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Adapting Industry-Style Business Model to Academia in a System of Performance-Based Incentive Compensation

Reece, E Albert MD, PhD, MBA; Nugent, Olan MS; Wheeler, Richard P. MD; Smith, Charles W. MD; Hough, Aubrey J. MD; Winter, Charles PhD

doi: 10.1097/ACM.0b013e31815c6508

Performance-Based Incentive Compensation (PBIC) plans currently prevail throughout industry and have repeatedly demonstrated effectiveness as powerful motivational tools for attracting and retaining top talent, enhancing key indicators, increasing employee productivity, and, ultimately, enhancing mission-based parameters. The University of Arkansas for Medical Sciences (UAMS) College of Medicine introduced its PBIC plan to further the transition of the college to a high-performing academic and clinical enterprise. A forward-thinking compensation plan was progressively implemented during a three-year period.

After the introduction of an aggressive five-year vision plan in 2002, the college introduced a PBIC plan designed to ensure the retention and recruitment of high-quality faculty through the use of uncapped salaries that reflect each faculty member’s clinical, research, and education duties. The PBIC plan was introduced with broad, schoolwide principles adaptable to each department and purposely flexible to allow for tailor-made algorithms to fit the specific approaches required by individual departments.

As of July 2006, the college had begun to reap a variety of short-term benefits from Phase I of its PBIC program, including increases in revenue and faculty salaries, and increased faculty morale and satisfaction.

Successful implementation of a PBIC plan depends on a host of factors, including the development of a process for evaluating performance that is considered fair and reliable to the entire faculty. The college has become more efficient and effective by adopting such a program, which has helped it to increase overall productivity. The PBIC program continues to challenge our faculty members to attain their highest potential while rewarding them accordingly.

Dr. Reece is vice president for medical affairs, University of Maryland, and John Z. and Akiko K. Bowers Distinguished Professor and dean, University of Maryland School of Medicine, Baltimore, Maryland. He was vice chancellor of the University of Arkansas for Medical Sciences and dean of the College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Mr. Nugent is executive associate dean for finance and administration, College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Dr. Wheeler is executive associate dean for academic affairs, College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Dr. Smith is executive associate dean for clinical affairs, College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Dr. Hough is associate dean for translational research and special programs, College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Dr. Winter is associate dean for research, College of Medicine, University of Arkansas for Medical Sciences, Little Rock, Arkansas.

Correspondence should be addressed to Dr. Reece, 655 W. Baltimore Street, Room 14-029, Baltimore, MD 21201; telephone: (410) 706-7410; fax: (410) 706-0235; e-mail: (

The College of Medicine at the University of Arkansas for Medical Sciences (UAMS), like many other academic medical centers (AMCs) across the nation, faces diverse challenges, such as meeting patients’ demands for optimal health care while compensating all faculty fairly and equally, regardless of their particular area of expertise. Likewise, UAMS faces increasingly complex state and federal regulations. In recent years, the growing pressure placed on AMCs to meet these challenges has often threatened their financial stability and even their very existence. Performance-based incentive compensation (PBIC) systems, well-established business models in industry, have proven effective in achieving improved productivity, efficiency, quality of products, and workplace morale in industry settings and offer a solution to financial challenges in the AMC environment as well.

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Making the Case for Using PBIC in AMCs

PBIC is not a new concept. In fact, in the early days of the United States, all pay was performance related: if a farmer slept all day or failed to produce a successful crop, he earned nothing. This concept carried over as industrialization gained momentum in the form of factory piecework. However, in the early 1900s, labor unions began to demand uniform wage increases for everyone; thus, pay raises often became a demonstration of the union’s strength rather than a reward for increased productivity.1 Consequently, having widely varying compensation among employees of the same rank based on performance became prohibited and unacceptable.

In recent decades, as cost-of-living salary increases have dwindled, performance-based compensation has reemerged as a viable option to reward valuable employees and to link compensation with results. Various formulae exist, but their goals are the same. They are designed to (1) make a portion of salaries variable rather than fixed, (2) motivate employees to earn more and thus generate more revenue, (3) target key performance indicators that the organization wishes to enhance, and (4) highly compensate the most productive employees.

