How Big Should That Raise Be?

Dec. 1, 1996
How big should a raise be? Should it be based on the inflation rate? Should it be based on raises given by other employers in your area? Does this particular employee deserve more or less than the average? Why? Are your decisions based on concrete facts or are you using your `gut` feeling? Everyone is faced with these difficult decisions at least once a year. How you make them might mean the difference between a healthy practice and one with disgruntled, perhaps litigious, personnel.

Steven C. Reynolds, DDS

How big should a raise be? Should it be based on the inflation rate? Should it be based on raises given by other employers in your area? Does this particular employee deserve more or less than the average? Why? Are your decisions based on concrete facts or are you using your `gut` feeling? Everyone is faced with these difficult decisions at least once a year. How you make them might mean the difference between a healthy practice and one with disgruntled, perhaps litigious, personnel.

Because of the lack of business training received by dentists and, perhaps, because in the past, profit margins were higher, dentists have used simple, easily-available formulas to compute a basic rate for raises in their offices. The current inflation factor is announced on television quarterly and it is published in newspapers and magazines. Yearly, the government announces the annual cost-of-living increase. There are numerous articles written on the wage increases given in other sectors of the economy. These figures give us an idea of how prices are rising, and can be a good general indicator of the economy. However, if you rely solely on these figures, you are missing a valuable tool with which to manage your practice and employees.

Traditionally, dentists have taken cost-of-living figures and used their `intuition` to modify the base amount when calculating a raise or making a new hire. But, anytime intuition is involved, emotions can`t be far removed. Employment decisions, based on emotions, are lawsuits waiting to happen. Even discounting the legal implications, how can you run an effective, efficient business based on intuition? With overheads running up to 75 percent, you must be able to account for every cent that passes through your practice and you must ensure that each penny is spent wisely. This is the reason for production-based decision-making. For years, big business has used this method. General Motors, IBM or Blue Cross/Blue Shield would never think of making wage decisions based on emotion. They know precisely how much an employee produces and what the company can afford to pay that employee. Production-based decision-making is based on managerial accounting `costing` principals. Using this method, you assign costs (what we commonly call overhead) to each department and weigh that against the production of an individual in that unit.

The first step is to figure out your service cost. This is more difficult than it sounds. There are many different ways to determine this figure. Every consultant will give you a slightly different method. The difficulty lies in what figures to include and what figures to ignore. I believe that the service cost should take into account only those costs associated with the production of a particular service. If it is possible, it is even more beneficial to break out costs from other departments that can be specifically attributed to each service.

Most offices have three departments, front-desk or support staff, operative staff (doctors and assistants) and hygiene staff. Front-desk staff is nonproductive, but you can determine their cost to the other departments. The costs of the front desk could be classified as fixed, indirect costs. They are fixed because they won`t vary with production levels and they are indirect because they can`t be traced directly to the cost of providing a service, as would be the case for a hygienist or assistant.

There are two different fields of thought regarding indirect costs. One is to distribute the cost over the entire practice and give everyone an equal piece of it. The other is to try to trace each part of the activity to a particular department and assign it there. It is unfair, for example, to assign equal, front-desk costs to the operative and hygiene departments, when considerable time is spent by the front desk doing hygiene-recall procedures. It is equally unfair to assign front-desk costs associated with making patient-payment arrangements to the hygiene department. In general, you should study your financial statements and think about which costs or what percentage of those costs can be attributed to each service. Once you have the costs associated with a service, it is a simple task to determine your profit margin on that service. Just subtract the cost of providing that service from the fee you receive for providing that service and express the result as a percentage. That is your `service profit.`

The next step in implementing this program is to determine each employee`s production. Once you have the production figures for a particular employee, then determine how many hours that employee worked during a given time period. Monthly probably is the most convenient and is long enough to help smooth out variability. If you then divide the monthly production by the hours worked that month, you will arrive at a production-per-hour figure for that employee. This number should be recorded, preferably on a computer spreadsheet. A spreadsheet makes it easy to do the math. Just program the spreadsheet with the formulas and, when you plug in the numbers, it automatically will compute the hourly production. If you have a charting program or if your spreadsheet is so equipped, you even can create a graph to help visualize the numbers.

Once you have your `service-profit` figure and the employee`s production rate, you can determine how much you can pay for a certain position. For example, let`s say that a particular hygienist is producing $60/hour. Your service profit is 35 percent, which means you clear 35 percent on that service. If you paid that hygienist 35 percent of $60, or $21/hour, you would just be breaking even on that employee. This also gives you a basis to determine what you should pay a new hire. If your average hygiene hourly production is $65/hour and your service profit is 35 percent, then the highest wage at which you would want to start a new hygienist would be $22.75 (35 percent x $65). You probably would want to start that employee at a rate less than that so that you can be certain to be able to give the employee an increase at the first review. You wouldn`t want to make the mistake of hiring a new employee and then discovering that you were paying too much and weren`t making any money on that employee.

All of your employees should know that you are using production as a partial basis for determining their pay rate. This is the real value of the system. It helps them realize that if they produce more, you can afford to pay them more. When employee-review time comes around, review their figures with them. Perhaps not in a specific manner: "Genny you are currently producing $65/hour." But rather talk in general terms; " Genny, your production is a little on the low side, compared to the other hygienists. Let`s go over some ways that will help you boost that up." Remember, if you increase their pay when production increases, you must be prepared to decrease it if their production falters for a long period. However, the office manager or the doctor should talk to the employee long before that becomes a problem and help him/her to determine what is wrong.

Productivity should not be the sole means for determining pay rate. Factors like attendance, reliability, work habits and work quality also need to be considered. Don`t make the mistake of trying to run a practice reimbursing personnel only on their production. You will have back-stabbing, self-serving employees, office chaos and unhappy patients. However, if you want your practice to be profitable, you must have some accurate means by which to base your wage decisions.

When you start to put this system into your office, start slowly. People will be concerned. Keep the figures for a number of months before you discuss them with employees. Study the numbers, see where you are, see if you are paying too much or too little. After you have a number of months in your spreadsheet, begin to discuss them at the employee review. Employees don`t need to know the exact figure they are producing; remember, you aren`t paying solely on production. But, they should know that you are and have been keeping these numbers and that you examine them monthly. The employee should be told if his/her production is high, low or average. You should then offer ways to increase the production.

In these days of high costs, decreasing insurance benefits, managed care and tougher competition, everyone must be aware of his/her office costs and have a rational method of determining wages. The prudent use of production-based, decision-making can do just that.

The author practices general dentistry and owns a large, three-doctor practice in Rochester, MI.

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