April 1997 Bulletin

Common causes of concern, responses to net income bonus method

Although the net income method is likely to be preferable to the percentage of collections methods for many orthopaedic practices, it may raise some concerns. Three common concerns - and responses - follow:

First concern: To demonstrate that the bonus is calculated correctly, the established physician must reveal his or her income to the new associate at the end of the first bonus period. Some established physicians may be uncomfortable showing a new associate how much more money they make than the associate makes; other established physicians simply balk at revealing this type of sensitive information.

Response: Yes, at the end of the first bonus period, the established physician will have to tell the new associate his or her earnings, but this is not really bad for the established physician. Showing the new associate that your practice is profitable should assure him or her of its stability and motivate the new associate to work hard to eventually enjoy the same level of success.

You will ultimately be required to reveal the practice's finances, including physician salaries, to the new associate if you offer him or her practice co-ownership in a year or two. So the net income bonus simply requires you to reveal information a bit earlier than you might prefer.

Second concern: Making the new associate's salary increase contingent on an increase in my own income may not sufficiently motivate the new associate.

Response: The percentage-of-collections approach is likely better than the net income bonus in terms of motivating hard work, provided it is structured to be attainable. However, this benefit may be outweighed by the potential financial penalty to the senior physician(s).

Remember that paying a market-competitive base salary, offering the prospect of future partnership and income sharing, and providing the new associate with an opportunity to gain invaluable practice experience should be sufficient to motivate the new doctor to work hard.

Also remember that you can adjust the net income formula to make the bonus more attainable by decreasing the bonus threshold to a figure lower than 100 percent or 105 percent.

Third concern: To hire a new associate, it will be necessary to invest substantially in new equipment, more staff and more office space. Those expenses may artificially depress the established physician's pre-associate net income level, which will generate an overly generous bonus to the new associate when the practice's income returns to "normal" in the following year, which is the new doctor's first year of employment.

Response: Remember that the net income bonus is based on net practice receipts minus tax deductible expenses, which include depreciation. In the year of equipment purchase, the charge to your taxable income for the newly acquired items will be the first year depreciation allowance on these items, which is less than their full cost. In the following (bonus) years, you can again claim a depreciation allowance on recently acquired items. Under those circumstances, the one-time pre-associate expenses the practice incurs should cause no real negative consequences, in terms of the bonus.

- Daniel M. Bernick, JD

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