PBIC plans currently prevail throughout industry and have repeatedly demonstrated effectiveness as powerful motivational tools for attracting and retaining top talent, enhancing key indicators, increasing employee productivity, and, ultimately, increasing profits. Incentives, in the form of performance-based bonuses and stock options, are commonly believed to be important motivators for executive-level employees and, as a result, are also believed to enhance the firm’s overall performance.2

Similar incentives may contribute to enhanced long-term performance at academic medical facilities by motivating faculty and staff to excel in their professions,3 whether in a clinical, educational, or research setting. Yet, despite their success in industry, PBIC plans have been slow to take hold at AMCs. This may be at least partially because the AMC setting presents many situations where performance can be difficult to measure. For example, traditional clinical measures provide little or no information about faculty involved in research or education. It is also difficult to monitor the activity of highly specialized physicians who often treat nonroutine ailments that may not have an established medical protocol or benchmark performance.4

On the other hand, increased competition from other health care systems, as well as decreases in external funding, have already prompted a growing number of health care organizations to reward staff and faculty with performance-based incentive pay in addition to a base salary. According to the Association of American Medical Colleges (AAMC) 2002 survey of faculty personnel policies, 80 of 125 U.S. medical schools now offer some type of salary bonus or incentive policy for basic science faculty,5 some of which are simply one-time recognition awards for teaching or research excellence. Regrettably, as has been demonstrated in both corporate and academic settings, this type of recognition program has a limited impact because it tends to recognize only a handful of individuals, does not change behavior, and does not motivate people to perform at higher levels prospectively.6 Thus, this type of program does not link an individual’s paycheck directly to performance the way industry-model salary incentive programs do.

Where PBIC plans do exist at academic medical institutions, they have historically tended to be relatively simple combinations of a fixed salary and an annual or semiannual cash bonus.4 Studies have shown that most large medical facilities prefer common compensation plans for all members, and these use the same salary/bonus mix for large groups of faculty. These plans may work well when faculty have similar backgrounds, skills, and risk preferences, but they are not as effective when faculty show a greater diversity in their tasks and characteristics,4 such as would be found among the various scientists, clinicians, and educators at a typical academic medical institution.

Linking pay to performance should be a top priority for AMCs, which need to change their view of compensation from the “cost of doing business” to one that considers compensation as a functional tool that supports the organization’s strategic plan.7 For example, academic departments of internal medicine that use well-thought-out, performance-based compensation programs have demonstrated their ability to compete more effectively for extramural research support and access to patients while successfully preserving their teaching mission.8 As a result of such programs, these departments have additionally been able to achieve the following outcome parameters:

  • ▪ increase the compound annual growth rate for clinical work;
  • ▪ increase federal funding, because award incentives encourage research faculty to obtain more grants;
  • ▪ improve National Institutes of Health (NIH) rankings through greater research efforts; and
  • ▪ improve teaching effectiveness when compensation is linked to student evaluations and performance on standardized examinations.

The UAMS College of Medicine introduced its own PBIC plan to further the transition of the college to a high-performing academic and clinical enterprise. A forward-thinking compensation plan was progressively implemented during a three-year period. It was modified as needed to meet the unique and diverse situations found within the various departments. As a result, continued improvement in several parameters is being realized as performance among the college’s key mission areas is emphasized, monitored, and measured. Faculty compensation is not capped in the existing system; rather, it is linked to these ever-improving performance parameters.

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Managing the Components and Implementation of the PBIC

The various departments within the college of medicine at UAMS have historically followed the general trend of AMCs in the United States; that is, the college has had in place for the past several decades a common compensation plan that was primarily arranged around a fixed base salary, and in some instances, a fixed bonus as well.

In 2002, the college implemented an aggressive five-year vision plan that established college-wide goals encompassing all of its departments and covering four vital areas: (1) research and technology, (2) education, (3) clinical care, and (4) philanthropy and finances. After the introduction of this plan, the college concluded that a transition to an industry-type compensation model would most effectively benefit all of the vision plan’s mission areas as well as faculty in each of its departments.

