You are recruiting Dr. Adams, an Interventional Cardiologist, to your health system and are reviewing the compensation package put forth in his letter of intent. Aside from his compensation, he is requesting up-front payment for tail insurance, relocation, and sign-on bonus amounting to $200,000 on day 1. You review your fair market value (FMV) support and wonder if it has considered the total compensation, inclusive of the up-front payments, appropriately?
Health systems execute employment agreements with physicians daily across the country. These agreements can vary significantly from health system to health system, specialty to specialty, as well as physician to physician. In the case above, Dr. Adams’ up-front payment for tail insurance, relocation, and sign-on bonus is being highlighted. These payments are often a part of the overall physician transaction. As such, compensation professionals are left with the decision as to how to handle these payments in terms of compliance. Below are a few items for consideration.
Types of payments
As in the Dr. Adams case, typical up-front payments include sign-on bonuses, retention bonuses, student loan payments, relocation reimbursement, and tail insurance. These payments are paid at a face value less any applicable w-2 withholdings / taxes. This important to understand in order to accurately convey to the physician. In cases where the physician wishes to receive the face value, the total up front payment needs to be grossed up for these applicable w-2 withholdings / taxes.
Amortization
The full up-front payment is paid at the onset of the agreement, however, it is often amortized over the term of the agreement. For instance, table 1 illustrates a physician receiving a sign-on bonus of $30,000 with a three-year employment agreement. As a such, the $30,000 payment will be amortized over 3 years resulting in an effective $10,000 amortization payment per year that needs to be accounted for in that year’s FMV compensation support.
Table 1: Amortization of a Sign-On Bonus
| Base / Quality / Production Compensation | Amortized Sign-on Bonus | Total per Year (To be supported by FMV) | |
| Year 1 | $400.000 | $10,000 | $410,000 |
| Year 2 | $400,000 | $10,000 | $410,000 |
| Year 3 | $400,000 | $10,000 | $410,000 |
| Total | $1,200,000 | $30,000 | $1,230,000 |
Re-Amortizing One-Time Payments
Physicians and hospitals will on occasion enter into a new agreement prior to the term of the initial agreement. In table 1, should this occur at the end of year 2, the physician would still have $10,000 in unamortized sign-on bonus. If the new agreement is for 3 years, what happens to the unamortized $10,000? There are two choices that we often see: a) maintain same amortized payment per year of $10,000 and have it fully satisfied at the end of year 3 (or year 1 of the new agreement) or b) re-amortize the remaining balance of $10,000 over the new 3 year term, thereby diluting the annual amortization payment down to $3,333 per year. In the latter case, the sign-on bonus is not fully satisfied until the end of the new agreement. Be sure not to re-amortize the remaining balance and maintain the same date to fully satisfy the physician’s payback obligation.
Table 2: Re-Amortizing One-Time Payments
| Current Agreement Amortized Sign-on Bonus | New Agreement Amortized Sign-on Bonus | Total per Year (To be supported by FMV) | |
| Year 1 | $10.000 | $0 | $10,000 |
| Year 2 | $10,000 | $0 | $10,000 |
| Year 3 | $0 | $3,333 | $3,333 |
| Year 4 | $0 | $3,333 | $3,333 |
| Year 5 | $0 | $3,333 | $3,333 |
| Total | $20,000 | $10,000 | $30,000 |
Is the sign-on bonus within FMV?
In answering this question, your policy should consider the physician department/specialty as well as the amount of the bonus. We recommend reviewing the available survey data and paying close attention to the specialty of the physician whom you are providing the sign-on bonus. For instance, it may be within the 75th% to pay a sign-on of $75,000 to a Neurosurgeon, but only up to $30,000 for a Family Medicine physician. Not saying that $75,000 cannot be paid to the Family Medicine physician, however, you would probably need to justify it given the potential survey data. As a result, we would recommend that you set policy on a specialty-by-specialty basis and consider other unique characteristics of the individual physician (i.e. physician instructor vs Chair of Department in an academic setting).
Paying in excess of the survey data
If you do choose to pay in excess of the survey data, you would want to consider the potential of the excess sign-on bonus being seen as a no-interest loan. As such, the physician could be receiving an undue benefit. As such, we would recommend that you consider factoring in some amount for interest based on prevailing rates in these cases where the sign-on bonus amount is in excess of norms. This interest amount can go against the available dollars left over for physician compensation
