A real options approach to clinical faculty salary structure

Area of Science:

• Financial Economics
• Health Economics
• Academic Medicine

Background:

• Clinical faculty salaries in academic medical centers are complex.
• Current salary structures often rely on empirical methods.
• Incentive plans involve salary guarantees and caps, creating financial risks and rewards.

Purpose of the Study:

• To apply option pricing theory to analyze clinical faculty salary structures.
• To demonstrate the utility of financial models in academic medical practice plans.
• To propose a financially neutral method for balancing salary guarantees and caps.

Main Methods:

• Utilizing the option theory model, originally developed for financial markets.
• Viewing physician salary as the underlying asset.
• Applying the Black-Scholes options pricing model to value salary guarantees (put options) and salary caps (call options).

Main Results:

• Salary guarantees function as put options for physicians.
• Salary caps function as call options for practice plans.
• The Black-Scholes model can price these options and determine a neutral balance point.

Conclusions:

• Option pricing theory provides a robust framework for analyzing clinical faculty compensation.
• This financial modeling approach offers a more objective and superior alternative to empirical methods.
• Implementing option pricing can lead to more equitable and financially sound salary structures in academic practice plans.