The PBIC plan used by the college is designed to ensure the retention and recruitment of high-quality faculty through the use of uncapped salaries that reflect each faculty member’s clinical, research, and education duties. It was decided to implement the plan in three phases. Phase I, which is the focus of this article, was the pilot phase that targeted primarily clinical and research programs. Phase I began in 2002 and is ongoing. Phase II, implemented in 2006, has three targets: (1) review of all existing departmental plans, (2) emphasis on teaching and academic citizenship, and (3) inclusion of department chairs in each departmental plan, with emphasis on leadership and overall department accomplishments toward the college’s five-year vision plan. Phase III, expected to begin sometime in 2007, will give the college and individual departments the opportunity to adjust the vision plan to meet desired objectives specific to the individual unit.

When the PBIC plan is introduced to a department, broad, schoolwide principles are adapted to that particular department by creating an individual incentive plan. Each department administrator works with the college’s executive associate dean for finance and administration to complete a plan. Each plan is reviewed by the dean’s office, and, once approved, the dean’s office guarantees the plan financially for the first year, in that faculty will be paid their calculated incentive bonus either from the departmental budget or from the college’s funds. Plans are administered by each department’s business administrator and centrally monitored by the dean’s office.

The plan is purposely flexible to allow for tailor-made algorithms, developed by each department and central administration, to fit the specific approaches required by individual departments. Participation in the plan is mandatory.

In each department’s plan, a base salary is established for each faculty member, determined by that person’s academic rank and seniority; contributions to medical student and resident education; service to the department, college, and university; good citizenship; and other issues pertinent to each faculty member, the college, and university. The base salary is paid in monthly increments and is not at risk of being withheld as long as that faculty member continues to hold his or her current position and is in good and regular standing.

The incentive salary is provided by general funds from either the faculty member’s department or the college of medicine, not from grant funds. An incentive salary consists of at least four individual components of the faculty member’s performance, which are measured and weighted according to criteria relevant to each department:

  1. Productivity in clinical practice. Clinical productivity is measured using relative value units (RVUs), which are calculated separately for each department and division. In addition, other newer measures, including quality of care indices, patient satisfaction resource use, and adherence to evidence-based guidelines, are now added to existing plans.
  2. Research (basic and clinical) activities. Research productivity, such as salary support from grants and contracts in clinical departments, is converted to the RVU system on the basis of the amount of support (percent of effort) a scientist receives from each grant.
  3. Academic performance. Academic performance is determined using student evaluations and reviews of how students perform on nationally standardized examinations. Measures also include academic teaching (teaching hours), such as residency or medical student program involvement, journal club, and grand rounds participation. Further measures include awards and recognition and scholarly activity, such as publications in peer-reviewed journals, presentations at national and international meetings, book chapters, and participation on editorial boards. Time effort in teaching preparation is not directly evaluated; however, it may be indirectly reflected in other identified parameters, such as student evaluations and test scores. If a faculty member teaches only one small segment within a possibly interdisciplinary curriculum, multiple factors, including student evaluations, course credit, teaching hours, and test scores, are used to determine his or her incentive.
  4. Academic citizenship efforts, including the promotion of the strength and soundness of the faculty member’s department and the college of medicine. Academic citizenship criteria include overall cooperation within the department and college, committee participation, and compliance with departmental, college, and university policies.

These four components are measured and awarded separate incentive pay. Therefore, a faculty member may receive incentive pay in one area in which he or she excels but may not realize incentive pay in another. Incentive salaries may be paid quarterly or semiannually at the discretion of each department. Annual reviews are conducted by each department chairman for all faculty to facilitate communications about ongoing faculty performance and to discuss individual accomplishments on clinical, educational, and research levels. In addition, each year during the college’s budget hearings, the plans and their effects are reviewed by college administration. Concerns are addressed, and necessary revisions to individual department plans are made.

