Compensation and Bonuses:

Ever had a year when your production dropped, yet you still gave your staff salary increases? Many dentists feel compelled to give automatic annual pay increases and to continue bonus programs of questionable value, merely because the staff expects it. Dentists typically lack a system for determining pay increases. Instead they pull figures out of a hat, often at the expense of their own compensation.

It pays to pay wisely!

Jim Pride, DDS

Ever had a year when your production dropped, yet you still gave your staff salary increases? Many dentists feel compelled to give automatic annual pay increases and to continue bonus programs of questionable value, merely because the staff expects it. Dentists typically lack a system for determining pay increases. Instead they pull figures out of a hat, often at the expense of their own compensation.

Add to this an emotional attachment to the staff, and we see why compensation is a major problem for employers, especially dentists. The staff`s feelings have far less impact on the CEO of a large company than on the dentist. Our closeness to the staff makes objectivity a challenge. Since staff compensation is the highest overhead expense of the practice, it pays to pay wisely. Here we examine four basic tenets of compensation and present an effective compensation model based on research and field experience with thousands of practices.

(1) All salary increases must come from increased profitability. Many dentists get into financial difficulty by giving bonuses and raises that their practices can`t afford. Common sense dictates that without increased profits, staff raises will come from the doctor`s pay.

(2) Compensation should be competitive with the market. When employees feel underpaid, they develop poor attitudes and performance. We need to know why such feelings arise and how to correct them. Consider:

Employees may actually be under-compensated. If the regional average is $14 per hour for a given job, and you`re paying $11, the employee will feel underpaid. Dentists must pay market value to compete with other employers for qualified staff.

Employees may feel unappreciated. When employees are paid a competitive wage, but still feel under-compensated, they may feel unappreciated. Ironically, it`s often our best employees who don`t feel recognized. We ignore our stars while spending undue time worrying about the poor performers. We must excel at recognizing top employees, so they feel well-treated, appreciated, and well compensated.

(3) Employees must have control over their compensation. Employees will not feel properly paid if they have no control over their compensation. The staff loses control when the dentist gives annual pay increases arbitrarily. If compensation is awarded independent of performance, why should employees work hard?

The staff also loses the ability to influence their compensation when it rests on factors they believe are not their responsibility. For example, basing a raise on increased collections could destroy the motivation of the dental assistant who is typically uninvolved in collections, or considers them "someone else`s job." It is up to the dentist to establish parameters for employees, and help them recognize their overall contribution to the practice`s goals that affect their salaries.

Employees also lose control over their compensation when a dentist sets a year-end bonus for the entire staff, rather than setting individual objectives for each employee or department. Consider the case of the practice targeting a productivity goal, such as $600,000, offering the staff a trip to Disneyland for achieving the goal. This type of compensation fails because the individual employee does not understand his or her role in hitting the goal. Moreover, the best achievers assume that they will work hard but the less conscientious team members will not, and that the office will miss its goal, regardless. So why try? Furthermore, the underachievers in a group can`t accept an award in good conscience that they don`t deserve.

(4) Compensation increases should be based on demonstrated skill, ability, and attitude. It is financially unsound and psychologically unmotivating (for dentist and staff) to increase compensation arbitrarily. Base employee raises on actual job performance that boost profitability and, in turn, pay for the increase. How do you reward employees individually for their contribution to increased profitability? Compensation based on performance requires the dentist to be a leader who sets clear, achievable expectations for each employee and measures performance against those guidelines. When this occurs, the employees feel in control of their job performance and proud of their accomplishments; they understand their direct contribution to the bottom line and how they influence their own pay. If dentists do not know how to be effective leaders, they`re not alone; most corporate CEOs seek leadership training, and so should dentists.

Establishing a compensation pool

Set aside money for staff increases in a compensation pool. Do not base your pool on a percent of net profit. If you do, employees tend to develop a negative attitude towards your expenditures, viewing new carpets or computers as taking away from their pay increases. This is why compensation models based directly on profitability routinely fail.

The pool is actually based on increased production, measured by collections (to ensure you`re paying based on money obtained). Collections, incidentally, should be 98 percent or higher of production. Set aside a certain amount of money, ideally 10 to 20 percent of the increase in collections, to divide among the staff for annual compensation raises. This amount allows for the owner`s profit and the expenses of increased productivity (such as additional lab and dental supply expenses, which should not exceed 20 percent of production).

For example, let`s assume the practice collects an additional $30,000 for the year. That $30,000 could be allocated as follows: 20 percent, or $6,000, for expenses; 20 percent for staff compensation increases; and 60 percent, $18,000, for the doctor`s compensation increase or for new capital expenditures. This puts $6,000 in the pool for next year`s salary increases.

This compensation model measured by collections is an indirect way of sharing profits without the staff feeling in competition with other expenditures. The percentage of increased collections awarded to the staff is optional. A minimum of 10 percent should be allocated; however, 20 to 30 percent is a generous and motivating amount.

Where does increased profitability come from? By increasing profits steadily, year after year. A company that plateaus in profits is headed for trouble because employees expect compensation increases. Controlling costs may provide money for salary increases once or twice, but there is just so much juice in that turnip. For the long term, staff compensation increases are fed from increased profitability, which derives from better and more efficient scheduling, treatment, collections, and patient service.

