Compensation structures for group dental practices
By Matt Dickstein
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In this article, I talk about compensation plans for group dental practices. For a barebones outline of a compensation structure, read — Outline of compensation / expense structures in a group dental practice.
In general, a group practice pays its dentists in some combination of three ways: (1) salary, (2) productivity payments, that is, productivity bonuses or shares in profits or collections, (3) corporate dividends. Your balance of the three forms of payment determines in large part the culture of your group practice. Without further adieu,
Salary vs. Productivity Payments
In a compensation structure, the tension is between salary and productivity payments. Both have their pluses and minuses. On the positive side of the ledger, salaries create team spirit, while productivity payments give incentive to work.
As for the negatives, a compensation structure that is heavy on salary leads to freeloading. [see ft.1 below for definitions of freeloaders and malcontents] Why work so hard if either way you’ll get paid the same? A compensation formula heavy on productivity bonuses and profit shares leads to: (i) malcontented dentists who are unhappy to make less than others in the group; (ii) administrative staff devoting their time to tracking individual production and allocating overhead; (iii) complexity because you must find some other way to compensate dentists for necessary work that doesn’t produce revenue, such necessary work being, for example, practice governance, management, staff development.
The Solution – Combine Salary and Productivity Payments, and Account for Special Overhead
I’m sure you saw the “solution” coming a mile away – use a combination of salary and productivity payments. I won’t belabor the salary part of the equation, except to note that you can tier salaries based on volume of work performed. This reduces the freeloading effect of salaries. For example, to be eligible for a full salary, a dentist must work 90% of the group’s work days in the year + achieve 90% of the group’s annual quota for office visits (regardless of complexity of procedures) + 90% of the group’s quota for on-call hits. The group can reduce a dentist’s salary proportionately based on the percentage drop below each 90% level.
As for productivity bonuses and profit shares, your group can pay based on such factors as collections, patient encounters, some other relative value unit applicable to the practice, and non-revenue factors such as seniority or management services for the group. No matter what factors you use, try to pay the productivity bonuses (and deliver the corresponding accounting reports) on a monthly or quarterly basis.
Lastly, a group practice can charge a portion of certain costs against individual dentists. You do this if the costs inure to a particular dentist’s benefit, for example, insurance for the dentist’s specialty, extraordinary continuing education expenses (the cruise to Hawaii) and special equipment or supplies.
Corporate dividends are much simpler than the first two forms of compensation. Most corporations pay dividends on a per-share basis, meaning that the more shares you own, the more you get paid. Founders get paid more because they usually own more shares. You might consider using stock options or restricted stock (stock subject to repurchase by the group) to regulate stock ownership among founders, incoming dentists and outgoing dentists.
Ft.1 — Matt’s theory of freeloaders and malcontents: All partners in a business, including you and me, fall into one of two categories, and frequently both. Each of us is either a freeloader or a malcontent. Having trouble with the concept? – visualize your marriage. You’re a freeloader if you’re happy to do less work than the other guy. Freeloaders say things like, “The value I bring is intangible but necessary; someone has to keep morale up.” You’re a malcontent if you resent working more than the next guy. Malcontents say, “I’m so tired of doing all the work around here; it’s just not fair.” In practices that survive, the dentists develop a sense of perspective because they know they’ve played either or both roles before, and will do so again. In case you’re interested, I’m a freeloader. Read Shareholder buy-sell agreements for dental corporations, for more on the subject.
Again, for a barebones outline of a compensation structure, read — Outline of compensation / expense structures in a group dental practice.
It is with great joy that I conclude this article. Call me if you want to talk more.