practices can look to the competition, and ask the question, Where do employees go when they leave the practice? Table 2 illustrates these differences in displaying compensation for receptionists, an entry-level position, among five states. Among the five states listed here the difference in median salary for receptionists in Oklahoma, $10.21 per hour 9, and New Jersey at $14.82 per hour 10, is $4.61. The impact of turnover on staffing A key consideration in staffing cost and efficiency is turnover. A survey of registered nurses conducted in New York in 2002 revealed that nearly half of the 10

13 hospital staff nurses under the age of 52 said they expected to change jobs within five years. The average turnover for registered nurses at that time was estimated at 15 percent, and the estimated cost to replace a staff nurse is 1.2 to 1.3 times that nurse s average salary. 11 A consequence of a nurse, or any other key staff s leaving can create even more turnover. Remaining staff may be overloaded with additional tasks and may feel compelled to leave also. According to Fay Hansen, Workforce Management contributing editor, turnover is not simply a cost, but a combination of costs and benefits. The solution is to manage turnover levels so that financial gains outweigh the losses. To accomplish this, it is important to document the savings created by the turnover bonuses that are not paid, vacant position savings, reduced salary costs for the replacement, benefit savings and potential productivity improvements. 12 (Table 3 illustrates the method for balancing cost and benefits of turnover) Futurist, Roger Herman, states that people don t leave jobs, they leave supervisors. In his article entitled, Visions from an HR Futurist, he lists five principal reasons that people leave jobs: 1) It doesn t feel good around here, 2) They wouldn t miss me if I were gone, 3) I don t get the support I need to get my work done, 4) There s no opportunity for advancement, and 5) Insufficient compensation. 13 When employees don t feel good while in the workplace this may be due to a corporate culture issue based on the company s reputation, working attitude of coworkers, environment, or leadership. Or, they may believe that they would not be missed if they left the practice. In order to alleviate these feelings leaders need to communicate to employees that they are valued by the practice. 11

14 When employees are unable to do a good job, they may be frustrated by lack of leadership, poorly organized systems, lack of proper equipment or training, and move on to another organization. Also, opportunity for advancement is important to most employees. People want to learn, grow and sharpen their skills. When opportunities are not available, people move to organizations that provide jobs with better opportunities for growth and development. Low compensation and insufficient increases can also be a real de-motivator. Some basics about practice compensation plans Prior to further discussion about benchmarking, it is important to note some basic information about practice compensation plans. A likely ongoing objective of the medical practice is to increase capacity and productivity and, a conceivable goal of the practice is to attract and retain key staff members. While benchmarking tracks compensation goals and objectives, many other factors influence a successful practice compensation plan. A capable, focused and productive staff is a critical element to the success of the practice, the provider and the patient. A key instrument in benchmarking to create a practice s compensation strategy is the staff compensation survey. 14 Compensation strategy should always be tied to your overall business strategy. When this is not done, compensation strategy may actually undermine the business strategy, or its effectiveness will be limited. Before salary benchmarks can be utilized effectively, a compensation plan, based on compensation strategy, should be in place. The basic elements of a compensation plan are a compensation philosophy, development of compensation ranges, consideration of the salary range overlap, job descriptions, benchmark jobs, benefits and bonuses and a job evaluation. 12

15 Compensation philosophy What is a compensation philosophy, and why is it important? A compensation philosophy is a significant component for attracting and retaining successful, happy employees that directly reflects the strategy of the practice. The compensation philosophy is a statement of intention that provides the basis for designing a practice s compensation plan, and should be developed directly from the practice s mission statement. It also serves as a guideline for determining compensation goals. The compensation philosophy should address at least three major points: 1) What is the mission statement of the practice? 2) What are the business goals and strategy for the practice? 3) What skills and behaviors should be remunerated and rewarded among employees? Practice leaders should be actively involved in the development and continuation of the compensation philosophy in order to help ensure its success. A compensation philosophy creates common understanding of the compensation plan, provides clear guidance to employees and establishes direction for compensation and benefits design. The plan also sets benchmarks for ongoing success measurement, reinforces the practice s mission, values and goals, and is influential in directing culture. Communication of the compensation philosophy throughout the practice promotes a message about the rationale behind, and focus on the practice s pay philosophy. Along with reinforcing a feeling of openness, honesty and inclusion, it provides insight into the values of the practice. It is a good policy to conduct an annual 13

