If compensation has put the squeeze on your practice, take a look at your doctors' slice.
Dr. Robert Esplin is the owner of a state-of-the-art, 16,000-square-foot small animal practice near Toledo, Ohio. Sylvania Animal Hospital, which he opened in June 1974, utilizes the talents of five veterinarians, each one supported by six team members. The practice features 24-hour care, temperature-controlled ICU cages with supplemental oxygen, an underwater treadmill for canine physical therapy, and its own blood bank.
Across four decades, Dr. Esplin has cultivated the fruits of practice ownership. But recently, the issue of associate compensation left a sour taste. When he offered to pay one of his doctors 18 percent of her production—a number he based on years of research about compensation—she told him his offer made her feel disrespected. "She has no idea how angry that made me," Dr. Esplin says.
No subject is trickier (or produces more frustration) for doctors on both sides of the owner-associate divide than associate compensation. To figure the real cost of, say, a dental extraction—and consequently determine what the associate who performed the surgery should be paid for her work—the practice owner must consider everything from electricity to continuing education to floor wax.
It's no wonder that owners and associates alike become overwhelmed when it's time to talk turkey. And it's no wonder that they've consistently searched for a reliable way to determine appropriate compensation. Paying doctors a straight salary is the simplest approach, but some say it eliminates the motivation factor. Paying doctors a percentage of the gross revenue they produce rewards associates for their efforts, but other experts say it encourages unhealthy competition. In fact, ask five different experts what they think about associate compensation, and you'll likely get five different answers.
One prominent voice among these experts is Veterinary Economics Hospital Management Editor Mark Opperman, CVPM, owner of VMC Inc. in Evergreen, Colo. He's developed a system called ProSal, which promises the best of both worlds by guaranteeing associates a base salary but paying them based on their actual production.
ProSal and other production-based compensation models have become extremely popular in the last 20 years, being used in as many as 77 percent of practices, according to Benchmarks 2009: A Study of Well-Managed Practices by Wutchiett Tumblin and Associates and Veterinary Economics. But some are questioning whether production-based pay is still the best choice for current economic times. What's more, these industry analysts say, paying for production doesn't really provide the sort of motivation a modern practice needs to flourish into the future. Are they right?
For Opperman, the answer is clear. "ProSal is perfect in this environment," he says. "Practices that aren't on ProSal now need to be."
In fact, he says, practices that use ProSal are currently faring better financially than those paying associates a fixed salary. "It's doing what it should be doing," he says. "On ProSal, the veterinarian is more motivated to offer a full-service approach and to charge for all the services provided."
The basic ProSal formula is this: Associates receive a guaranteed base—let's say $70,000—however, they're paid based on a percentage of their actual production. That percentage can range from 18 percent to 25 percent, as determined by the doctor's benefits package, the number of support staff at the practice, and other factors. (For a refresher, see Squashing ProSal myths.) "Those are the golden numbers," Opperman says. "They haven't changed with the recession—they're based on the actual cost of doing business."
But Dr. Esplin says ProSal has never computed for his practice, at least not at the percentage his associate was expecting. "When I look at how I would apply production compensation to my practice, which is heavily leveraged with nearly six techs and assistants on staff per doctor, it's not sustainable financially," he says.
Another practice management consultant, Owen McCafferty, CPA, CVPM, of North Olmsted, Ohio, believes doctor compensation needs a fresh look. He says the idea of production-based pay originated in the 1970s with the late Don Dooley, a "practice management grandfather" (and a Veterinary Economics Editorial Adisory board member until his death in 2004). Dooley, McCafferty says, developed the idea that emergency clinic veterinarians ought to be paid 35 percent of the gross income they generated (the low-volume nature of these businesses being the reason for the high percentage). The idea began to catch on in other types of practices as well, with Dr. Ross Ainslie of Halifax, Nova Scotia, being the first to use production-based pay in general practice in the late 1970s, McCafferty says. Deriving compensation from one element of service—production—was simpler than assessing a doctor's total contribution and basing his or her salary on that. So production-based pay became increasingly popular.
Through the 1980s and later, the parvovirus epidemic generated "a massive amount of dollars" through services alone, McCafferty says. Consequently, production-based pay became even more entrenched. And Mc-Cafferty says this allowed doctors to neglect other aspects of practice-building."In those days," he says, "a veterinarian's role was not to develop the practice but simply to provide services."
