Question: Lowering employee pay in a financial turnaround

Our business has a unique opportunity to acquire a group of loss-making state owned medical clinics.

For an effective turnaround, our due diligence suggests that we will have to lower physician pay and benefits immediately. In the long run, we will need to move their fixed salaries to a pay-per-production model (similar to private practice).

How should we approach this topic with all stakeholders?

2 Expert Insights

Tying salaries directly to revenue may be a problem if, in fact it will take some time for the revenue to turn around. You may want to propose a sliding scale of profit sharing with higher upside revenue sharing. You may also want to look at some other interim alternatives to provide incentive compensation when you lower the base. Are there opportunities for gain-sharing based on other parameters? Is there an opportunity for patient satisfaction parameters that could be demonstrated as potential practice growth determinants? Is the hospital engaged in any alternative reimbursement approaches like ACOs or bundled payments? Perhaps the specialty groups could take the lead (and the lion's share of potential profits) in these new models.

It occurs to me that you have two problems to solve - the presenting problem, as it were, is physician salaries.  The strategic problem is developing and implementing a cost model that is sustainable.  

If you need to make drastic changes - e.g. replacing physicians on a large scale with PAs or other mid-levels or something similar, then get your financial stakeholders on board and wield the ax.  It will be painful, but there's not much sense in trying to get people on board with an idea that is only going to be cataclysmic to them anyway. If you have already figured out all the process changes and determined that the last remaining solution is simply a salary cut, then make the case and make the cut and move on.  These ideas may seem draconian, but it will go over worse with physicians if you're simply going through motions with them.

If, however, your changes are significant to moderate and you need input on process changes, then by all means get physicians on board with you and challenge them to solve the problem. They may prefer to eliminate a position and spread the work differently in order to preserve high salaries of performers and use the opportunity to get rid of dead wood.  They may agree to share the pain. but in any case, they will be more likely to both create a a better solution and buy in to implementation if you involve them.

I'm not sure about tying physician salaries into clinic revenues. If the physicians can influence revenues, then do it.  They may be able to implement process changes to improve patient throughput if demand is high. But if they can't affect throughput or demand, why explicitly tie it to pay?

This is obviously a sketch of ideas; I'm certain the real-life problem is more complex.  Happy to discuss further if you want to get in the details a little further.