We’re pretty hard-pressed to find a hotter and perhaps more frustrating topic in private practice (and all small business) ownership these days than employee compensation. Staff shortages and resulting bidding wars to get people hired contributed greatly to the chain reaction of the runaway inflation these recent years, and more than ever, it’s incumbent on us as CEOs of our practices to be as creative as we can in providing strong employee compensation while not breaking the bank.
At some point, that balance has to involve moving beyond inside-the-box thinking of giving raise after raise after raise (often without passing that increased expense along to patients and even while some plans have actually LOWERED reimbursements yet again!) and lean on performance-based compensation to keep revenue and expense ratios in check.
We’ve talked a good bit in the Blog posts and Podlectures about employee compensation strategy, and for this month’s post, I wanted to share some highlights of an actual on-going HELP DESK dialogue with a colleague (with her permission of course) that seems particularly timely for a broader partner discussion on don’t some do’s and do’s of performance-based employee compensation.
This dialogue started with the partner’s realization that it’s not enough simply to have a performance-based component in employee compensation. Our methodology needs to benefit the practice as well as the employees. Their set-up was not doing that, and we’re working in our dialogue to fix that.
Here are some highlights of the on-going dialogue:
– Colleague: Me again with more questions! Wondering if you have profit-sharing structures that have been successful in other practices I could compare ours with. We have always prided ourselves on benefiting as a whole group from increased revenue, and we came up with an equation that has served us well to this point. I’m analyzing our financial picture and wondering what else is out there.
– THRIVE: Great to hear from you, and I love your “whole group benefits” way of seeing things. Couldn’t agree more. Glad to offer some detailed thoughts, have a few quick questions for first:
1. What amount of Gross Profit are you paying out in performance-based compensation?
2. Who is eligible and how is it paid out?
3. You mentioned the this is based on Gross Profit, so Cost of Goods is taken out first, correct?
– Colleague: Thanks for your reply. I actually misspoke earlier in that our current equation actually uses Gross Revenue, not Gross Profit.
To answer your questions, our full-time employees qualify, and they must have worked at least 50% of the days of the month in consideration to receive profit-sharing. Our current profit-sharing (which we all in the conversation now realize is Revenue-Sharing and not Profit-Sharing) formula is:
– Monthly Revenue above $66,000 x .14 = Amount Added to Employee’s Hourly Wage (for all hours worked by each full-time employee in the period)
So by this formula, hourly amount added to each employee’s hourly wage averaged $5.30 additional per hour last year. (thus $15/hour becomes $20.30/hour with this add on)
– THRIVE: Got it, and thanks for the helpful elaborations and example here. This is a creative and relatively sophisticated bonus program. What I really like is its opportunity to significantly increase staff compensation (which says a lot about you as practice owners desirous of sharing practice success with the team that drives it – I LOVE THIS!). I know of other colleagues using similar bonus structures, and overall, most of them are glad for its impact on the practice and team (among which are team desire for growing the practice and keeping the schedule booked). The main drawback I see in this system is the focus on just top-line revenue, which only tells part of the practice health story.
A concern I have is that, as I understand it, you’re paying the bonus hourly amount regardless of what kind of month the practice has. So theoretically, if we lost money this month, we still pay the bonus hourly amount. We prefer instead a bonus structure based on achieving predetermined objectives known team-wide for three or four performance metrics we’re targeting for growth. So rather than paying bonus on what comes in regardless of what goes out, bonus is paid because the practice is performing at or beyond our predetermined goals, not just because the practice was open and thus saw patients and generated revenue.
We typically recommend basing bonus compensation on more than one production metric to keep the team focused on and driving toward balanced production. So we’ll typically base bonus paid out on performance of three or four metrics that give us good overall production perspective. With four metrics as the base, if we make all four goals, we might pay 100% of the Available Monthly Bonus Amount, if we make three, we might pay 75%, make two , pay 50%, and make one, pay 25%.
With this model, we designate the Available Monthly Bonus Amount. In some practices, this is a set dollar amount (i.e., the full bonus amount if we make all 4 metrics goals is $2,000 per month, allocated to qualifying employees, or $5,000 per month, or whatever amount we establish). In other practices, it’s a designated percentage of Gross Revenue (Receipts) or Gross Profit.
If you move from a “whatever is generated” to a goals-based bonus structure, a concern we’ll need to head off at the pass is that of staff realizing we’re moving from “I get a bonus every month” to “I may or may not get a bonus or the full bonus any given month.” A possible solution is to set the amount of available bonus at or above what has been the average bonus amount over the past year, and when our designated goals are set right and met, we’ll be ahead in net practice outcomes and benefit when full available bonus is paid out.
Glad to continue the conversation, and again, I’m thrilled you have a performance-based component in your staff compensation set-up and are therefore already checking a lot of important boxes even if you don’t change a thing!
– Colleague: Thanks for your reply, which addresses much of my concern for our current program. I definitely like the idea of a bonus structure based on specific goals. That said, I’m treading on thin ice here, because our bonus structure is important in how we retain staff and we want to be able to continue offering a
great financial incentive for our employees to stay. I’m not looking to decrease how much we pay our employees, just trying to analyze this more closely and ensure that we’re being financially responsible for our business. The way it’s set up now, it feels like when we have "big months,” our employees benefit greatly at potentially the expense of the business’s bottom line, and essentially, we (the doctors) don't benefit much.
– THRIVE: Masterfully said! We need to be very deliberate about how we MAKE, how we MANAGE and how we MESSAGE any evolutions in your program. I have zero doubt this bonus program is helping you not just retain staff, but retain MOTIVATED staff in a time when it’s difficult to do so. So there’s a good bit at stake here. As an example, when my dentist retired, the new owner axed the bonus program after owning the practice a while, and in the time since, all of the long-time staff have quit (some even took it upon themselves to contact me and tell me about it knowing what I do for a living!). One could and some consulting types would argue his staff were “overpaid” (a sometimes product of strong staff longevity) and advise by hard-and-fast rule that if you’re over X% in staff compensation percentage, you ax programs and people. I suspect that’s exactly what happened, but I believe he made a mistake eliminating the bonus structure without putting something strategically in its place.
We benefit as owners, of course, by the benefits that come with retaining staff. But given the responsibilities and challenges of ownership, it certainly makes sense that owners would benefit from big months too. Your current structure was put in place for the right reasons (taking care of good people, retaining individuals and overall team, etc.), but tends to take a sizable chunk out of financial reward realized by owners. So you can see why some consulting types advise cutting such programs. I don’t fault their reasoning, but a full-on cut of the program without something put in its place is short-sighted in the overall picture… (to be continued)
Well, Friends, this seems a good stopping place in this colleague dialogue, and I hope gives us a good bit about which to think when applied to how we’re doing it in our practices. Next post, we’ll share details of what we’re putting in place to replace this colleague’s employee bonus system based on financial stewardship of the practice as well as great employee opportunity. Talk to you then!
Like all THRIVE content, the purpose of BOWEN’S BLOG and SUMMIT TALK Podlecture conversations is to keep us driving together toward IMPACT. If something here has struck a chord, shoot us an email or give us a call and let’s talk it out! Tbowen@mythrivecoaches.com