The above article applies to financial management in terms of attaining the objective of financial management, which is to maximize the wealth of stockholders Brigham and Houston, 2002). The case fact admits the “pay-for-performance schemes offer potential benefits to shareholders in the form of reducing agency cost by better aligning shareholder and managerial interests. ”
By analogy, reducing agency costs is one of the concerns of financial management because of possible conflict of personal goals with shareholder wealth maximization and managerial compensation is one of the specific mechanisms to motivate managers to act in the shareholders’ interest. The case fact further admits that said “systems offer benefits and risks that must be addressed if a system is to be effective”, which is an indication that there is a balancing act that must be done as in the case of effective financial management.
In the present case the doctors are being equated with managers of business organization. In business financial management the goal is maximizing shareholders’ wealth while in the case of doctors’ being motivated by providing treatment and follow up plans that could save billions of dollars and prevent unnecessary hospitalizations and deaths, the goals is minimizing health cost for the most effective health maintenance of patients. The doctors may not be working for the interest of health beneficiaries or patients if they are just being paid their fees without any bonus.
Such is the very reason why as per case facts, health care plans are adopting pay-for-performance systems whereby doctors are paid cash bonuses for providing treatment and follow up plans that could save billions of dollars and prevent unnecessary hospitalizations and deaths. By analogy, a manager in a business organization must obviously be given a specified salary, which is necessary to meet living expenses, a bonus paid at the end to the year, which depends on the company’s profitability during the year and even options to buy stock, or actual shares of stock, which reward the executive for long-term performance.
Managers would more likely to focus on maximizing stock prices if they are themselves stockholders (Brigham and Houston, 2002). In other words, when doctors are being motivated by being given bonus for “for providing treatment and follow up plans that could save billions of dollars and prevent unnecessary hospitalizations and deaths” they are just like finance manager’s being motivated to produce maximum wealth of stockholder.
In health what is measured it attaining good health that would prevent hospitalization and debts while in financial management the goal is increasing the value of stockholder. Like any other activity, providing bonus or incentive must be kept in balance. It cannot be done that a very big bonus should be given to the executive as would amount to depriving the stockholders in their share of the dividends which has the same basis as the bonus, that is, the profits earned the company for the year.
It is the very same issue in the instant case, whereby doctors and others are raising concerns over the fairness of pay-for-performance compensation to doctors and patients, allocation of income across doctors, gaming the system, and others in the instant case where it is estimated as per case fact that that the pay-for-performance compensation could account for 20% to 30% of what federal programs to pay providers in the next five to ten years.
Bonus of managers then must be reasonable and fair to stockholders. References: Brigham and Houston (2002), Introduction to Financial Management, Thomson South-Western, U. S. A. Case study, Module 1, Written Critique