Early Management Accounting Research

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Early Management Accounting Research

• Christopher D. Ittner
• The Wharton School
• University of Pennsylvania

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Early Management Accounting Research

• Quantitative models in managerial accounting
• Overhead allocation via mathematical programming
  (1971)
• Reciprocal cost allocation (1973)
• Overhead allocation with imperfect markets and
  nonlinear technology (1974)
• Investigation and significance of cost variances
  (1975)
• Applications of quantitative models in managerial
  accounting (1976)
• Activity analysis approach to unit costing with
  multiple interactive products (1980)

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Early Management Accounting Research

• Health care studies
• Patient incentives and hospital insurance (1972)
• Empirical analysis of the efficacy of a
  comprehensive health project (1972)
• Determinants of physician office location (1973)
• Management accounting in hospitals a case study
  (1974)
• Analysis and control of nurse staffing (1975)

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Early Management Accounting Research

• The wake up calls
• Measuring Manufacturing Performance A New
  Challenge for Management Accounting Research
  (1983)
• Yesterdays Accounting Undermines Production
  (1984)
• Evolution of Management Accounting (1984)
• Accounting Lag The Obsolescence of Cost
  Accounting Systems (1985)
• Must CIM be Justified by Faith Alone? (1986)

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Lessons Learned as Bobs Doctoral Student

• Focus on real-world problems
• Get out in the field
• Take research risks
• Be creative when identifying research sites or
  data outliers can provide the most interesting
  and insightful research opportunities
• Be interdisciplinary
• Learn to write well

6
Performance-Based Compensation in Professional
Service Firms

• Christopher D. Ittner
• University of Pennsylvania
• David F. Larcker
• Stanford University
• Mina Pizzini
• Southern Methodist University

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Motivation

• Agency theory provides the underlying model for
  most empirical research on reward systems
• Yet the degree to which compensation contracts
  reflect agency theory is still not fully
  understood (Prendergast 1999)
• Relatively little empirical research on
  professional service firms, where members can be
  both principal (partner) and agent (employee)
• Use a unique data set of member-owned medical
  group practices to extend our understanding of
  agency theory in contract design
• General agency theory
• Agency-based theories for professional service
  firms

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Advantages of Setting Medical Group Practices

• Groups operate in the same service sector, but
  compensation mix varies widely across and within
  firms
• Simple combinations of fixed salary and cash
  bonus
• Extensive physician-level data on factors
  predicted to influence compensation plan design
  (e.g., experience, task and work setting, etc.)
• Wide variety of management structures
• Joint by all partners
• Physician executive
• Management company

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Compensation in Medical Group Practices

• Salary guaranteed pay not dependent on clinical
  output
• Performance-based (bonus) pay based on clinical
  output
• Charges
• Relative Value Units (RVUs)
• Patient encounters
• Little use of outcome measures for bonuses in our
  sample

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General Hypotheses

• Salary/bonus mix influenced by
• Extent to which output-based bonuses can promote
  goal congruence between physician and group
• Informativeness of available clinical output
  measures
• Physicians experience
• Mixed theoretical predictions
• Groups ability to monitor physician
• Executive compensation literature focuses on
  ownership concentration
• Peer monitoring in partnerships

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Data

• Survey Medical Group Management Association
  (MGMA)
• 5,193 surveys mailed
• 1,609 useable responses
• 31 adjusted response rate
• We focus on member-owned practices 596 firms
  (9,851 physicians) after excluding
• Outside-owned practices
• practices with lt 4 members
• practices missing compensation data
• practices using equal shares for compensation
• Practice-level data, Physician-level data

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Use of Performance-Based Pay

• Percent of physicians pay based upon performance
• 0, if compensation is entirely salary-based
• 25, if 1-50 of compensation is based upon
  individual performance
• 75, if 51-99 of compensation is based upon
  individual performance
• 100, if 100 of compensation is based upon
  individual performance
• Results similar using ordered logit
• Categorical responses consistent with validation
  tests using group-level compensation and clinical
  output data

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Distribution of Physicians Pay Based on
Performance
Source MGMA
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Hypothesized determinants

• Capitation (-) of group revenues derived from
  capitation contracts
• Output-based compensation inconsistent with
  profit maximization under capitation contracts
  (goal incongruence)
• Staff hospital (-)indicator if group staffs a
  hospital department, 0 otherwise
• Little control over work flow, and hence,
  productivity team production (individual
  productivity measures will have low
  informativeness)
• Non-Clinical (-) percentage of physicians time
  devoted to non-clinical matters
• Reduces information content of standard clinical
  productivity measures
• lt2 years, 3-5 years, gt25 years (/-)1 if
  physician has experience level specified.
• Efficiency (-), Learning (-), horizon problems
  (-), Reputation, future earning (-), Selection
  ()

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Hypothesized determinants

• SIZE (/-) indicator variables for various
  practice size levels (number of physicians)
• Opportunity cost of monitoring, harder to monitor
  large practice (-)
• More physicians, greater mutual monitoring
  ability ()
• Same specialty (-) ln( in same specialty)
• The more alike, the easier it is to mutually
  monitor
• Management co. (-) indicator if group uses an
  outside management company
• Provide information to use in monitoring
• Physician executive (-) indicator if group has
  appointed a member to manage firm in exchange for
  equity interest
• Physician executive can act as monitor

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Hypothesized determinants

• Surgical specialty () 1 if in surgical
  specialty
• Harder to monitor because more complex than
  primary care
• Non-surgical specialty () 1 if in non-surgical
  specialty
• Harder to monitor because more complex than
  primary care ()
• Quality (-) indicator variable if the group
  bases any compensation decisions on quality or
  patient satisfaction

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Control Variables

• Weeks Worked/yr. equivalent number of weeks
  worked per year
• Female indicator if physician is female
• Location
• Regional 11 regions
• Metropolitan urban, suburban, rural

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Results
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Results (continued)
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Summary

• Contracts in physician-owned firms generally
  support agency predictions
• Performance-based pay ( at risk) is
• decreasing in the proportion of revenues derived
  from capitation plans (consistent with goal
  congruence)
• increasing in the information content of clinical
  performance measures
• decreasing in groups ability to monitor members
  Lower for part-time employees and females
• A common salary/bonus mix based upon individual
  performance is used
• in smaller, single-specialty practices
• in practices with a larger percentage of male
  physicians, a smaller percentage of inexperienced
  physicians, and those whose members exhibit
  little variation in non-clinical responsibility