Today, McCafferty says, veterinary hospitals are more focused on diagnostics, which requires more sophisticated and expensive equipment. Andthe support team plays a greater role. While employee pay accounted for 14 percent to 16 percent of gross revenue in the mid-1970s, it now takes 18 percent to 22 percent—or as high as 28 percent for practices that emphasize team-building, McCafferty says.
These changes, he contends, mean the veterinarian's contribution is just one of many factors in the interplay of revenue against costs. "If you're measuring the effects of the doctor in a practice with state-of-the-art diagnostics and facilities and a highly leveraged support staff," McCafferty says, "that's a different situation from the doctor with little assistance." Associate production doesn't, for example, account for contributions such as visibility in the community, team building, continuing education, efforts to build client loyalty, and other forms of practice furtherance, he says.
The upshot, McCafferty believes, is that the traditional 20-something production percentage used in most compensation formulas is antiquated. "But the student coming out of veterinary school doesn't have the benefit of this historical perspective," he says. "Instead, there's this perception that if you don't get 'blank' percent of gross, something's wrong."
Denise Tumblin, CPA, is a strong proponent of paying on production with a guaranteed base salary; she recommends that owners pay doctors 16 percent to 21 percent of their production. (Exceptions, she says, are practices with few support staff, which affects a doctor's ability to produce and necessitates a higher percentage.) But she agrees with McCafferty that false perceptions are a problem. For example, when a practice owner posts to a discussion board where a hot debate is raging that she pays her associate 23 percent, readers don't know 23 percent of what, or what 23 percent includes or doesn't include, from payroll taxes to benefits to continuing education fees. Twenty-three percent becomes "the number," and it fixes the idea for associates that 23 percent is what they should be paid.
"Everybody's looking for that number," says Tumblin, owner of Wutchiett Tumblin and Associates in Columbus, Ohio, and a member of Veterinary Economics' Editorial Advisory Board. "But when it comes to salary, it really isn't one size fits all."
This is exactly the perceptual snag Dr. Esplin encountered. Many associates learn about production-based pay in veterinary school classrooms, and often from guest speakers. So Dr. Esplin called the speaker who'd suggested the percentage that his associate was expecting. The speaker, he says, told him bluntly, "They're not hearing everything I'm saying."
Those kinds of misunderstandings can carry over to the actual arrangements owners make with associates, Tumblin says. The sharpest issue, she argues, is not compensation, "it's miscommunication about compensation."
Tumblin recommends that most practice owners pay associates using a production-with-guaranteed-base method. She advises fixed salaries only for practices that are overstaffed by choice—those with more practitioners than necessary, often to meet quality of life demands. If those associates are paid on production, she says, the practices run the risk of veterinarians fighting for caseload.
Tumblin, the author of the Benchmarks series of Well-Managed Practice studies, says that just 28 percent of Well-Managed Practices in 2009 paid associates a straight salary. Fifty percent paid production with a guaranteed base. The remaining 22 percent paid straight production. "I do believe in incentive-based formulas," Tumblin says. Here's why:
Plus, in lean economic times, Tumblin says, it's not fair for the owner to be the only one who suffers. "Incentive formulas can be a way for other doctors in the practice to experience reality," she says. "There's no doubt that it's the owner's responsibility to bear the primary burden of hard times, but it's foolhardy for associates to ignore the economic situation."
Working out the exact numbers to provide fair compensation is difficult, Tumblin admits, but many guidelines are available. She herself encourages a "split rate" for associates, meaning doctors receive different percentages for different types of production. In companion animal practices, Tumblin's rate for services is between 22 percent and 26 percent; for products it's between 4 percent and 10 percent—all dependent on the staff-to-doctor ratio, the service-product mix in the practice, and a host of other factors. The Benchmarks 2009 study suggests that the average split rate being used by owners is 22 percent for services and 8 percent for pharmacy products and therapeutic diets. (For a more thorough explanation of Tumblin's strategy, see Get a clue about associate compensation.)
"I think there's enough information out there for a practitioner to calculate the right incentive compensation," Tumblin says. "You just have to remember there's no one right or wrong answer. The more important thing is to clearly communicate how you're calculating compensation and be sure your associate understands and agrees."
