Third in a four-part series- Associate contracts: salary vs. production-based compensation

The initial two articles in this series on associate employment contracts dealt primarily with legal details of the contract; contract periods, renewal provisions and other esoteric elements that are commonly ignored when a new associate is considering a job offer.

This month, we'll review the contractually specified salary and production-basedcompensation items and a few pitfalls that should be considered in the negotiationprocess.

Base or percent?

New graduates and their employers often have difficulty in deciding whetheran employment agreement should contain a pay provision which is based ona base salary or a percentage of an employed veterinarian's produced revenue.

It is very difficult to make a blanket statement as to which is morebeneficial. There are however, some basic considerations for both employerand employee to take into account in making the decision as to which theyshould aim for.

There are a number of pros and cons associated with both an establishedbase salary and a production-based formula.

Straight salary compensation

First, it is often desirable for a new graduate to seriously considerthe reliability of a straight salary system. In a situation where a significanteducational debt service obligation exists on top of travel costs and livingexpenses (frequently in a new town), it is often nice to know that everyother week a certain, finite amount of money can be expected.

Second, any veterinary employee who accepts a straight salary is establishingsomething of an "insurance policy" against his or her own professionalshortcomings.

New graduates, for example, are frequently less sure of themselves thantheir experienced counterparts and may consequently take longer to concludean office visit or surgery. Also, they often are assigned the less lucrative,more "price-shopped" commodity types of surgical procedures, suchas spays and declawing procedures. A new graduate who did not receive agreat deal of experience in surgery during training may take more than averagetime in completing even these low-gross tasks at first. A straight salaryprotects such a person from getting hit in the pocketbook for starting outas a slow surgeon.

Third, the newly employed veterinarian only has the word of the practice'sowner that it is sufficiently busy to permit the new doctor to generatethe amount of revenue needed to satisfy the employee's financial obligations.Also, there is no way for the new doctor to know how effective the practicestaff is at charging records and collecting accounts.

General rules on salary alternatives

When reviewing a contract for employment with a new practice, it is frequentlybeneficial to follow these general rules:

1. As discussed previously in this series, be sure that it isclearly explained in the contract that the salary or compensation formulawill require review in one year. That way, if the initial contract arrangementsaren't working as planned, there is a set date for renegotiation.

2. New graduates should undertake some vigorous self-appraisalon their experience and skills. If a new grad was formerly employed as atechnician in a hugely successful practice and is very comfortable withher speed in the exam room and surgery suite, there is probably no reasonnot to dive into production-based compensation. If a new doctor tends tospend 35 minutes in a routine vaccination call, a minimum base salary shouldprobably be sought.

3. A hybrid salary/production arrangement should be carefullyconsidered. An arrangement such as a minimum base pay figure, coupled withproduction bonus when goals are achieved may protect the new associate fromsuffering a financial burden while allowing the employer to offer an incentivefor good productivity.

Legal minutia to consider

Imagine now that you have identified the ideal salary arrangement andthat some portion of your income or bonus will depend on your production(your gross-generated revenue). You and the boss write the elements intoa succinct employment agreement, and you are all set for a harmonious firstyear at the new practice, right? Possibly not.

As viscerally appealing as a short and sweet employment agreement mayseem, there are benefits to carefully examining the details of a salaryoffer. Let's briefly look at some problem areas that have crossed my deskover the years.

* 1. Collection: Does the agreement specify whether the grossrevenue calculation includes uncollectable charges? You won't care untilyou spend three days working up a parvovirus case and the owner stiffs theclinic. Unless your contract states otherwise, 24 percent of an uncollected$1,000 may equal $0.

* 2. Time-dependent percentage bonuses: If you are extremely productiveand are generating (and expecting) a bonus for your work through the endof October, you could get a nasty holiday surprise. All your overtime maybe for naught if you take a few personal days around Thanksgiving and theclinic's business trails off around Christmas. Maybe it would have beenwiser to have quarterly or monthly bonus periods? On the other hand, yourclinic might view an annual calculation as amounting to an incentive totake some extra holiday emergency hours or encourage salesmanship duringlean periods. There is no one right answer.

* 3. Specification of sales attributable to associate work: Employmentcontracts that use a productivity-based compensation system often fail tospecify what constitutes doctor-generated revenue. Example: Dr U sees anold dog with a bad mouth. She sends home antibiotics and schedules for atechnician to perform a dental cleaning during which Dr. U will examinethe mouth. Dr. U is credited for generating revenue for the exams and theantibiotic. Does she get her 22 percent of the cleaning? The refill of Antirobe?How about the diet food the receptionist suggests at the dog's discharge?Surely the doggy toothbrush will be credited to Dr. U?

Dr. Allen is a partner in Associates in Veterinary Law, P.C., a lawpractice specializing in business and legal counsel for veterinarians andtheir families. He can be reached at www.veterinarylaw.com or call (607)648-6113.