Part III: Economic Framework
When I started this compensation series, I intended to post on the current state, define direct vs. indirect, and provide a basis for crafting a compensation strategy in today’s challenging times of provider businesses, particularly physical therapy. Unfortunately, when you push on compensation issues, a ton of very related issues arise, thus making this a longer series than intended. The impact of inflation and shortages has begotten an entire additional challenge, retention, and indirect burnout, which now has to be managed as ignoring is catastrophic to a practice. A starting discussion on salary vs. benefits has a processional impact on creating a great workplace where people can flourish, be part of a team and mission, and are inspired to do great work. We have discussed in prior posts what employees want and what employers want, but compensation strategy has to be well thought out and executed to be effective. In Part I, we defined this debate and dilemma, and in Part II, we outlined the significant challenges and how employers are reacting (namely, the lever arm of variable compensation via productivity most commonly). It is now time to shift to crafting and resolving this dilemma. Thanks for the many messages necessitating this series, it has to be expanded to cover it comprehensively. In successive posts, we will examine creating a compensation strategy that incorporates some major phenomena including:
1. Incentives Influence Behavior (economic framework)
2. Motivation is Personal (the only way to know is to know)
3. Traditions (PT is not typically a variable pay job like sales or other medical providers)
4. Compensation as a Strategic Competitive Advantage
In this part III, we address #1 Incentives Influence Behavior. Compensation and crafting of incentives and benefits predictably positively influence behavior-sometimes, and others not so much, particularly their unintended consequences; for example, overly incentivizing visits will impact compliance and unwittingly burnout.
The implications of all this suggest that before you design a compensation and benefit plan, you need to choose and buy into an economic framework that supports and defends your plan. Your choices are between behavioral vs. traditional economics, which differ primarily in their assumptions about human behavior and decision-making processes.
Here’s a breakdown of the key differences:
1. Assumptions about Rationality:
- Traditional Economics: Assumes that individuals are fully rational agents who always make decisions to maximize their utility (happiness or satisfaction). This model is based on the idea of “homo economicus,” a perfectly rational and self-interested decision-maker.
- Behavioral Economics recognizes that individuals are often irrational and influenced by cognitive biases, emotions, social factors, and heuristics (mental shortcuts). It integrates insights from psychology to explain why people sometimes make decisions that deviate from the purely rational model.
2. Predictability of Behavior:
- Traditional Economics: Believes that behavior is predictable and consistent, following clear patterns based on rational choices.
- Behavioral Economics: Acknowledges that behavior can be unpredictable due to various psychological factors. It explores why people might make seemingly inconsistent or irrational choices, such as spending more with credit cards than with cash or underestimating the benefits of saving for retirement.
Suppose you have the perspective of a rational and self-interested decision-maker. In that case, you will take the position that all compensation that results in higher wages and higher opportunities for more “take home” pay via an incentive program based on visits will work. If you are a fan of the behavioral approach, you realize other factors are at play. My heavy bias and experience favor behavioral economics.
4. Policy Implications:
- Traditional Economics: Often suggests incentives-based policies, assuming that people will respond predictably to price changes, taxes, or subsidies.
- Behavioral Economics: Advocates for “nudges” and policies that account for human biases and behaviors. For example, automatically enrolling employees in retirement savings plans (with the option to opt-out) can increase participation rates, acknowledging that inertia and default options strongly influence behavior.
5. Scope of Analysis:
- Traditional Economics: Focuses on macroeconomic and microeconomic models, emphasizing broad economic indicators, markets, and large-scale economic behavior.
- Behavioral Economics: Often examines individual and small-group behavior, providing more granular insights into how people make decisions in real-world settings.
In summary, while traditional economics relies on the assumption of rational, utility-maximizing individuals, behavioral economics seeks to understand the psychological factors that influence real-world decision-making, leading to more nuanced and sometimes more accurate predictions of human behavior.
This is to say that when designing an overall compensation approach, remember you are dealing with human beings who aren’t always rational, have varying motivations (the subject of a separate post), and respond in various ways to policies, particularly incentives. Therefore, you must ensure all of this is considered in your plan.
To best summarize, I will end with this classic story to illustrate how incentives influence behavior. This story is a modern adaptation of a classic social psychology experiment from the field of behavioral economics, often referred to as a “reverse incentive” or “overjustification” effect.
The Story:
In a small town, there was an older man who lived alone. Every day after school, a group of children would pass by his house and, for fun, they began to harass him by soaping his windows, throwing trash on his lawn, and generally causing a ruckus. The old man was annoyed by this, but instead of getting angry, he decided to use an experiment to change their behavior.
One day, when the kids were up to their usual antics, the old man came out and said, “Hey, kids, I love the energy you bring to my day! I’ll give each of you $5 if you come back tomorrow and do the same thing.”
The kids were thrilled. They returned the next day, caused more trouble, and at the end of it, the old man paid them each $5.
This went on for a few days, with the old man cheerfully paying the kids to make a mess of his property. But then, after a week, he said, “You know, I’m an old man and my pension isn’t what it used to be. I can only afford to pay you $2 each now.”
The kids weren’t as excited, but $2 was still better than nothing, so they agreed and continued their mischief. The next week, the old man apologized again, saying, “I’m really sorry, but all I can give you is $1 now.”
The kids grumbled, but a dollar was still something, so they kept coming. Finally, after another week, the old man said, “I can only afford to give you 25 cents now.”
At this point, the kids were insulted. “25 cents?!” they exclaimed. “That’s not worth our time at all! We’re not going to waste our energy for just 25 cents!”
And just like that, the kids stopped harassing the old man. He had successfully used the decreasing incentives to shift the kids’ behavior from intrinsic enjoyment of their mischief to an expectation of monetary reward. Once the reward was low enough, their motivation disappeared altogether.
The Lesson:
The story highlights how external incentives can sometimes undermine intrinsic motivation. Initially, the kids were motivated by the fun of causing trouble. However, once money became involved, their motivation shifted to the financial reward. As the reward decreased, so did their motivation until it wasn’t worth it anymore.
For every provider on a productivity bonus and thriving in that environment, a significant number of PTs will despise the environment and quietly quit and find another job. Those who are on a monthly productivity bonus will also be surfing jobs that pay the same as their current base plus the material part of their bonus program
Shifting the incentive from purposeful, mission-driven work and compassion to economic incentives is a very real phenomenon and a byproduct of poorly crafted incentive bonuses. Unwittingly, an employer can contribute to burnout, retention problems, and a shift in their employee’s attitudes toward patient care . This certainly doesn’t mean you can’t have incentives that work. Still, you have to have an economic framework for your comprehensive program, particularly the underlying motivations of your providers- the topic in Part IV.
Thoughts?
@physicaltherapy
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Lastly, 100% of all proceeds from my book Called to Care: A Medical Provider’s Guide for Humanizing Healthcare goes to The Foundation for Physical Therapy Research