16 review of the compensation philosophy in order to evaluate whether it remains in alignment with the mission of the practice. In creating the compensation philosophy it is imperative to be aware of legal guidelines such as the Equal Pay Act. The Equal Pay Act Compensation equitability is covered by the Equal Pay Act of The Equal Pay Act requires that men and women working for the same establishment be paid the same rate of pay for work that is substantially equal in skill, effort, responsibility, and working conditions. Pay differentials are legal and appropriate if they are based on seniority, merit, systems that measure the quality or quantity of work, or any factor other than sex. 15 this is another important reason to benchmark compensation. Job descriptions, benchmark jobs, benefits and bonuses Once the compensation philosophy is in place, actual job descriptions can be created with compensation ranges assigned. Benchmarking is an important component that enables the practice to set compensation structure and update market changes. The method used to modify the compensation structure depends on how the practice views its relationship to the market. In order to fully understand how practices interface with the market, it is important to understand some key terms. A job description is a written summary of overall task requirements, and qualifications of a specific job. It provides a basis for developing further processes such as performance standards, benchmarking salaries, recruiting, training and performance appraisal. The job description typically includes basic information about the job, the purpose of the job, typical duties and responsibilities, required knowledge, skills, 14

17 abilities and equipment required to perform the job, as well as the working conditions. Job descriptions should be updated on a regular basis even annually during the performance appraisal process. A benchmark job is a standard job that is easy to identify, common to most practices, is relatively stable in job content, and can be described in clear and concise terminology. Benchmark jobs are used for making compensation comparisons, either within the practice or equivalent jobs in the external market. Examples of benchmark jobs are medical assistants, licensed practical nurses, and registered nurses. Benefits include any rewards to employees in addition to salary. Major benefits include free or reduced-cost services and security and health benefits. Benefits can also be in the form of flexible work schedules if appropriate for the job. Bonus is a form of compensation that is typically granted following the employee s performance time or accomplishment, and may be discretionary or predetermined as a compensation incentive. Job evaluation Before jobs can be monetarily appraised in terms of their overall worth to the practice they must be evaluated through benchmarking. 16 In order to be successful, a practice s job position evaluation structure must cover all positions, be perceived as consistent and internally equitable by both management and employees, and be competitive in the market. There are several methodologies to approach job evaluation supported in published literature, and five are listed here. 15

18 The point evaluation method identifies factors for each job, then point values are assigned to each factor, and the points are added to obtain a total point value for each job. These factors can be, for example, experience, education, certification and responsibility. The advantages of the point method are that the points are predetermined, and therefore, evaluation is objective, although it is difficult to determine the relationship of job worth to the practice. Disadvantages are that set up time is lengthy, and it is difficult to assign the appropriate point values to various factors. The Bureau of Labor Statistics uses this system in their published compensation statistics. A ranking system is a simpler method that can be suitable for smaller practices with fewer jobs. This system ranks one job with another. Two jobs are simply compared as to which is more difficult or complex. Then jobs are added one by one and ranked with the original two. With this system, it is difficult to know how much more difficult one job is than another job and there is no quantitative basis for setting compensation. For a practice with more than ten different positions, it becomes very difficult to make comparisons, and to add additional new positions into the method. A third methodology is the classification system. With this system, jobs are compared against a predefined index, and the evaluator fits each job into categories that best describe its knowledge, skills and abilities. This system has flaws that are similar to the ranking system. Also, jobs are not defined in a meaningful way. The factors comparison system uses a subset of key jobs for evaluation to create a baseline. Then common factors are compared from these baseline jobs with additional jobs. The most commonly used factors are knowledge, skill, authority, physical 16