The efficiency and effectiveness of the UAMS’s PBIC programs are achieved by the carefully designed, clearly specified, and conscientiously administered incentive compensation plan. Particularly, the detailed incentive salary measurements cover all the aspects of an academic medical institution. These measurements are achievable by individual faculty, but they also reflect the missions, goals, and objectives that are vital to the success of UAMS as a whole.

To be effective, the results of a PBIC implementation must mirror the improvement of individual performance as well as institutional performance. To that end, the UAMS’s PBIC plan has achieved three significant results during the last five years: (1) an increase in revenue and faculty salaries, (2) improvement in extramural research funding, and (3) increased faculty morale and satisfaction. To further ensure success and improve the implementation of the incentive plan, the PBIC plan has been introduced in three phases, as discussed above. Annual departmental reviews, college-wide faculty surveys, and annual college administration reviews form the basis for revision of individual departmental plans and consequently facilitate the overall improvement of the UAMS’s PBIC program.

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Measuring Outcomes and Monitoring Changes

In May 2006, a college-wide faculty survey was administered to determine faculty satisfaction with Phase I of the PBIC plan to that point. A summary of the survey report follows.

As of July 2006, the UAMS College of Medicine had begun to reap a variety of short-term benefits from Phase I of its PBIC program, including increases in revenue and faculty salaries. In some areas within the college, the plan is still too new to measure results effectively. As with any major reorganization, some “growing pains” have been noted. Fortunately, the plan includes an effective monitoring system, and concerns are quickly addressed as they materialize.

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Alignment of structure, function, and governance within the college

The college’s PBIC plan has become very effective in aligning the activities and priorities of the faculty with those of each department’s leadership. In turn, this has helped each department to meet more effectively the overall goals set by the college. This is most evident by faculty placing greater emphasis and measurable time in areas where added compensation may be derived. Because of this, PBIC plans must be carefully thought out.

The above accomplishments have been attained, in large part, because of the uniform standards of compensation set by the plan, based on the emphases set by the college and the rewards given for certain specific performances. Through the PBIC plan, the college established that faculty members’ compensation will be within 10% of the total median salary for faculty in other medical schools across the nation within their specific disciplines, based on data published by the AAMC. The incentive bonus would be additive and based on a series of performance measures. Using such an approach, systematic principle exists across the college and less concern arises about salary inequities, because differences are not subjective but, rather, are related to performance.

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Realignment of financial resources

Because compensation to individual faculty members is essentially based on a profit margin, the PBIC plan has had a significant positive effect on departmental budgets. The changes in charges and payments for several clinical departments from FY2002 to FY2006 are reflected in Tables 1 and 2, respectively.

Table 1

Table 1

Table 2

Table 2

The current five-year period (2002–2006) had an annual rate of growth of 5.51%, with an overall five-year growth rate of 30.74%. In contrast, the preceding five-year period had an annual rate of revenue growth of 2.25%, with an overall rate of 11.77%. In that preceding five-year period, prior to PBIC implementation, the slower rate of revenue growth was apparently attributable to various contributing factors. These contributing factors are out of the scope of the present report and, therefore, are not discussed. Although causes of revenue growth are clearly multifactorial, the direct association between the introduction of PBIC plans and increased departmental revenue performance was striking, thus resulting in a robust, college-wide, enhanced fiscal performance.

Under the structure of these plans, each faculty member has a strong incentive to achieve a greater level of performance and profitability. In Phase II of the plan, which was launched in 2006, department chairs are now being paid according to a series of indicators, primarily through the achievement of priorities established in the college’s Five-Year Plan, along with other measures of department leadership, academic accomplishments (teaching and research), and fiscal profitability.

As an added benefit of this increased profitability, each department is better able to meet its own financial needs, thus requiring less assistance from the college. This has allowed for the expansion of various departmental programs, as well as the flexibility to provide faculty with funding to pursue professional or program growth. As with any business, such financial improvements allow the departments and the college to reinvest the profit margins back into programs (retained earnings). This ultimately leads to improvement in the overall enterprise.

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Improvements in college of medicine reserves across all departments

Furthermore, the college of medicine reserve balance has increased 244% from 2001 to 2006, with increments ranging from 8% to 51% each year (Figure 1). This increase in reserves enabled departments to invest in expanding existing programs, introducing new ones, and hiring new faculty.

