Production pay: How to determine the right percentage

Now that we've established (in last month's column) that most practices with declining transactions need to switch associates from straight salary to production-based salary, how do you determine the percentage that goes into the contract? What else is involved?

Compensation contract: the basics

The percentage you choose depends on many factors. Certainly any associate with three techs assigned will produce and earn more at 16 percent than one earning 20 percent, but with just one tech to assist.

Let's start at the beginning: You want to switch to production-based compensation because you feel that each associate should be compensated according to his/her thoroughness and dedication. The more hours they work and the more thorough their efforts, the more they will take home, just like any practice owner.

An associate with a good work ethic will produce and profit from being paid on production, and you will not overpay an unmotivated associate.

Further, it is self-limiting. If the associate chooses not to take on a productivity contract in a declining-transaction situation, your conscience is clear. You offered the best that you were able in difficult times.

First, estimate what percentage of production the associate is currently being paid on fixed salary. If the associate being paid $76,000 (including all expenses of insurance, continuing education, dues and vacation) produces only $260,000 in gross collected revenues, he/she already is being over-compensated by 29 percent. This rate of compensation is excessive and unduly cuts into your legitimate profits. He or she needs to know that this is unsustainable, and they must move up or move on.

No practice can ever afford to pay more than 25 percent of an associate's personal production. Unless this associate can increase production to $320,000, you face rapidly diminishing net profits and should not be renewing this associate's contract.

Alternatively, another, more enthusiastic, associate produces $315,000 while being compensated only $60,000. That is 19 percent, and this associate may well go on to greener pastures unless he/she can earn more. They read what others are making and are not happy.

Practices paying 21 percent to 25 percent of production have the least associate turnover.

The Rule of 45

This rule states that the salaries for practice owner, associates and staff cannot exceed 45 percent of gross revenues and still maintain practice viability. Paying 20 percent to paraprofessional staff leaves 25 percent for paying owner(s) and associate(s).

In a $900,000 two-doctor practice, 20 percent of revenue comes from non-doctor OTC income, so total doctor production is the remaining $720,000, and 21 percent to 25 percent of that should be apportioned according to productivity.

Doing the math, $720,000 @ 25 percent compensation leaves $180,000 to divide. If owner and associate produce equally, each would get $90,000 for their professional services. This very generous (considering the circumstances) percentage compensation means no additional compensation for vacations, continuing education or any other benefits, because 25 percent is 25 percent.

For transitioning current staff, I used to suggest guaranteeing that they would make last year's salary as a base but no more unless they are willing to put more effort into their work.

You would pay the higher of last year's salary or X percentage. In today's economy, no such guarantees can be made.

Determining the percentage

The maximum percentage you are able to pay associates is: practice net before professional salaries minus 15 percent.

(Realistically, you must count sneaky fringes as profit for this calculation.

If someone, not you certainly, were hypothetically charging off a car and paying their children salaries for tax-avoidance purposes, add this back in as net profit.)

If you net 40 percent, then you may pay 25 percent to associates.

If you net 35 percent, then you may pay 20 percent to associates.

Then there is the matter of associate support.

Every technician that you assign to work with the associate adds to his or her ability to produce more income by delegating lab sampling, radiographs, etc.

Someone has to pay for these technicians. If each additional tech (more than one) costs $30,000/year, then the associate's percentage must be reduced to reflect the costs.

Example: An associate working with two techs produces $350,000 @ 22 percent = $77,000. Adding another tech produces an additional $75,000 in revenue, and 18 percent associate compensation will still produce $77,000.

We have seen four- to six-doctor practices where an associate (with two or three well-trained techs) producing $600,000 earns more @ 16 percent than an associate in a two-doctor practice producing $320,000 @ 25 percent with one tech per vet.

Dr. Snyder publishes Veterinary Productivity, a newsletter for practice productivity. He can be reached at 112 Harmon Cove Towers Secaucus, NJ 07094; (800) 292-7995; Vethelp@comcast.net; fax: (866) 908-6986.