19 requirements, and level and degree of responsibility. All jobs are ranked in terms of points for each factor, one by one. Then the points are summed, to compare each job s overall value. The method is useful, because it compares job with job. But, the more factors there are, the more complex is the entire process. A fifth method, termed market-based pay, uses a direct market-pricing (benchmarking) approach for all of the jobs in the practice. With this standardized method, direct matches are required for each job. When using market-based pay, it important to analyze more than one source for information in order to check the reliability of the information, while another method of evaluation must be used to price jobs not present in the survey. 17 Statistics defined Before further introducing hands on benchmarking tools it is important to define and discuss statistical terminology commonly used in surveys to describe the numerical values of compensation. There are three words used to describe measures of central tendency. A mean value indicates the average of all the values included for a particular job. A median indicates the midpoint between the lowest and highest value. Often the median is the preferred value used to describe compensation, as it is not easily distorted by extreme values, while the mean factors in all values. Exceptional performers, or employees who have additional job responsibilities are often found at the top of the compensation values and may not always be comparable to an employee typically found in this position. 17

20 The mode is the most frequently occurring value, although this statistic is not typically published in compensation survey reports. In simple terms the standard deviation is a computed value that shows the approximate average distance of the observed values from the mean. For example, assume the mean value is $100,000 and the standard deviation is $20,000. In a normal distribution where the mean, median and mode are equal, the value of one standard deviation includes 68 percent of the sample values. Therefore 68 percent of the values will be between $80,000 and $120,000. Approximately 95 percent of the data values should lie within two standard deviations of the mean or $60,000 and $150,000, and 99.7 percent of the data values should lie within three standard deviations of the mean or between $40,000 and $170,000. Any values beyond three standard deviations are considered to be outlying or extreme values, and rarely occur in a normal distribution, although they are sometimes seen in compensation surveys. Not all data reported in real world surveys are in a normal distribution. This general rule of thumb can be used in many instances to understand compensation distribution. However, if compensation values are not in a statistically normal distribution the standard deviation should not be interpreted as above for other types of distributions. The reader is advised to seek advice about interpreting different types of statistical distributions, as variances may mean something very different, and a lengthy description is not practical for the purposes of this paper. The minimum value is the lowest occurring value in the compensation represented, and the maximum is the highest occurring value. A value listed as a percentile, such as the 25 th percentile, falls at the 25 percent mark of all the values 18

21 listed. Percentile values are useful in determining compensation, as a specific employee may be compared to a person performing at the 25 th percentile, or at the 75 th percentile. Reliability is, in statistical terms, the stability, internal consistency and equivalence of the information gathered. Benchmarking techniques There are at least four key concepts to address in reviewing benchmarking techniques: 1) Frequency of benchmarking, how often should it be done? 2) How to confirm that like comparisons are being made, 3) Internal and external benchmarking, and 4) What benchmarking methods can be used? Successful practices develop and consistently monitor compensation plans for staff members, using compensation surveys as tools. The availability of online compensation information has leveled the playing field between employer and employee when it comes to negotiation and job offers. The astute administrator will keep a finger on the pulse of compensation levels that are available online to the employee, as well as using good benchmarks, such as those from the state MGMA salary surveys. For most benchmarking in a stable employment market, annual reviews and benchmarking are sufficient. However, in a competitive market, more frequent benchmarking may be necessary. The survey is used as a good indicator of competitive compensation practices, but it is also important to have a compensation system in place in the practice for longterm practice strategy. 18 Salary surveys provide useful, comparative wage information for establishing external staff compensation pricing, and for internal equivalency. Compensation 19

22 information must be carefully matched and the results reviewed and analyzed to understand true comparability. It is not unusual for survey data to vary from one survey to another for any given job there is no one universal resource that has the correct answers. It is important for the practice administrator to define the germane labor market, assess the quality of relevant survey reports, and choose comparable data in order to obtain legitimate comparisons. Analyzing compensation surveys can also provide the practice administrator with awareness of the factors that actually influence salary and wages. By comparing compensation for the same position in various geographic or demographic areas, one can determine how compensation amounts vary and adjust to be competitive and attract competent staff. The analysis also helps to determine fairness to verify if there is internal equity between jobs. 19 A final step in the benchmarking process is to record the information source, along with the number of participants and data selected. Compensation ranges A significant part of compensation philosophy is developing salary ranges that establish the limits of worth or payment for jobs. Compensation ranges are commonly used to manage payroll costs and to provide an objective method of determining individual pay levels. A compensation range defines the minimum and maximum rate the practice will pay for a particular job. Compensation ranges enable employers to create a flexible structure for discriminating compensation based on individual performance, experience or knowledge important to the practice s success. Setting ranges helps to manage the size and frequency of merit increases, and also facilitates employees understanding of how 20

