We ask two experts the same question on a complex issue.
Gary Schaub
Question: What are the popular ways to compensate an associate?
There are usually two ways, plus a combination of them, to compensate an associate. However, there are also some traps that should be avoided. The compensation formulas are as follows:
Daily guarantee: The daily guarantee rate is usually used when an associate first starts with the practice. It may take some time for the associate to build up their clinical speed with patients. Also, it may take some time to completely fill the associate's schedule. Thus, the reasons for a daily guarantee. Typically, the guarantee will probably be in the $500 to $600 per day range.
Production percentage: Once the associate is up to speed, compensation can shift to a production basis. Depending on what is included in production, this range may be from 26% to 32% of practice production. I usually do not include hygiene production and patient X-rays in this percentage. However, patient exams done by the associate should be included. Most practices will use a net production calculation, after insurance adjustments and write-offs. It can be tempting to use collections, but this can get complicated to calculate and the associate doesn't get immediate feedback. My overall goal is to keep the compensation plan simple to calculate and easy to understand.
Combination: This is an either/or formula, based upon whether the daily production percentage compensation is greater than the daily guarantee compensation.
Traps to avoid: It can be tempting to define the associate as an independent contractor, since you will not have to calculate payroll taxes and other employee benefits. However, consult with your CPA because the IRS makes it very difficult to define an independent contractor and the penalties can be severe. It is also tempting to hire an associate to bring in new patients to try to grow your practice. This usually results in failure. Ideally, you should be able to share some of your patient load with an associate in order to maintain production and perhaps cut back on your own time in the office.
Tom Snyder, DMD, MBA
There are several ways to compensate your associate. Most associates are paid on a commission with a recoverable draw based on a percentage of collections or net production. A smaller number of associates are paid a fixed salary. Let us assume that your associate is full-time. If so, we typically guarantee a salary for the first three to six months. This is particularly true if you are paying your associate a commission based on a percentage of collections. This allows adequate time for the associate to build up an accounts receivable from which to be paid. Conversely, if you are paying a commission based on net production, the cash flow issue is not a problem. More importantly, the primary reason why a guaranteed salary at the outset makes sense, especially if your associate is less experienced, is a clinical one! We suggest that you control the new associate's clinical production initially, thus providing you an opportunity to familiarize yourself with the doctor's clinical capabilities.
After the initial probationary period, you can change the compensation arrangement to a recoverable draw. Usually, the draw amount is identical to the initial guaranteed salary amount. Since the draw is "recoverable," meaning if there is a shortfall in performance so that the salary paid was greater than what the associate was entitled, you reserve the right to lower the draw to avoid a huge deficit at the end of the year. We also recommend that your associate's draw be reconciled quarterly. If your associate exceeds his or her draw, based on greater-than-anticipated performance, an additional paycheck is written for the additional compensation due.
The commission ratios that are paid to associates vary dramatically around the country based on supply and demand, ranging anywhere from 20% to 35%. Percentages, however, are usually lower for associates paid on production. Most associates are paid on a percentage of collections vs. a percentage of production. The only exception to the rule is in instances where the net production of the practice is very close to that of the practice's collections. However, paying on a percentage of gross production is not advisable, especially if you have a significant number of PPOs. Typically, lab expenses are charged to the associate in an amount equal to the associate's commission percentage. Concerning fringe benefits for full-time associates, we typically see single-coverage health insurance being offered, as well as a continuing education allowance and sometimes malpractice insurance. Since professional liability premiums are relatively low for general dentists, having either party pay the premium does not have a significant impact either way.
Gary Schaub is the founder of HELP Appraisals & Sales Inc., a dental and medical appraisal and brokerage firm in Portland, Oregon. He is a member of American Dental Sales and can be reached at (503) 223-4357 or (855) 463-0101.
Tom Snyder, DMD, MBA, is the director of transition services for Henry Schein Professional Practice Transitions. He can be reached at (800) 988-5674 or [email protected].
