What's a fair compensation package for a general dentist associate these days? I also hear different things about restrictive covenants being potentially illegal or unenforceable. Should I still look to put one in place?
Allen Schiff, CFE, CPA
In today’s world, each market is different. So, your market may be a little different from what I have identified below.
At the Academy of Dental CPAs (www.adcpa.org), we’re constantly discussing this topic. Based on my knowledge coupled with these discussions, general dentist associates today are compensated using any of the following formulas:
- percentage of net collections
- percentage of net production
- annual fixed compensation
- other (combination formula)
Here’s a breakdown of each of these formulas.
Percentage of net collections
You could offer an associate compensation based on a percentage of net collections. The actual percentage will vary; some are at 35% of net collections; some could be at 33% or 30% of net collections. If you offer less than 35%, in order to justify such, you should take into consideration the lab fees the practice will pay on behalf of the associate.
Percentage of net production
Net production takes into consideration the insurance write-offs, senior citizen discounts, friends and family discounts, and related professional write-offs. I usually see 25% as the percentage used here. It must be less than the percentage of net collections because it doesn’t take into consideration the bad debts or accounts receivable write-offs that may occur.
Fixed annual compensation
You should consider this approach based on the expectations of the new dental school graduate. Depending on your market, you should be in the neighborhood of $125,000 to $150,000 annually. I would refer to this as base compensation. In addition to base compensation, I would also consider adding a paragraph to the employment agreement as incentive compensation, which would be addition to the base compensation. By doing so, you will incentivize the associate to meet targeted monthly/annual goals as set out by the practice.
Combination compensation formula
You may want to consider this combination formula when you have an associate who is highly trained in procedures you are currently referring out. An example of these procedures would be endo (simple), orthodontics using clear aligners and extractions (simple), etc. If this is the case, I would consider compensating the associate on one of the three methodologies as listed and adding to that the “specialty procedures” your office has identified, and compensate the associate for performing these professional services. After all, prior to hiring this associate, these procedures were referred out and not kept within your practice.
A note on restrictive covenants
You might also hear different things about restrictive covenants being potentially illegal or unenforceable. If you’re still looking to put one in place, consult with your dental-specific attorney as to whether one would be enforceable. As dental CPAs, we are trained to give accounting, practice management, and tax advice. We are also trained not to render a legal opinion or advice. We must respect this as the CPA profession is very clear on this matter. I do know from my experience that there are some markets that will support a restrictive covenant while there are some markets that won’t. So again, I would seek out a dental-specific attorney to help you if this a concern for your market. I would definitely put a restrictive covenant in your associate employment agreement, if your market will allow it.
It’s possible that you had no idea of the potential variations of compensation there may be available for a general dentist associate. I would highly encourage you to consult with a dental CPA or a dental-specific attorney. You want to be fair to the associate and also to yourself. Although the compensation arrangement can be complex, I would suggest you keep it as simple as possible so that both you and the associate understand it and can prosper from it. Good luck!
Chris Salierno, DDS
I like to think about compensation as a machine with several levers. When an employer and employee enter into a negotiation, they play with the levers until they reach a mutually agreeable solution. An associate wants a higher percentage of collections? We pull that lever up a bit and perhaps pull down commensurately on the lever for CE reimbursement. But we need to have a good idea of where to set these levers to begin with.
The base/draw formula
A traditional and commonly used formula for compensating a general dentist associate is a daily or hourly amount (base) with a bonus that makes them whole to a percentage of production or collection (draw).
For example, an associate would be paid a daily rate on a biweekly basis, with a monthly bonus that represents the difference between 33% of collections for that month and the base already paid. In essence, they are being paid 33% of collections but a portion of that is guaranteed and paid in advance.
This is a good starting point for negotiation. The details will depend on the rest of the compensation package you want to offer, i.e. how many other levers you would like to add. If you feel strongly that your associate should pay a portion of lab fees, you may need to consider raising to 35% of collections to remain competitive. If you are offering medical insurance and a generous annual budget for CE reimbursement, you may be able to offer closer to 30% of collections.
Another approach for compensation is to offer a base pay and to give bonuses on clearly defined targets. These targets might be tiers of production or collection, meaning that as the associate reaches higher tranches of financial performance, they are then rewarded with higher percentages of production or collection.
At Tend, we pay our associates a competitive salary and offer a range of benefits, including health insurance and retirement plans. Our bonus utilizes a Care Score concept a weighted formula that measures elements such as average daily production, patient satisfaction (Net Promoter Score), and performance of the entire practice. This allows us to celebrate achievement while maintaining our promise to patients that we do not incentivize overtreatment.
As for restrictive covenants, it is true that there are states that have strictly prohibited noncompete agreements and others that will simply not enforce them. Check with your attorney (preferably one with dental experience) before putting one into your contract.
Your compensation machine, with its various levers, should be as simple as possible. It shouldn't be overly complicated to figure out how to pay someone, for your sake and for your associate's. When you've finished adjusting your levers and have reached a negotiated agreement, run a few scenarios to ensure full understanding by everyone involved.