23 pay is determined and clarifies potential career progression. Other factors that influence compensation ranges are the practice s ability to pay and current labor market conditions. In small practices, salary ranges can be set for each individual job, but in larger practices it may be necessary to group similar jobs into categories. A formal salary range consists of a minimum, median and maximum. The minimum is the bottom rate that the practice will pay for a job, and may be for an entry-level employee. The median is often referred to as the market rate. The upper limit of the range, or the maximum, is where the practice can no longer justify additional increases for this particular job. The percent difference between the minimum and maximum of a range has no set standard. Depending on the compensation philosophy and the value of specific jobs to the practice, ranges can vary. Typically, lower-level jobs have smaller ranges in the percent category, while management-level positions may vary as much as 60 percent. 20 Compensation range computation methods can vary, and Tables 4, 5 and 6 offer three different benchmarking approaches that result in small variations in the ranges. These examples create a compensation range for a medical assistant based on the 2005 Utah Medical Group Management Association Staff Salary Survey Based on 2004 Data. 21 (See Tables 4, 5 and 6) The published hourly rate values for all medical assistants in the survey were: As illustrated in Table 7, using a reasonably selected range spread of 35 percent, Employees 143 Mean $ Standard Deviation $ 1.66 Minimum $ 8.00 Median $ Maximum 21 $ 16.25

24 the minimum level of compensation for a medical assistant would be $7.69, the midpoint would be the median, $10.99, and the maximum would be $ The range spread was selected based on a reasonable assumption of the variance between minimum and maximum values. With a simple computation outlined in Table 7, the range was computed to be $6.60. Table 8 demonstrates using a formula of 1/2 the range spread of 35 percent, or 17.5 percent, multiplied by the median. This produces a smaller range with higher values computed as a minimum of $9.07 and a maximum of $12.91, or a range of $3.84. In Table 9, the methodology uses the median, plus and minus the standard deviation, which creates a minimum value of $9.33 and a maximum value of $ The use of the standard deviation closely parallels the variation of the employees listed in the survey, and therefore puts the practice compensation range in a similar position as the Utah MGMA survey participants. Notice that the mean and median differ by only 28 cents, which puts these values in a nearly statistically normal distribution. Using the standard deviation raises the entire level of the range and also narrows the range. Any methodology that is consistent across job positions, and produces practical and equitable ranges can be used. Employers might also choose to adjust the median of their range up or down, depending on the compensation philosophy. A practice in a start up situation might want to move their median down to $10.80 to lower the cost for this position, use different methodology, or even broaden the range to 40 percent. This would accommodate a lesser expense for a newly hired employee, with more flexibility for frequent pay increases. Another practice, striving to recruit the highest performers 22

25 affordable might move their median up to offer an above market wage, or opt to use formula three in Table 5 to create a slightly higher range. The employer must decide how to position the compensation range medians in order to rate the relationship among jobs, and whether to broaden or narrow the ranges. Compa ratio The concept of comparing (benchmarking) internal compensation values within a specific job compensation range by using ratios is widely used. The term used for this comparison is called the compa ratio, and it describes the relationship of the observed salary in question to the midpoint of the compensation range. The compa-ratio can be used to compare how an individual is paid relative to a competent performer (the median compensation value) in the job. If the compa-ratio is 100% then the individual is being paid in line with a competent performer. If the compa-ratio is greater than 100% then the individual is being paid more than what a competent performer in the job would be normally. This analysis can be used to align an individual's pay with their performance and in this regard is a valuable tool in the implementation of reward for performance. A compa-ratio is the average of employee actual pay divided by the range midpoint. Salary range overlap The salary range overlap is the degree to which a pay rate appears in one job range and also in an adjacent job range and is determined through internal benchmarking. By varying the range widths and the difference between the medians, practices can manage range overlap. If there are too few differences in pay rates for 23

