How to create an effective compensation system in your dental practice

Employee compensation: although it should be just another system in the dental practice, the topic generates so much angst, stress, and dread, it’s as if it were a nuclear device.  

Maybe this is because many of us have “relationship issues” with money. We equate money with self-worth, value, and success, which can generate financial and emotional reactions to compensation. To make this topic even more emotional, there’s often the perception that the dentist and team are on opposite sides: employees want more money, and dentists want to save money. 

This issue is not unique to dentistry. In their 2023 survey, Franklin Templeton found that employee expectations about compensation have exploded in all industries. They write, “The workplaces of today face insatiable employees that continue to ask for more.”¹ 

This quote bothers me. Equating employees who want higher salaries to hungry piranhas can lead to unnecessary resentment. We’re all experiencing the same era of decreased buying power. Employees do need higher salaries simply to keep up.  

Here’s another interesting statistic from the survey. While there was a 79% increase in employee expectations around compensation, there was also a 77% increase in expectations about recognition and acknowledgement.¹ That should make every dentist sit up and take notice because the crucial insight is: compensation and recognition are inextricably linked.  

During the last 25 years, I’ve observed that the least happy employees are the ones demanding higher salaries. It’s as if they tell themselves, “If I’m not getting fulfilled emotionally, then I damn well want to be paid more.” Therefore, one way to keep payroll expenses affordable is to ensure you have a practice culture where employees feel valued and recognized. 

Defining a compensation system

The first step toward untangling these conflicting emotions and goals is to treat employee compensation as objectively as any other system in the practice, while ensuring that personal recognition is included in the process. A system is a predictable, objective, and fair way of organizing tasks and behaviors.  

In my February 2024 Dental Economics article, “Can you afford your next dental practice employee?” I wrote that if you dole out raises only when employees approach you, you might have a method, but you do not have a system.²  

A great compensation system should be supported by this philosophy: compensation includes all the ways an employee is rewarded and recognized in the practice. A compensation system must feel fair to the employees, be affordable for the practice, and incorporate employees’ social and emotional well-being. 

Components of the compensation system  

In my February article, I described the philosophical tenets of fair compensation. A compensation system includes these components.  

1. Compensation and raises should be based on an employee’s growth and contributions during the year, not their longevity. Although employees may receive a small cost-of-living increase, raises should only given if the employee’s performance has improved and merits an increased investment from the practice.

2. Everyone should have a performance and salary conversation with the dentist at the same time of year. This avoids the stress of remembering hiring dates.

3. These conversations should be scheduled in January or February, after the practice has determined the previous year’s collections numbers. To ensure the practice can afford raises, there must be an increase in collections compared to the previous year.

4. Assuming there is an increase, the dentist should create a salary pool from a percentage of that increase. The dentist should also determine the maximum raise that can be given to each employee.

5. Employee raises should be based on how well the employee met expectations in three areas: how well they fulfilled their own job tasks, how they contributed as a team player, and how they supported the practice’s business goals.

6. Employees should have an active role in evaluating themselves and determining their raises. During the performance conversations, the employee should be expected to self-evaluate and partner with the dentist to cocreate their new performance goals. It’s these goals that will be used to determine the amount of next year’s raise.

7. Throughout the year, the dentist should provide employees with effective feedback about their strengths and challenges so that there are minimal surprises during these annual conversations. Employees should never leave these conversations feeling like they need a therapist or a lawyer.  

Every system has associated paperwork. You’ll need: 

• Employee self-evaluation worksheets
• Dentist evaluation of employee worksheets
• Contract for performance (goal-setting worksheet)
• Compensation package overview (This compares the employee’s current salary and benefits to their new compensation package. This helps employees appreciate the true value of their compensation.) 

FAQs about compensation 

I’ve been asked a number of “what-if” questions.  

1. How do I compensate an excellent employee who is already highly compensated? You can give that employee a one-time performance acknowledgment. Employees do value cold, hard cash for all the reasons I listed. A one-time acknowledgement check won’t lock you into a new base salary.

Also, remember that employees want to be recognized and feel appreciated for who they are. Learn something this person genuinely values and create a personalized gift. This could be anything from a gym membership to certificates for manicures, haircuts, house cleaning, or babysitting services. Be sure to talk with your CPA about how to declare this. 

2. What should I do if there wasn’t a collection increase, or it was too small to create a salary pool? Employees need to understand there is no magic money tree for raises if the practice is not profitable. The key is to keep them focusing on the future. Perhaps you can create a goal-based game where the team can win cash awards for achieving milestones, such as asking for a specific number of referrals. Most importantly, the team needs to engage in a planning session where you all brainstorm ways to increase production and collection for the coming year.  

3. What if an employee wants a raise midyear? This is tough because the employee may be threatening to leave for higher compensation elsewhere. If you give this person a raise, then anticipate that word will get out and it will be open season for everyone to ask. This undercuts the whole purpose of having a system.  

So, the short answer is no, but the nuanced answer is to have an honest conversation with this employee. Is there anything else that’s bothering them about working in your practice? Do they need health benefits because they’re getting divorced? Are they feeling overworked or overwhelmed? Aside from a raise, is there anything you can do to keep them in the practice? Finally, remind them that they may get that raise if they hold on until the performance conversations.  

One two-part question emerges repeatedly. How can a dentist determine if their current payroll costs are healthy, and how can they calculate the impact of raises or new employees?  

This question inspired me to develop the Dental Wage Planner. This tool helps dentists calculate their current costs, including employee benefits and payroll taxes, and compare the costs to their production and collection. The tool also enables dentists to calculate the costs of forecasted raises or new employees. I’m happy to provide the Dental Wage Planner to any Dental Economics reader who requests it.  

To recap, if you don’t want compensation to become a nuclear topic in your practice, you need to implement a system. This means you need a protocol for raises and a process that includes a timeline, job descriptions, and goal setting and evaluation worksheets. 

Finally, you need feedback skills so that you can direct and support your team. This might sound overwhelming, but when done well, your compensation system will become the backbone for employee growth.

Editor's note: This article appeared in the June 2024 print edition of Dental Economics magazine. Dentists in North America are eligible for a complimentary print subscription. Sign up here.

References

1. Voice of the American workeplace survey. Franklin Templeton. https://www.franklintempleton.com/insights/research-findings/voice-of-the-american-worker-survey

2. Weiss S. Can you afford your next dental practice employee? Dental Economics. February 1, 2024. https://www.dentaleconomics.com/practice/systems/article/14303383/can-you-afford-your-next-dental-practice-employee