Medical groups often offer physicians retention bonuses or sign-on bonuses to gain a competitive edge. Are these bonuses worthwhile for the physician? What’s their purpose? How do we calculate their face-value?
You might be offered $50k as a sign-on bonus. This money is paid out to you as a lump sum or, more often, in multiple payment over the first year.
There are stipulations with these sign-on bonuses, depending on the medical group. One example might be that if you leave before year-1 then you have to pay the money back – often with interest. They can stretch it out as long as 3 years.
If you are fired from the medical group the same penalty will often apply.
A retention bonus is often a larger sum than the sign-on bonus. Sometimes it’s advertised as a student loan aid program. It’s an annual amount you get over several years.
A retention bonus of $150k might be paid out over 5 years. The medical group can keep you hostage for up to 7 years, if they wanted to. If you leave anytime before this timeframe you would owe the money back with interest.
Again, if you are fired because of a fault of your own then they can still enforce the payback.
For a couple of years after you get this bonus you are often indentured to your medical group, as we discussed.
The money is owed back to the medical group, often with a fine. This might be a percentage of the initial bonus. You may owe the money back as a lump sum or they might let you pay it back in installments.
The point is for the payback to be prohibitively large enough that most physicians won’t consider it as an option.
A friend recently told me that his $150k bonus would be owed back at $280k if she decided to leave that medical group early.
Transparency is important to me because I feel competent in my abilities to make the right decision for myself. I don’t like these complicated sign-on bonuses or retention bonuses because it intentionally limits my career mobility. Even a pension is designed to keep you employed with one employer for the long-term.
If an employer pays me a $250k salary then I know how much will go to taxes, how much in my pockets, and how much I can set aside for retirement.
With retention bonuses or sign-on bonuses it gets complicated. The number of stipulations attached to these are often prohibitive. Understandably so. The medical groups are trying to retain us – trying to make sure that they get their return on investment for onboarding us.
When it comes to deciding whether it’s beneficial for a physician to jump ship and take on a higher paying job at a competing medical group, it’s tough to account for the math.
Add to that having to work for X years before being absolved of payback, it’s damn near impossible to keep track of the numbers.
Finally, taxes add an extra layer of complication.
Taxation of Bonuses
Many think that bonuses are taxed differently by the IRS than regular income. That’s incorrect. Even though you have a higher percentage of the bonus withheld by the IRS initially, it gets paid back to you once you file your taxes.
Larger bonuses are best dispersed over several years due to the higher tax consequences. If I have $150k added to my base income of $250k then I would owe more taxes than if I am paid that $150k in three $50k installments in consecutive years.
But… but… but… when you have $300k in student loans at 7% annual interest then you are accruing interest year after year. For those with large debts, it’s far better to pay down the $300k loan with a $100k sign-on bonus or retention bonus in a lump sum.
How to Decide
Traditional Physician Household
If I had to generalize then I would say that a traditional physician household with 2.5 kids, an income earning partner, a high mortgage, 2 car payments, and $400k in student loan debt should be fine keeping their first job for 5-7 years.
The household above would can take on retention bonuses or sign-on bonuses because they will likely complete a long tenure at their first medical group.
For the single physician it’s a bad idea. If sign-on bonuses or retention bonuses are offered then inquire if you can take the bonus on after you serve your sentence at the particular medical group.
This will require HR to give you a document in writing that you can accept the bonus retrograde.
Otherwise, I don’t think it’s a good financial decision. A Family Medicine physician who can earn $300k a year won’t benefit much from a $150k retention bonus that’s paid over 5 years. The inability to move to a higher paying job is just not a good enough value proposition.
Availability of better jobs, higher paying jobs, and life circumstances just don’t make a 5-7 year commitment a good financial decision. We might start out thinking that we want the highest income possible and then later place lifestyle over our career.
Calculating a Face-Value
A $150,000 retention bonus after taxes will be worth around $90,000. This comes out to around 1,000 hours of work or 6 months of full-time work for a Family Medicine physician. Or 12 hours for a radiation oncologist, apparently. Fuckers! (said with love and admiration).
If you have to pay back this retention bonus then, unfortunately, you would have to not only pay a fine but you’d also have to earn quite a bit more to have that money in after-tax format in your account.
For example, if you were given $150,000 and have to pay back $200,000 then you have to earn nearly $350,000 to be able to afford paying back $200,000 to your medical group. Unfair, isn’t it?
If you work out a payment plan and can pay the money back over 5 years, it would come out to $40,000 a year. Can you find a job that pays $40,000 more per year and one that you enjoy more?
As you can see, the math gets complicated.