Does the dentist have to increase profitability forever? Basically, yes! The staff needs compensation increases to rekindle their motivation and keep up with inflation. Therefore, the dentist must continuously increase productivity. When a new partner or associate comes on board to expand the practice, the senior dentist can ease off - on hours worked, not hourly production.

The good, the bad, and the ugly

A type of compensation that many employees count on is the bonus program. Bonuses are monetary awards or gifts, usually based on the occurrence of certain events. Many dentists tend to set up bonuses that backfire, offering them in lieu of salary increases. Programs like this often set the expectation among employees that any production increase automatically results in bonuses.

Dentists also routinely offer end of the year bonuses, even when they can`t afford it. They feel obligated, due to the time of year and its supposed positive effect on employee morale. But giving $500 or $1000 to boost morale seldom has more than a temporary effect. If Sally and Pat bicker at the front desk, and consequently make mistakes in scheduling, billing, and patient service, giving them money at Christmas will not correct the situation.

A more effective way of showing genuine appreciation of your staff during the holidays is to give them paid time off. Consider closing the office for a few days and giving your staff time off with pay. Plan carefully for it and incorporate it into your production goal. Paid time off is universally valued by employees and is an excellent holiday gift - but don`t call it a bonus.

Whatever the case, bonuses should be based on productivity. If Sally and Pat work out their differences, and improve their performance, as well as production, then, and only then, do bonuses make sense.

Another bonus "trap" is when the doctor commits to sharing 15 percent of collections with the staff at year-end - but only if they hit a 98 percent collection rate. The staff may work hard, but only hit a 96 percent collection rate. Though the dollar value of increased collections was $80,000, the dentist must then tell the staff the bad news: Although they all should be sharing a $12,000 bonus, they are not going to receive any bonus that year because they missed the target rate by two percent. This not only kills staff motivation, it makes them angry - with the dentist! It also decreases morale. The staff may resent whomever they feel did not produce their fair share of collections. Ensure that your bonuses have no punitive or unfair provisions. Base bonuses on the dollar value of the increased collections, which is the true "bottom line."

Tailor the bonus to the employee

Consider the dentist who gave a 20-year employee a diamond necklace on her anniversary and was shocked at her unenthusiastic response. The employee did not wear jewelry, nor did she appreciate the qualities of the fine piece. Rewards must reflect the values of the individual, as well as the values of the practice. An unmarried employee may truly appreciate a trip as a bonus, whereas someone with small children may not, because it would take her away from her family.

Simple public acknowledgement can often be the most effective way to demonstrate gratitude to employees. Research shows that the three aspects most valued in group dynamics are appreciation, recognition, and validation. Give sincere recognition for specific achievements, so the employee knows the reasons for your praise, making it credible. Whenever an employee performs above and beyond the call of duty, shake hands with the person and commend him or her before the group. This highly motivating reward can be more valuable than cash, because cash never tends to be enough.

Phase out an unsuccessful bonus program. Explain the reasons behind your decision and assure the staff that it is not a punitive move. This is a time when clear communication is vital to avoid a negative reaction. In fairness to the staff, you may need to incorporate a long-term, expected bonus into a pay increase when eliminating the bonus program.

Reward and recognition programs

Once the staff is in control of their compensation, the dentist can incorporate innovative and enjoyable ways to increase staff motivation and morale. Reward and recognition programs are programs or games that are more specific and short-term than bonuses. Such games should be based on changing certain behaviors and systems to improve a particular aspect of the practice.

For example, when teaching the staff a new scheduling system which pre-blocks three significant procedures daily for the dentist, offer a reward to motivate the staff to implement the new skill. You may place an IOU for $25 in a pot on each day that the goal is met. If the goal is reached for every day of the month, then double the amount in the pot. Divide the money among yourself and the staff and go on a shopping spree together.

Reward and recognition programs such as these are team- and skill-building exercises that the employees should help create, adding variety and fun to the work experience and improving the practice. Vary your programs every month. Experiment with new and fun ways to improve performance.

As business owners, it is important to know how to compensate the staff in a wise and fair manner. When we behave like effective leaders, we build trusting relationships with the staff and enhance their job satisfaction. We also ensure our own compensation increases and practice success.

Rewards must reflect the values of the individual, as well as the values of the practice. An unmarried employee may truly appreciate a trip as a bonus, whereas someone with small children may not, because it would take her away from her family.

Dividing the money

How will you divide the money in your compensation pool?

- Determine the range of your salary increases, based on industry norms (generally up to 15 percent over the employee`s current salary). Consider factors such as the amount of time since the last increase and where your salaries sit competitively in the market.

- For each position, have job descriptions in place that clearly define the tasks and skills required. Include clinical, practice management, and people skills.

- Rate each employee individually on job performance. Also give credit for new skills and tasks mastered, as well as teamwork skills.

- Determine the percentage increase for each employee. One employee may earn a 4 percent increase, and another 15 percent. The amounts should be based on individual performance. Work out the increases you will pay so that they do not exceed the money in your compensation pool.

One way to do this is to calculate what the total amount of the increase would be if you gave all employees the highest raise, for example, 15 percent. Ensure that this sum falls within the amount in the pool. If it does not, lower the maximum raise to 10 percent, and re-calculate. You can then feel comfortable giving each employee any percentage up to that maximum.

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