Playing the percentages Beware of pay pitfalls

Monday morning

Lou Swinney wheeled his new SUV into the cramped parking lot. A cup holding his morning java suddenly jarred forward as he made the abrupt stop. The inertia sent a quarter of the contents on an additional journey. Swinney quickly wiped the rim and base of the cup with a tissue and barreled out of the vehicle toward the front door, a wide briefcase trailing from his right arm like a broken rudder.

He entered and saw Pam Kennedy at the front desk. He dropped the case and straightened his shirt and tie.

"Hello, Lou," Pam said as Lou completed his personal re-arrangements.

Lou finally looked up, smiled and asked if Dr. Moss was in. "He usually is, but he didn't feel well today. Dr. Ben Collier is here. He is just finishing an appointment and may have a few minutes," Pam said.

Lou smiled and thanked her.

He represented Acme Drug and Serum Co. and was part of a dying breed of mobile sales representatives still offering a wide variety of drugs and equipment. His company was the largest in the region and had stabilized after a "Fortune 500" company had acquired it a few years ago.

After a few minutes, Dr. Collier entered and greeted Lou professionally.

Lou was very good at his job and was affable. He could be quite persuasive if he was behind in his sales goals. Usually, however, he just wanted to talk and meet people and was genuinely interested in the well-being of his clientele. This was really why he loved his job. After he got to know his clients, he would sometimes probe a bit too far.

Like most sales associates, Lou started with new-product detailing and inquiries into the needs of the practice. The conversation eventually ended with the trading of opinions on the general state of the profession.

Sometime during the visit, regardless of its success or failure, Lou would pop the inevitable question: "Are you slow, or are you busy?"

Center Valley had been fairly busy, so the question and the answer seemed to satisfy all parties.

"Are you happy here, Dr. Collier?" Lou finally probed.

"Oh, pretty well. You know nothing's always perfect, but Dr. Moss has been good to me and so far it is all going well."

"Did you ever think of starting out on your own?" Lou asked.

Ben blushed a bit and hesitated. "Occasionally, but I am not really ready for all that right now," he said.

Lou leaned forward at bit and whispered:

"Well, if you ever do, give me a call. I can set you up completely."

Early a.m. Tuesday

Dr. Gene Moss turned over and looked up at the dark ceiling. He could see only a shaft of light peeking into the room from the hallway "night light." His mind was racing as he worried and fretted. Shadows appeared and moved with every passing car. He could hear a distant train — something that he hadn't noticed in years.

He turned over one more time as his wife shifted and whispered in his ear.

"You're not sleeping. How come?"

"It's nothing. I just can't get to sleep."

Sally moved to the lateral edge of the bed and dropped off to sleep again almost immediately. John continued to toss and turn.

Tuesday morning

Gene fumbled with his shirt button for no apparent reason. He continued to see clients but dreaded the morning like none before it. He watched his busy associate Ben Collier and imagined the worst.

"Will he quit? Will he understand?" Gene thought to himself.

"I will have to tell him – do I have the courage?" he mumbled under his breath.

Gene looked at the clock and went over to the morning schedule. They would be through with clients in just a few minutes. He started to sweat profusely and noticed an unpleasant fullness in his abdomen. He excused himself and sat down in the office. He opened a side drawer and took a long drag from a bottle of Pepto-Bismol. A pink mustache appeared, unnoticed.

Finally Gene got up and asked Ben into the room.

Ben strode in with youthful vigor and quiet anticipation. Usually, these meetings were to discuss cases and go over scheduling conflicts. But today would be different.

Gene broke the awkward silence.

"Ben, the practice is doing pretty well, but we don't seem able to get over the hump."

Ben was clueless, but took note of the pink mustache.

"Your production and salary based on production continue to increase and that is good. But our cash flow continues to drop in spite of this."

Gene coughed and began to belch but managed to keep the impolite activity sequestered in the back of his throat.

He licked his lips and continued:

"I have allowed you to take most of the new clients so that your production would increase and so that you could see the value in production pay. It seems to have worked out too well from that standpoint. I have gone over the numbers until I am blue in the face and cannot understand why things aren't working out."

Ben was stumped. He knew nothing about veterinary business management and wasn't particularly interested. He just wanted to be a great veterinarian – and to be paid accordingly.

Finally, Dr. Moss got to the point:

"I would like to continue giving you all the benefits we agreed on, but I am going to have to cut your percentage to 22 percent or maybe even a bit lower."

Gene's body felt suddenly cool and his hair stood up on his arms as he looked at the associate.

Ben was shocked.

"Dr. Moss, with all due respect, I have been working hard and feel that I have earned my keep. I give myself my own raises if I work hard, and you have given me a guaranteed salary if I don't. But this seems to be unfair."