26 jobs in consecutive pay ranges, employees may not consider the additional responsibility worth the promotion to the higher level. A review of the literature shows varying rule of thumb ranges, but in general the recommendation is overlapping pay grades between 50 percent and 70 percent. 22 In the illustration in Table 10, using hypothetical information, the reader can see that job ranges for billing clerk, billing coder and billing supervisor are overlapping. For the billing supervisor position the highest hourly rate increases with responsibility so that at highest level in the billing supervisor position there is no overlap at the highest level. (See Table 10) By plotting each employee on the graph within the compensation range, the practice administrator knows how much flexibility remains for the individual employee, and can communicate that accordingly. (See Table 11) Open communication with the employee enhances trust and understanding of the practice s limitations for that job position, and takes a proactive stance. Discussing in advance the limitations of the position can avert instances of inflated compensation for employees who have remained in a single job position with the practice for many years. Together, the administrator and the employee can plan for the future. The relative value index compensation tool The relative value index compensation tool (RVICT) is based on the system of market-based pay, and introduces a method of comparing external benchmark jobs to other jobs. This ratio tool was developed by the author for the purpose of this paper to exemplify a way of using the state MGMA salary survey as a benchmarking resource. It differs from the compa ratio in that it is used with external benchmarking rather than solely internal benchmarking. 24

27 The creation of the tool was accomplished by combining research from seventeen states salary reports, together with other background gathered for this paper. The tool utilizes median compensation whenever possible as it is the measure of central tendency least distorted in compensation surveys. 23 In examining the state salary survey reports, it was determined that there are some key benchmark jobs found in all reports which carried, overall, matching job descriptions listing consistently larger numbers of responses, and therefore having greater reliability than jobs with fewer responses, among the total employees salaries listed. By using the Colorado Medical Group Management Association s Healthcare Staff Salary Survey: 2005 Report Based on 2004 Data, 24 a template was developed that recognizes the relationship of other jobs compensation to a consistent benchmark job. (See methodology in Table 8) A benchmark job is used here to make pay comparisons with other jobs, either within the practice or to comparable jobs outside the practice, to develop or validate a job evaluation hierarchy. In this example, the medical assistant position is used as the benchmark job. (See Table 9) The reader can see that the median medical assistant compensation in Colorado is $12.88 per hour. This compensation is assigned a value of Other jobs in the table represent an example practice. As each median compensation value is inserted, the value is divided by the constant, the median value for medical assistant, to compute its relative value in relationship to the medical assistant. Any benchmark position can be used in the same fashion, such as receptionist, licensed practical nurse, or registered nurse, as long as the position meets the criteria for a benchmark position. Using this quick and easy method, 25

28 the practice administrator can assess whether job compensation ratios are internally consistent with local market pricing. And, by incorporating the compensation philosophy listed on page 10, keep the relationships in line with the strategic direction of the practice. Table 10 shows examples of the median compensation relationships for medical assistant, receptionist, and registered nurse for several states. The reader can confirm that compensation rates do vary from state to state, although many of the individual state ratios are comparable. The lowest ratio of receptionist to medical assistant was.77 from Virginia and the highest was Tennessee at The simple average of all values is.92. For the registered nurse the lowest ratio value was 1.44 from Nebraska and the highest was Utah at The simple average of all values is The user of this tool might choose to use the ratio for his/her respective state, or the simple average of.92 as the relationship of receptionist salary to medical assistant, and the same logic for the relationship of registered nurse to medical assistant. Table 12 further emphasizes compensation differences by illustrating the hourly rates for the same three job positions. The information sources for these figures were provided by state MGMAs and were used with permission from representatives from the individual states. Without that information, this research would not have been possible. What does the future hold for employers? Medical practices must manage staff compensation, not only for today, but also be prepared for the future. By using many of the tools listed in this exploration paper, practices will be better prepared to adapt to the future changing business environment. 26

29 Statistics published by the Hay Group, an internationally recognized human resources consulting firm, indicate that 93 percent of admired organizations utilize both external and internal benchmarking to set compensation. Trends in these organizations indicate that using performance based pay concepts is increasing in use. 25 Performance-based pay requires greater scrutiny of pay ranges, and clear, fair performance goals that are accompanied by appropriate incentive compensation. Performance-based pay can better match overall practice productivity to individual reward, but will bring additional complexity to the group practice administrator for setting compensation ranges and computing payroll. Roger Herman, futurist and CEO of the Herman Group, advises employers to work hard to retain employees. It is important to understand what each staff member wants now and in the future. Evaluate the practice s current and future needs for staffing. Now is the time to build a team with depth for the future. 18 Summary This paper has addressed the support important compensation strategies such as attracting and retaining staff, reducing turnover, and maintaining equity and parity in staff compensation ranges for the small to mid-size practice. Large practices typically employ human resources staff who have expertise in computing and managing salaries, but the administrator in smaller practices must be his/her own resource. The MGMA state survey reports are excellent benchmarking tools available to medical practices that provide relevant quantitative information to use in developing a practice s compensation plan, and setting staff compensation. Examples of benchmarking methods were explained and actual information from the state MGMA 27

