We all know how difficult it is to find and retain great employees. Retention is an issue faced by most businesses, particularly those in client-facing industries where retaining talent can be the key to increasing profit and sustained growth.
Medical practices, particularly those who are engaged by practitioners ("independent practitioners") to provide services, are additionally tasked with maximising their appeal to those practitioners in order to generate service fees and ultimately increase revenue.
Types of incentives
Incentives are broadly categorised into two categories - non-equity and equity-based incentives.
Non-equity based incentives do not grant any ownership in the business that operates the medical practice. They tend to be governed by policies and the discretion of the business owners.
Equity-based incentives will grant an ownership interest to the employee or practitioner in the business, and will be governed by the relevant governance documents (for example, a Trust Deed or the Constitution and Shareholders' Deed of a Company).
When deciding what incentives to offer, you should consider:
1. The output of your employees or independent practitioners:
Is the output of the employee/independent practitioner measured in monetary outcomes, task achievement or something else? How can incentives be clearly linked to output?
2. What is the employee or consulting doctor most likely to be incentivised by?
Monetary compensation or additional benefits? Equity and profit distributions?
3. The structure of the business:
Is there a possibility of offering equity in a company or trust? Is this permitted by current governance documents? Are the existing owners in agreement? What are the plans for succession?
4. How to reflect and communicate these incentives; and
5. Tax and accounting considerations.
Generally, incentives should be measurable, clearly communicated and structured. Failing this, a practice may risk employees or independent practitioners becoming disincentivised or feeling unfairly compensated if expectations do not align with reality.
Non-equity incentives
The most common types of non-equity incentives are:
1. Discretionary bonuses.
Discretionary bonuses are awarded by a business entity at the discretion of the owners, based on a clear set of criteria. While these are flexible and generally simple to implement, they often "lag" behind the conduct of the employee or Consulting Doctor. Generally, these are inappropriate for independent practitioners based on the nature of the relationship between them and the practice.
2. Fixed value bonuses tied to monetary or Key Performance Indicators ("KPIs")
In contrast to above, these incentives are usually granted on the basis that an employee or consulting practitioner reach a particular milestone – for example "should the generated revenue exceed $X for the financial year, the employee will receive a $X incentive bonus payment".
There is inherently a difficulty in setting these bonuses as individual employees or consulting doctors may have different circumstances which lead to differing targets and incentive structures. This is particularly the case where an employee's output is measured by non-monetary KPIs.
Additionally, outstanding employees or independent practitioners may significantly exceed these targets and feel entitled to a higher bonus, or be disincentivised to continue to exceed output targets as no further incentive applies.
3. Percentage-based bonuses which commence over a threshold of output.
For example – "the employee incentive payment in each financial year will be 25% of the employee generated revenue over $600,000." In this case, for revenue generation of $700,000 the employee would receive a bonus of $25,000.00.
This structure provides further incentive as higher thresholds of performance are met. However, this structure of incentive is generally inappropriate where performance is measured by non-monetary KPIs.
4. Ratcheted bonuses, which increase over time as higher thresholds of output are met.
Noting that generally practices are engaged by consulting doctors (who receive their own medical revenue) these incentives can be adapted to vary the service fee percentages offered to the consulting doctors such that they retain a higher percentage of their own medical revenue.
This is particularly appropriate in circumstances where a consulting practitioner chooses to consult from the practice on a regular basis and accordingly their service fees exceed their proportionate consumption of the practice's fixed overheads such as premises rent and staff wages.
5. Profit share schemes
Whilst similar to discretionary bonuses for an individual, this incentive would entitle employees by virtue of their employment agreement, to some bonuses based on the performance of the Company overall and possibly additional payments on certain triggering events (i.e. a business sale etc).
These incentives tend to be more structured, but less flexible and also difficult to change or negotiate. They are most often suitable for executive employees as these individuals are likely to have some measure of control over the outcomes.
These profits are usually taxed at the usual marginal tax rates and may attract company taxes at the first instance.
Equity-based incentives
1.Special class share issues.
In contrast to Ordinary shares, which usually grant the holder voting power in the Company (subject to its governance documentation) the business owner may choose to grant different classes of shares which permit the payment of dividends but do not grant voting power, or any right to participate in the assets on winding up.
This type of incentive depends on the governance documentation of the company and the various decision-making powers to issue these special class shares.
2. Full voting-rights ordinary shareholding.
The Company may choose to offer Ordinary shares to an employee or consulting doctor.
These share issues or transfers come with the highest burden to all parties, including:
- ordinary shareholders have a right to access information pertaining to the Company.
- dependent on the threshold and governance documents, the shareholder may be entitled to appoint a director;
- the governance documentation will determine who can vote and how decisions are to be made within the Company, but some matters are reserved to a vote of shareholders pursuant to the Corporations Act 2001 (Cth) ("Corps Act");
- the voting power of the existing shareholders is necessarily decreased;
- minority shareholders have rights against oppression under the Corps Act which can be very expensive to defend; and
- Ordinary shareholders have the right to participate in the assets of the Company upon winding up.
The issue of these shares incrementally over time may also be an administrative exercise requiring the consent of the existing shareholders upon each issue. This can lead to a large volume of documentation for a comparatively small benefit.
Businesses should keep in mind that an inherent consideration to the grant of any form of equity or share participation is that every ordinary shareholder, even minority ones, have a say in the operation of the business/Company.
Specialist advice should be obtained and the current governance documents reviewed to ensure that your business' key objectives are achievable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