Ben stopped a moment and thought to himself, "Gene must be managing the practice badly — how can this be?"

Gene looked away.

"I am sorry, Ben, but the practice cannot continue unless I make this change."

Ben got up and left the room.

Gene reopened the drawer and reached for the pink liquid.

Thursday evening

Dr. Ben Collier fumbled with the small numbers on his cell phone. Finally the correct combination appeared on the screen.

Ben was nervous as the line activated.

"Hello."

"Hello, Lou, this is Ben Collier. Could we do lunch sometime?"

Percentage pay

Somewhere in the not-so-distant vapors of practice management, the stars seemed to align and provide the impetus for gurus to pronounce that percentage pay for doctors of veterinary medicine was the way to go.

What glorious gross income and happiness lay ahead for those practices leading the vanguard to this form of remuneration for associates!

There are several forms of this type of pay scheme. It is reported that as many as 50 percent of associates are being compensated this way.

Let me list the alleged advantages of this type of pay format:

• The doctor will be able to achieve higher income through increased production.

• You just set the vet on "automatic mode," and you never have to deal with pay raises again.

• It is self motivating for the associate.

• Net income grows as the doctor becomes more productive.

• Yearly performance reviews may not be needed since they take care of themselves. Financial reviews might needed, however.

I am not about to tell you that percentage pay can't work. It often does. However, it is not a panacea. During several consults over the years, certain aspects of this type of pay arrangement have troubled me. Here is some of the feedback that I get from some doctors working with percentage pay:

• "My net is dismal—why?"

• "My doctors don't seem to be motivated by percentage pay. They work only so hard and are satisfied once they reach what I consider to be a substandard final salary for them and poor production parameters for the practice."

• "My doctors make more than I do!" (This often is true, considering the owner's FTE pay as a practicing veterinarian in the practice.)

Take a closer look

Let us look at some numbers to illustrate. Certain assumptions have been made in order to clarify and simplify. We will not take into consideration OTC sales, and will consider all DVM earnings at 25 percent of production. Management returns go to ownership. (In many practices, this pay goes to practice mangers or others.)

Year 1

In Table A, the associate is paid at 25 percent of his or her gross and a small number of fringes occur in the expense category. The owner is taking home $101,000 and the associate $87,000.

Table A

Overall expenses range in all tables from 70 percent to 72 percent.

Year 2

In Table B, the next year the associate increases his or her gross 14 percent and expenses rise 8 percent (this is very conservative). The owner gives up all growth to the associate but keeps his own production the same. Expenses still are roughly 70 percent of gross. You will notice that net cash remaining is shrinking and is shrinking as a percentage of gross — not good, as things seem to be "hopping" in this practice.

Table B

Year 3

In Table C, the owner is now concerned and raises prices across the board by 5 percent. Client numbers level out this year, and the associate and owner take pay increases from the 5 percent price hike. Expenses creep up to 72 percent of gross. The practice is now in the red. The owner takes a pay cut and is taking home less than the associate. Both veterinarians are blind to these realities. The owner considers new options, one of which is to reduce the percentage pay.

Table C

What you see in these examples is a common three-year cycle in veterinary practices — status quo, followed by production and expense increases, followed by reactionary price increases brought on by these expenses and the eventual poor financial performance.

This is exactly the type of scenario that leads associates like Ben to start a new veterinary practice.

Please note that I could have chosen 22 percent as pay for associates and tinkered with the overall expense equation, but eventually it leads down the same path to poor financial performance unless the owner makes some healthy increases in prices.

The time bomb: percentage pay for specialists

Why does this happen?

Production pay doesn't always deliver because production does not equate to efficiency. A growing practice is not very efficient because doctor production attracts expenses to itself.

Secondly, expenses are expanding faster than gross can catch up because new technologies and building costs are expanding faster than veterinarians are prone to pass the cost on to their clients. This expansion makes a certain "gold standard" pay percentage, be it 25 percent or 22 percent or 19 percent, a moving target —frustrating to associates and owners caught in the crunch.

What to do?

Veterinarians and consultants have had to backtrack. They now conclude that 25 percent is intolerable. Some say 22 percent is untenable. Is there any end to it?

David M. Lane DVM, MS

Part of the answer is happening before us — part-time veterinary medicine (which may be best paid for on an hourly basis), better expense control, and paying veterinarians based on salary plus bonus system, might be helpful.

Time will tell.

P.S. I would like to have feedback on this issue because it seems to crop up everywhere I go. Please send comments to dverdon@advanstar.com

Dr. Lane is a graduate of the University of Illinois. He owns and manages two practices in southern Illinois. Dr. Lane completed a master's degree in agricultural economics in 1996. He is a speaker and author of numerous practice management articles. Dr. Lane also offers a broad range of consulting services and can be reached at david.lane@mchsi.com