Is the management upside down?

If you go on VIN, you will see dozens of posts and links trying to define what production pay is and how to pay it. Unfortunately, it is a constantly moving target. The current thinking is this:

Total pay is 25 percent, including benefits. The usual periodic pay is 19 percent to 23 percent of production, and thus the remainder occurs in benefits. These numbers have been shrinking mysteriously over the past few years as expenses have galloped along unabated.

In the end, all owners and employees are paid on percentage:

Employees paid on a percentage of production get a pay raise not only when prices go up (and/or when they are more productive), but also receive an increasingly greater portion of the net income if price increases cannot keep pace with inflation or expenses. Somewhere out there, net income would disappear and the business would cease.

Employees paid on salary receive some percentage of the net income. This is the standard approach. It relies on periodic reviews and wage adjustments. If the practice is participating in open-book management, these employees easily can justify fair and sometimes substantial wage increases.

Is the owner on percentage? You bet....

As an owner, add up your draws against the business, add (or subtract) changes in cash in the bank, then add any phantom income that is left over according to your financial statements (only your accountant knows for sure). Take this number and divide by the gross for the practice, and you get a theoretical percentage income from the practice.* Alternatively you can simply take your taxable income from the practice and divide by the gross and get another similar percentage. (Caution: Do not reveal this to your spouse.)

In practice, after accounting for return on management, return on risk and then return on investment, a large percentage (Did I use the word percentage again? Gasp!) of today's practice owners are making less as a practicing veterinarian than the associates they hire.

This cannot continue for long.

In other words, this is upside-down management.

*Depreciation not withstanding