The Compensation Debate: Salary vs. Benefits for Physical Therapists

Physical therapy practices face a significant dilemma regarding how to best compensate their therapists. Growing a business is challenging when your key contributors, who are in high demand and often in short supply, wear shoes and go home each night. Employers frequently find themselves caught between offering higher take-home pay or enhanced benefits, sometimes both. However, many conflate these strategies with employee engagement, leading to a cycle of increasing salaries and business margin impairment without addressing what physical therapists truly value (See this post on What Employees Want and this post for What Employers Want). The compensation debate is among the most critical dilemmas a practice faces since salaries, benefits, and wages constitute about 67% of the expense of a practice and hover around 50–55% of net revenue.

The Impact of Inflation

Adding to the complexity is the current impact of inflation. This has understandably shifted the focus towards take-home pay in overall compensation plans as employees have demanded it. The shortage of therapists has driven up salaries, and inflation has only magnified this trend. Over the past three years, inflation rates have soared from about 1.4% in 2020 to around 8.6% in 2022. This rapid increase in the cost of living has led many physical therapists to ask for higher pay to keep up with rising rents and soaring prices of essential goods, groceries in particular. In response, employers have increased or created various sign-on bonuses, implemented retention bonuses, and introduced various incentive plans, especially those linked to the productivity of a therapist. But the real question is whether these measures foster long-term employment or just serve as temporary fixes. In my view, throwing compensation at the wall and hoping something sticks is the fastest way to harm a business. Creating an overall strategy around compensation and having the discipline to stick with it and weather storms like inflation is a better pathway to competitive advantage.

We’ll delve deeper into what data and evidence tell us about compensation in Part II, but for now, let’s level-set the concept of total compensation, which includes both direct and indirect components.

Direct Compensation: Fixed and Variable

Direct compensation consists of fixed or base salary, known as take-home pay, and variable pay. Variable pay includes bonuses, commissions, or incentives, providing immediate financial rewards for hard work or going the extra effort to achieve. In recent years, employers have used variable pay through sign-on bonuses to attract and retain employees, often tying these bonuses to specific milestones. For instance, a $10k sign-on bonus might be structured as $5k at signing and $2.5k after two six-month periods. Various incentive bonuses, particularly those tied to productivity, have also been introduced alongside retention bonuses for longevity. Many employers have opted for variable pay under the belief that increasing base salary can be harmful to business, whereas variable pay can, in theory, create a “win-win.” While these measures address only direct compensation and employers recognize that variable pay offers flexibility in times of economic challenges and the inability to raise pricing, the second component, indirect pay, often holds more value and options for employees, yet it can also layer complexity for both employers and employees.

Indirect Benefits: Vast Options

Indirect benefits, or fringe benefits, encompass a wide range of non-monetary perks that enhance employees’ overall well-being. These benefits are particularly attractive as they are generally not taxable, making them even more valuable. The array of available fringe benefits can be overwhelming, and an entire industry of Human Resource consulting has been created to help employers make decisions. For the sake of convenience, we can categorize them to better understand their utility and ease of comprehension:

1. Health/Dental/Vision Insurance: High utilization, easy to understand.
2. Retirement Plans (e.g., 401(k) matching): Moderate to high utilization, moderately easy to understand.
3. Paid Time Off (PTO): High utilization, easy to understand.
4. Life and Disability Insurance: Low utilization, moderately easy to understand, perceived as “just in case” benefits.
5. Employee Assistance Programs (EAP): Low to moderate utilization, moderately easy to understand, although too many options often lead to inaction.
6. Tuition Reimbursement/Education Benefits: Moderate utilization, moderately easy to understand. Some programs take the form of a dollar amount for continuing education (CE) benefits, typically including Paid Time Off separate from the traditional PTO benefit. Other programs offer all employees some tuition assistance with furthering or obtaining additional degrees. In physical therapy, certificate programs, residency, and fellowship reimbursement is a hybrid of this benefit.
7. Wellness Programs (e.g., gym memberships): Moderate utilization, easy to understand — often discounted membership programs for local facilities.
8. Stock Plans: Low to moderate utilization due to complexity, includes stock options and purchase plans.
9. Deferred Compensation Plans: Low utilization, difficult to understand, mostly used for executive positions.
10. Celebration/Culture: High utilization, passive participation from employees. These are events or special perks (e.g., work anniversary gifts) that employers fund.
11. Student Debt Retirement: Varies in form, from taxable matching plans to IRS-approved plans. The IRS-approved plans are starting to be more popular in physical therapy due to the high debt load of PTs.
12. Other Benefits: Wide-ranging and can include pet insurance, adoption reimbursement, daycare.
13. Mandatory Employer Benefits: These are real employer costs and often not understood or appreciated by employees. Some are simply the cost of doing business and not really a benefit per se, such as professional liability insurance, worker’s compensation, social security and Medicare contributions, and state/federal unemployment contributions.

Benefit Percentage of Compensation

The percentage of salary that typically goes to benefits can vary widely based on the industry, location, and specific benefits offered by an employer. Generally, total benefits costs range between 20% and 40% of an employee’s base salary. According to the U.S. Bureau of Labor Statistics (BLS), benefits costs as a percentage of total compensation are typically around:

• Private industry: Approximately 30% of total compensation.
• State and local government: Around 37% of total compensation.

For physical therapists, benefits costs usually fall within this range. The annual mean wage for physical therapists per BLS is approximately $99,710. Factoring in benefits, which are typically about 30% of total compensation in private industry, a physical therapist’s total compensation package would include roughly $29,913 worth of benefits in addition to their salary.

Understanding the total compensation and how indirect pay contributes is crucial for employers. Often, the rush to match what competitors are doing to attract and retain physical therapists overlooks the importance of overall compensation strategy, and employers find themselves constantly shifting to play catch-up and compete for physical therapists in the market. This can inadvertently drive the cost of wages and benefits to such high proportions that the viability of the business suffers. The best employers are mindful of the relationship between direct and indirect pay and plan accordingly.

We’ll explore this, including evidence-based approaches to these challenges, in Part II.

@physicaltherapy