Even if he could find the perfect production number, Dr. Esplin says such a compensation system wouldn't be right for his practice. "I've always thought that unless you're very busy, production compensation pits associates against each other," he explains. "They worry about who gets what. They come in on their day off to do the gravy surgery. It turns them into accountants. Being human, often with a large student debt load, they may have a tendency to overprescribe and overrecommend.
"We're a profession," Dr. Esplin continues, "so we should be salaried. We're not selling a commodity. If someone wants to make more money, they should buy in and take some of the risk."
Dr. Marsha Heinke, EA, CPA, CVPM, of Grafton, Ohio, agrees that there's a danger associated with financial incentive programs. "When you choose to be a veterinarian, you choose to serve the public, not your pocketbook," she says. "I'm not saying those two things are mutually exclusive, but somehow they have to be reconciled."
Too much emphasis on performance incentives can, she says, lead to "unattractive behavior." She's seen associates hover over technicians as they filled out invoices to be sure their provider codes were properly recorded. Too much emphasis on the pocketbook, she says, can lead to gouging clients for services, ignoring situations that won't generate fees, and fighting over clients or lucrative cases. "The question is, do we lose the client-centeredness of our practices?" she asks.
McCafferty worries about this as well, noting that many practices monitor veterinarians for undercharging, "but only the best monitor for overcharging." That doesn't mean he's against rewarding associates financially, he says, but he argues that they should be incentivized to make long-range contributions to the business. "Smart practices reward associates who bring in clients rather than carpetbaggers who hop from exam room to exam room," he says.
Dr. Heinke agrees, adding that changes in the economics of modern veterinary practice force owners to approach compensation from a more holistic perspective. Her advice is for owners to "stay interactive with their top line," to understand their profitability and the relationship between their fees and operating expenses, and to monitor how they're using staff to boost what their veterinarians can do. "If I've invested in a large facility with all the bells and whistles—all the things that keep clients coming in the door—and a high level of staffing, my cost of operation as a percentage of revenue is a lot higher than the low-cost, high-volume, 1,000-square-foot facility with a couple of exam rooms that gets clients in and out as quickly as possible," she explains.
And if you add rapid obsolescence of expensive equipment, management software costs, service contracts, and other expenses, the cost of doing business grows dramatically. "You have to know what your profitability is, and then you work back to how to pay everybody," Dr. Heinke says, "which includes doctors. All the pieces work together."
Dr. Heinke advocates a compensation plan based on an array of factors, of which production is just one. For example, to receive the top level of incentive-related pay, a doctor:
The underlying purpose of an effective compensation strategy, Dr. Heinke says, is to help doctors reach their individual potential—which they do by helping the practice reach its potential.
And here Opperman would agree. He believes, however, that associates who focus on practice development—attracting new clients, getting involved in the community, furthering their education—will see the results reflected in their production income. And the only time he's observed any overcharging or vying for caseload is when doctors have had deeper personal issues. "These problems will come out anyway; they just show themselves sooner when the doctor's on ProSal," he says. "It's a personality flaw, not a flaw in the method of compensation.
While acknowledging that opinions vary on this complex subject, Opperman maintains that production-based pay is, in fact, the modern way of paying associates. In Dr. Esplin's situation, he would suggest a percentage on the low end of the scale to suit his highly leveraged practice. Tumblin agrees. "With six technicians or assistants supporting each doctor," she says, "the percentage paid to the doctors should be 16 percent or perhaps even lower."
So maybe the two camps aren't that far apart after all, at least in their belief that a progressive, highly leveraged practice needs to pay doctors a lower percentage. The upside for doctors in these hospitals, according to Tumblin and Opperman, is that a high staff-to-doctor ratio paired with a strong management structure results in higher efficiency and productivity. That means doctors can see more clients and produce more income—benefiting both the individual doctor and the practice as a whole—and the practice maintains employment costs (as a percentage of revenue) on par with a practice with a lower staff ratio, no management structure, and lower productivity.
So where does that leave Dr. Esplin and his sour compensation conversations? He's keeping it all in perspective. "I'm not a guy who sits in his office surrounded by charts on the wall tracking productivity," he says. "But, in the end, I know we pride ourselves on giving extremely good care to pets."
And no matter what compensation model he decides to use, that's a recipe for sweet success.
Veterinary Economics special assignments editor John Lofflin is a freelance writer in Kansas City, Mo., and journalism teacher at Park University in Parkville, Mo.