Signing Bonuses Should Sit Out of Total Annual Compensation in a Fair Market Value Stacking Analyses

Signing bonuses are long-standing recruitment incentives used by hospitals to attract physician employees. The term “signing bonus” can be a catchall that describes forgivable loans, relocation assistance, and other payments that employers offer prospective physicians. For this discussion, a “true” signing bonus means a one-time lump-sum payment provided as an incentive to sign an employment contract. It can be paid when the physician signs their contract or starts work. It can also include a repayment provision in case of early termination; however, it doesn’t come with a promissory note.

In Revenue Ruling 2004-109, the IRS says that bonuses paid for signing or ratifying an employment contract are employment wages subject to FICA, FUTA, and federal income tax withholding. Therefore, signing bonuses, whether pre- or post-employment, are W2 wages. This holds even if the signing bonus is paid in a different tax year than when the employee starts work.

When an employer pays a “true” signing bonus to a physician, our approach to evaluating the signing bonus typically involves looking at the bonus on a stand-alone basis, separate from other compensation. Physician compensation surveys and several recruiting firms report on signing bonuses paid to physicians, so there are plenty of benchmarks for comparison. In some cases, signing bonus benchmarks are broken out by specialty and reported in quartiles. The appropriate benchmark level is often determined by market factors such as the organization’s time and difficulty to recruit and physician-specific factors such as training and experience.  

Looking at the signing bonus separately from other compensation components may seem antithetical to the stacking analysis concept, which is an essential consideration in physician fair market value analyses. A stacking analysis contemplates all compensation components being offered to a physician and determines whether, once all stacked together, total compensation is fair market value.

The primary rationale for excluding a “true” signing bonus from a physician’s annual compensation in a stacking analysis is that “total compensation” benchmarks in well-known and widely used physician compensation studies generally do not include them. While total compensation is defined in these surveys as W2 compensation – and signing bonuses are W2 compensation – newly hired physicians (i.e., the physicians receiving signing bonuses) are largely not included in the “total compensation” sample. Instead, data for newly hired physicians are typically culled out and reported separately.

Consequently, including a “true” signing bonus in total annual compensation for a stacking analysis will likely result in a faulty comparison – and physician compensation measuring higher than it should be within the fair market value range.