Performance-Based Compensation in Professional Service Firms

56 Pages Posted: 28 Nov 2003

See all articles by Christopher D. Ittner

Christopher D. Ittner

University of Pennsylvania - Accounting Department

David F. Larcker

Stanford Graduate School of Business; Stanford University - Hoover Institution; European Corporate Governance Institute (ECGI)

Mina Pizzini

Texas State University, San Marcos - College of Business Administration

Date Written: September 23, 2003

Abstract

The purpose of this paper is to extend our understanding of theoretical agency considerations in the choice of compensation contracts by examining the use of performance-based compensation in professional service firms. We focus on compensation practices for physicians in medical group practices because this setting has several distinctive features that enhance our ability to study a wide variety of agency issues. Our sample covers 16,659 individual physicians in 778 practices. Consistent with agency theory, we find that the extent to which individual physicians are compensated using performance-based pay increases with the informativeness of standard clinical productivity measures. Monitoring serves as substitutes for performance-based compensation, but only in member-owned firms. The use of a common salary/bonus mix for all physicians is greater in smaller practices with little diversity in practice specialties. Member-owned firms also tend to use a common compensation mix when surgeons represent a greater proportion of members and when physicians staff hospitals, but tend to tailor the mix when there is greater variation in physician experience and in the amount of time physicians spend on non-clinical activities. Finally, equal-share arrangements tend to be used instead of salaries and/or bonuses in more technical practices where physicians have similar specialties and experience levels.

Suggested Citation

Ittner, Christopher D. and Larcker, David F. and Pizzini, Mina, Performance-Based Compensation in Professional Service Firms (September 23, 2003). Organizational Economics of Health Care Conference 2003, Available at SSRN: https://ssrn.com/abstract=468340 or http://dx.doi.org/10.2139/ssrn.468340

Christopher D. Ittner

University of Pennsylvania - Accounting Department ( email )

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United States
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David F. Larcker

Stanford Graduate School of Business ( email )

Graduate School of Business
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Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Stanford University - Hoover Institution ( email )

Stanford, CA 94305
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Mina Pizzini (Contact Author)

Texas State University, San Marcos - College of Business Administration ( email )

San Marcos, TX 78666
United States

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