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Physician Retention Bonuses
Retention bonuses have become commonplace inside and outside of the healthcare industry. These incentives are typically offered to high-demand, easily poached employees as a motivator to remain on the job for a minimum amount of time. Although they are sometimes lumped in with signing bonuses and forgivable loans, retention bonuses are different, and appraisers should analyze them separately when conducting a fair market value determination.
What is a Retention Bonus?
A retention bonus is a payment offered to incentivize a physician to remain on the job for a specific service period. Retention bonuses are often paid after a threshold period of service has been satisfied. If the retention bonus was paid upfront, the bonus must be repaid to the employer (in part or in whole) if the threshold service period is not completed. It’s important to note that retention bonuses are taxable in the year they are paid and are subject to the same income withholding and taxes, including Social Security and Medicare, at the physician's usual tax rate.
How Common are Retention Bonuses?
Many large companies, inside and outside of the healthcare industry, offer retention bonus programs. BuckheadFMV conducted online research into the nature of retention bonuses offered by physician employers. We found that three of the five main US military branches offer an annual retention bonus — from $12,000 to $60,000 — to medical officers who contractually agree to remain on active duty for two, three, or four years, depending on the length of active duty and their clinical specialty. [1] We also found that approximately 10% of private-sector online physician job postings mention a retention bonus — up from 5% when we checked in 2017. Although they aren’t ubiquitous yet, from our viewpoint, retention bonuses seem to be a growing trend among hospitals that employ physicians.
How Big are Retention Bonuses?
Across all industries, retention bonuses range between 10% and 25% [2] of a professional employee’s base pay. Based on our most recent physician-specific review of online job listings, retention bonuses for private-sector physicians range from $10,000 to $100,000 per year based on length of service, need, and specialty.
Signing Bonus Vs. Forgivable Loan Vs. Retention Bonus
Signing bonuses and retention bonuses can appear very similar. However, signing bonuses are often paid out prior to the start date, and retention bonuses are typically paid to employees already on the job. Signing bonuses also tend to require shorter service periods than retention bonuses.
Forgivable loans are another attractive incentive, but the difference between a retention bonus and a forgivable loan is that a retention bonus is a form of compensation, whereas a forgivable loan is a debt. Forgivable loans have certain tax benefits and can be forgiven (and taxes paid) when certain conditions are met (completion of a service period, for example). Unlike a retention bonus, a forgivable loan requires the physician borrower to sign a promissory note and accrue interest.
Don’t Forget Retention Bonuses When Reviewing for FMV
Given the significant dollars involved, it is important for employers with retention bonus programs to consider these payments when analyzing physician compensation for fair market value. It is also important to consider how the timing of retention bonus payments may impact the analysis. (And remember, retention bonuses are taxable compensation in the year payment is received.) Employers may find that retention bonus payments made at intervals throughout the service period, rather than in a large upfront payment, make it easier to stay within the fair market value range.
To consult about physician retention bonus structures and FMV physician compensation, contact us.
This article has been updated from February 2017.
[2] https://www.indeed.com/career-advice/pay-salary/retention-bonus and https://www.workhuman.com/blog/retention-bonus-agreement/
