Avoid these pitfalls when switching a veterinary associate to production-based pay

When a practice owner and her associate are trying to figure out the best compensation strategy under an employment contract, there are a few fairly universal assumptions flying around.

First, a newly graduated veterinarian or one with just a year or so of practice experience usually wants the comfort of a secure base salary. It's a known quantity of income that meets most economic needs, especially those looming student loan payments.

Second, the practice owner usually knows that newly minted veterinarians tend to be unsure of themselves, taking extra time to evaluate each case and proceed at a fairly slow pace during even simple surgical procedures. So a guaranteed salary takes some of the pressure off in these early years.

But before long, a straight salary becomes less useful for both the employer and the employed veterinarian. As the associate becomes quicker and more confident, a compensation formula that rewards his experience makes more sense. The practice benefits when the employed doctor sees more appointments and performs more procedures. The associate can usually take home a lot more money if he gets a negotiated portion of all of the work he produces.

GETTY IMAGES/RUBBERBALL/MIKE KEMP

As they say, though, the devil is in the details. And probably the most devilish detail is determining the percentage of the associate's production that he should receive above and beyond any benefits such as vacation time and health insurance. Determining the appropriate percentage is key but beyond the scope of this article. (Head over to dvm360.com/prosal for help figuring out production-based pay percentages.) Rather, my goal here is to examine the less obvious issues that present themselves during negotiations over compensation—issues that need to be identified clearly in the employment contract but are frequently overlooked.

Avoid these veterinary practice owner pitfalls

Practice owners often make two mistakes when determining reasonable and fair compensation for an associate.

1. Not budgeting for the change. While a percentage-pay package encourages production, it also introduces additional ancillary costs. Extra money must be set aside for workers' compensation insurance, unemployment insurance, the employer's portion of social security and Medicare, and any 401(k) or Simple IRA match that's been promised. For example, if an associate was making $100,000 and suddenly started making $150,000 under a production-based contract, workers' compensation costs alone can jump $3,000—a tough pill for unprepared practice owners to swallow.

Also, percentage-compensation programs often involve a base salary plus monthly or quarterly "bonuses," which are paid less frequently than the weekly or biweekly paycheck distribution. If extra funds haven't been set aside for the lump sum payment (the difference between the associate's gross production percentage and his base salary), the inadequate planning can leave the practice short on cash. This is especially true if payroll is on a biweekly schedule and three paydays occur in a single month.

Simply put, being aware of these additional costs and allotting the appropriate funds for them ahead of time can save a lot of frustration for employers and keep the practice's budget safely out of the red zone.

2. Not anticipating an encore. When an employer places her associate on a percent-production formula, she may think this is the end of the line for pay increases. She considers the associate to be in charge of increasing his own paycheck for the indefinite future—the harder he works, the more money he'll make.

Associates often see the switch to production-based compensation differently. They look at the change as an opportunity to show the owner how well they can perform in the revenue-generating arena, thinking, "If I show the boss how productive I can be, she'll find me valuable enough to keep and offer me another percent or two each time contract renewal comes around."

When a misunderstanding of this type isn't addressed at the outset of the production-based pay discussion, subsequent contract talks can take a nasty, unexpected turn. The boss will see the meeting over the next contract as a formality, while a well-performing associate will be expecting a big jump in compensation since he proved himself during the previous year.

It's much better to broach the subject of future raises earlier—ideally, as soon as the associate is put on production-based pay. It's a pretty significant disconnect when the owner thinks raises are over and the associate thinks they've just begun.

Put the details in writing

I'm generally in favor of making a contract only as detailed as is necessary to clearly express the rights of both parties. However, much more needs to be said in an associate employment agreement than, "If the revenue generated by the associate multiplied by 20 percent is greater than his base salary, he will receive the larger amount."

While that phrase may seem clear enough, it actually leaves open many questions that can create serious problems later. It's better to be as precise as possible about what constitutes "revenue generated by the associate."

For example, while it may seem obvious that grooming and bathing aren't included in such revenue, what about medicated baths that were recommended by the associate during an office visit? In some states, medicated baths are treatment and constitute nontaxable veterinary services while routine baths are taxable nonprofessional services. But many practices don't distinguish them for compensation purposes. Instead, they simply exclude all baths from associate revenue.

Even more complicated is the question of prescription refills. Some practices exclude them entirely from associate-generated revenue. But is this fair or realistic? If the employed veterinarian spends a lot of time on the phone and during appointments with clients tweaking the dose of a medication that he prescribed, shouldn't he be credited for generating the ongoing revenue stream created by his continued monitoring?

Make production reports part of the contract

A production-based compensation arrangement is virtually worthless if the associate involved gets no accounting of how his revenue-based bonus was determined. Many associates are afraid to pester their employers for details on their production numbers and as a result rarely or never see them. They often just accept (with some resentment) that their paychecks and bonuses are correct.

I'm a vocal proponent of putting a hospital owner under the written obligation to provide, at least quarterly, clear and detailed statistics of the revenue figures generated by any employed doctor operating under a production-based compensation contract. When included in the employment document, this written obligation reminds the boss of her duty to collect and reveal the information. Furthermore, it prevents a long lapse between the end of a revenue period and the associate's opportunity to look it over. Truthfully, stale revenue numbers are almost worthless for motivating employed doctors—they're viewed more as historical artifacts than as a call to actually modify behavior.

Decide on revenue generated vs. revenue collected

Finally, there's always the nagging question as to whether an associate's salary should be based on "revenue generated"—work for which a clinic is legally entitled to collect—or "revenue received," which means money the practice actually collected for an associate's work.

In practices where someone other than the doctor is in charge of figuring out how payment will be obtained, it's usually best to employ the term "revenue generated" in the compensation formula. After all, the associate has no control over the accounts receivable policy of the clinic—and he shouldn't suffer if it's lax.

On the other hand, other hospitals are set up such that associates discuss payment with clients and inform them of the requirement for deposits for surgical procedures and so on. If one objective of the revenue-based compensation scheme is to encourage the associate to be vigilant about collecting those deposits or to spend more time with clients discussing finances, it might be preferable to use the term "revenue collected."

Production-based employee compensation can be a good thing for both practice owners and their associates—if critical details and contract negotiations are properly addressed before any revenue is generated.

Dr. Christopher Allen is president of Associates in Veterinary Law PC, which provides legal and consulting services to veterinarians. Call (607) 754-1510 or e-mail info@veterinarylaw.com.