30 surveys was used to compare staff compensation levels. The author developed a tool that can be used to set compensation ranges within small to mid-sized practices. Any or all of these tools can be used to create a compensation plan for the medical group practice. Many state surveys publish additional valuable information on benefits and bonuses that is not addressed here, and there are also additional aspects of compensation that have not been addressed as they were not considered immediately relevant to benchmarking. The relative value index compensation tool was created as an example of using the state surveys to create a practical tool to assess compensation ratios within the practice. This tool illustrates only one method of using the state MGMA surveys. 28

31 29

32 TABLES (continued) TABLE 2 Median Hourly Values for Receptionists Median Variance Rate (See Note) Colorado $ % Indiana $ % New Jersey $ % Oklahoma $ % Utah $ % Note - Variance equals the percentage difference when compared to the lowest Median Rate. For example, Indiana's Median Rate is 13% higher than the Median Rate for Oklahoma. TABLE 3 TURNOVER CALCULATOR COMPONENTS Costs Benefits Separation costs Severance pay, administrative costs Vacancy costs Additional overtime, temporary help Replacement costs Recruiting, testing Training costs Performance costs Productivity lost during vacancy and transition Separation savings Annual bonus not paid Vacancy savings Open-position savings from salary and benefits not paid Replacement savings Lower salary and benefit costs for new hire New skills gained without additional training Performance benefits Productivity gain from higher performance, better skills match, new ideas 30

33 TABLES (continued) TABLE 4 Formula 2 Range Spread = 35% Minimum = 100% less 1/2 of Range Spread times Median Maximum = 100% plus 1/2 of Range Spread times Median Minimum = 100% less 17.50% times $ equals $ 9.07 Maximum = 100% plus 17.50% times $ equals $ TABLE 5 Formula 3 Minimum = Median less Standard Deviation Maximum = Median plus Standard Deviation Minimum = $10.99 less $ 1.66 equals $9.33 Maximum = $10.99 plus $ 1.66 equals $12.65 TABLE 6 Formula 2 Range Spread = 35% Minimum = 100% less 1/2 of Range Spread times Median Maximum = 100% plus 1/2 of Range Spread times Median Minimum = 100% less 17.50% times $ equals $ 9.07 Maximum = 100% plus 17.50% times $ equals $

34 TABLES (continued) TABLE 7 Per Hour Clerk Billing Coder Supervisor $ $ $ $ $ $ $ $ $ $ $

35 TABLES (continued) TABLE 8 Pay Range by Employee Pay per Hour $23 $21 $19 $17 $15 $13 $11 $9 $7 Clerk Coder Supervisor $ Employee Number 33

36 TABLES (continued) TABLE 9 Relative Value Formula 1. Determine benchmark job position. 2. Assign Relative Value of 1.00 to benchmark position. 3. To determine Relative Value for any other job position, divide the median per hour compensation for that position by the median per hour compensation for the benchmark position. Example 1. Benchmark position is Medical Assistant. 2. Relative Value for Medical Assistant is 1.00 and median compensation is $ Relative Value for Registered Nurse is 1.63, computed by dividing median compensation for Registered Nurse ($21.00) by median compensation for Medical Assistant ($12.88). TABLE 10 Example Practice Median Relative Job Description $ Per Hour Value Practice Administrator $ Physician Assistant $ Billing Supervisor $ Registered Nurse $ Office Manager $ Bookkeeper $ Billing Coder $ Insurance Clerk $ Billing Clerk $ Medical Assistant $ Scheduler $ Front Desk Combination $ Receptionist $ Records Clerk $ Benchmark job position is Medical Assistant 34