Figure 1

Figure 1

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Improvements in faculty productivity

Because a part of each faculty member’s pay is now tied directly to his or her academic and clinical productivity and profitability, faculty members have become directly accountable for their performance. Thus, performance has improved dramatically in several measurable areas, including RVUs, as shown in Figure 2. However, it should be noted that such improvement is often the result of multiple and combined factors, and the PBIC plan cannot, with certainty, be totally credited for all of the increase in faculty work units. However, circumstantial evidence is showing that it has played a major role in the increase.

Figure 2

Figure 2

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Improvements in faculty compensation

Of the more than 1,100 faculty members at UAMS, only those employed at 70% or greater time (676) were included in this analysis (e.g., part-time VA employees were included). Table 3 reveals an overall increase of about 20% in total compensation among all faculty between 2001 and 2006. Likewise, there was a significant increase in compensation for faculty at all levels of faculty rank, including chairpersons. This significant increase in faculty compensation occurred simultaneously with increases in departments’ net revenue and reserves (data not shown).

Table 3

Table 3

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Improvements in faculty extramural support

NIH research grant funding awarded to UAMS between FY1997 and FY2001—the five-year period before the PBIC plan was implemented—increased by a factor of 1.70. During the five years since the implementation of the PBIC plan (FY2002–FY2006), NIH funding increased by a factor of 2.15. The increase in both five-year periods was influenced by the doubling of the availability of NIH dollars for research between 1998 and 2003. However, NIH funding in the college of medicine nearly tripled early in the latter five-year period (FY2002–FY2006), indicating that our research faculty was increasing its “market share” of NIH funding during the implementation of the PBIC plan. The much lower rate of growth in the last couple of years is reflected in a slight flattening of the college of medicine’s overall rate of growth. Even during this period, we continued to increase our “market share” of NIH funding. The college of medicine has seen an 11.5% increase in 2007, an amount that greatly exceeds the 2% to 3% rate of growth of overall NIH funding for the same period (see Figures 3–5).

Figure 3

Figure 3

Figure 4

Figure 4

Figure 5

Figure 5

Collaboration among research faculty has also increased. This is considered to be related to the PBIC plans, which recognize overall funding obtained by individual faculty members, whether as a principal investigator or as a coinvestigator. Such funding is more easily obtained when scientists are willing to collaborate on multiple grants that often have additional support for cores and administrative costs. This incentive pay is provided by general funds from either the faculty member’s department or the college of medicine and not from grant funds.

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Faculty survey on perceptions of the program

Faculty who participated in the departmental plans were asked in May 2006 to respond to a total of 10 survey questions about Phase I of the PBIC plan, which focused primarily on clinical and research faculty, using an online survey tool.

Thus far, faculty members have given extremely favorable responses to the perceived effects of the PBIC plan on their department revenues (92%–93%) and reserves (88%–93%), clinical performance (85%–92%), research performance (74%–97%), faculty morale (62%–74%), departmental goals (71%–87%), and teaching (62%–67%). Although perceptions varied between basic research and clinical departments, the overall ratings were, nevertheless, relatively high in virtually all categories (Figure 6).

Figure 6

Figure 6

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Perception of Fairness is an Important Motivator to High-Level Performance

Recognition for a job well done is perhaps one of the strongest motivators for faculty to improve their performance. The way people are rewarded in an organization directly affects the quality of their work, attitude, flexibility, and behavior towards learning new skills. Faculty who are motivated and encouraged to perform, and who can directly benefit from their own outstanding performance, have been shown to demonstrate increased dedication to their institution and duties.8

PBIC taps into one of the purest sources of human potential and one which responds positively to linked rewards. Such plans can also help an institution attract and retain high-caliber faculty by rewarding them for superior productivity, thus inhibiting the crippling loss of high-value faculty. They can also provide a clear measurement of a faculty member’s success and the value he or she adds to the division, department, and college.

