A real options approach to clinical faculty salary structure.

One can use the option theory model originally developed to price financial opportunities in security markets to analyze many other economic arrangements such as the salary structures of clinical faculty in an academic medical center practice plan. If one views the underlying asset to be the portion (labeled "salary") of the economic value of the collections made for the care provided patients by the physician, then a salary guarantee can be considered a put option provided the physician, the guarantee having value to the physician only when the actual salary earned is less than the salary guarantee. Similarly, within an incentive plan, a salary cap can be thought of as a call option provided to the practice plan since a salary cap only has value to the practice plan when a physician's earnings exceed the cap. Further, based on analysis of prior earnings, the Black-Scholes options pricing model can be used both to price each option and to determine a financially neutral balance between a salary guarantee and a salary cap by equating the prices of the implied put and call options. We suggest that such analysis is superior to empirical methods for setting clinical faculty salary structure in the academic practice plan setting.