For a system to serve as a true incentive, a significant portion of each individual’s income must be “at risk,” meaning this portion must be completely dependent on the measures of the PBIC system.9 A realistic base pay must also be included; otherwise, the system will be perceived as unfair. With an established base pay, all faculty will, thus, be justly compensated for fulfilling their required duties, whereas those who strive toward greater achievements benefit from the incentive pay. A PBIC plan designed for academic faculty must define appropriate workloads across the spectrum of teaching, research, and service and develop measures for appropriate performance in each area. The system must also determine how faculty performance will be compensated and include a set of flexible standards to accommodate the substantial differences in the academic missions, as well as in each department. If universal, rigid criteria of a single, common compensation plan are applied to such a diverse group, they would likely yield dysfunctional outcomes because faculty would allocate their efforts to maximize compensation instead of the quality of their unique responsibilities. Above all, the basis for the compensation plan must be understood by the faculty affected by it.

A carefully thought-out PBIC system develops a culture of top performers by aligning goals, performance, and rewards across the entire organization.10 Within the college of medicine, this system helps to balance each faculty member’s responsibilities to research, education and patient care and places similar value on each, while also serving to keep UAMS physicians competitive with their peers elsewhere.

By providing the college with a sound financial base in times of growing inflation and reduced reimbursements from insurance carriers, the PBIC plan enables the college to pursue program development aggressively and to advance to the next level of excellence, thus enhancing institutional prestige and attractiveness to the public. In addition, such a plan offers the financial flexibility to maintain or improve pay despite budgetary constraints and to leverage institutional funds to manage costs related to the physical infrastructure. An added benefit is that because compensation is based on performance, it will very likely fund itself.

Despite these many benefits, roadblocks exist to the continued implementation of this PBIC plan. First and foremost, such a system must be thoroughly monitored and carefully balanced at all times. If even slight imbalances occur, unintended consequences may arise.

To administer a successful PBIC plan, the college of medicine and its component departments must fully embrace “systems thinking” and envision themselves not as separate departments but as a single entity that is in place specifically to deliver the same excellent patient-care product. Good systems thinking acknowledges that a system will most likely break at its weakest link; thus, it encourages respect and value for all people involved, and it fosters the understanding that each component is equally important in maintaining the whole. By adopting this mentality, more effective communications and coordination of effort will result, and continual quality improvement will be promoted throughout the entire system.

The PBIC plan, by its very nature, leads to a thoughtful reexamination of the mechanism of compensation as it applies to 21st century academic medicine for several reasons. First, the PBIC plan, rather than a rigid system for compensation, would likely resolve several of the perceived inequalities that exist among faculty. Second, the existing promotion and tenure system emphasizes independent research, whereas the current trend is toward translational and collaborative efforts, which require scientists to work as part of a team. Third, and perhaps most significant, clinicians and scientists who are not currently eligible for tenure make valuable contributions to the college, and clinicians undeniably drive the economic engine of the institution.

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A Successful PBIC Depends upon Many Important Factors

Given the prevalence of PBIC plans throughout industry, the historical rarity of these plans in academic medicine is striking. Until recently, AMCs almost never offered guarantees or tied faculty compensation to the quality or quantity of their work, although performance-based compensation has always been the norm in industry. The logic of such plans to address work goals rests on a simple premise: when employees are paid according to the quality and quantity of a work product, they are more likely to accomplish this goal than they ordinarily would be.11

Successful implementation of a PBIC plan depends on a host of factors, many of which may be complex and difficult to achieve. Among the most important of these factors is the development of a process for evaluating performance that is considered fair and reliable to the entire faculty. An effective compensation plan must be carefully designed and conscientiously administered, and it must conform to the policies and ethical standards of the college. Some important characteristics of a good performance-based compensation plan include

  • ▪ clarity,
  • ▪ transparency,
  • ▪ consistency of implementation,
  • ▪ adequacy of performance measures, and
  • ▪ fair program leaders who conduct systematically focused annual reviews with each faculty member.

The UAMS College of Medicine has become more efficient and effective by adopting such a program, which has helped it to increase overall productivity. More important, the PBIC program continues to challenge our faculty to attain their highest potential while rewarding them accordingly.

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