SO, YOU WANT TO START OR FIX A “BONUS” SYSTEM (Part 5 of 5)
NUTS AND BOLTS OF THE SUMMIT BONUS SYSTEM
Above, in outline form, you see the Summit Bonus System: A system that was used in my own office and has been presented to thousands of offices, having survived with little or no modification for over 35 years. Let me explain step by step what and how we arrive at the systems and how to apply the numbers.
The bonus is paid each and every month on or about the 10th. As you can see, even though the bonus is paid monthly, it is averaged over 3 months (rolling average). This has the effect of taking out the highs and lows in production and creating a more consistent bonus number. It also prevents staff, after seeing that this month is doing well, from deciding to have the last couple of day’s productive patients just pay when they come back next month. In this way, they get a running start on the next month. This violates our collection systems and is not what we want. Averaging the 3 months prevents both the staff and the doctor from manipulating the system. In this example we will be paying a bonus for the month of May. We go back and add the Production and Collection of March, April, and May to get a 3-month total for each. We divide by 3 to get the average Production and Collection figures and then divide the average collection by the average production. We are trying to create a system that emphasizes a collection rate of 98% or greater. If fact, it was unusual for our collections (after any adjustments) to be less than 100%, and most of the time was greater than 100% due to our pre-treatment payment discount. In this example the ratio of Collection/Production was greater than or equal to 98%. Because of this we will use the average of the sum of the Production plus Collections. If it had been less than 98% we would have used only the average Collection figure. You cannot pay money for something you did not collect. The staff will understand this and your collection rate will climb dramatically. Once we have our final number, we subtract the base or BAM number.
How do you arrive at your BAM or base? Remember: We are shooting to lower our overhead to around 50% (not the national average of 67%-75%). Let me give you a couple of ways that do not usually work but are an option. The base is the amount that must be exceeded before any bonus is paid. You either produce the base or do less and there is no bonus.
1. If you double your operating overhead you will have the exact amount that would give you a 50% overhead. Simple, but almost unobtainable in most offices. It is too great a difference between reality and the goal. It also will not motivate your staff if the amount of increase before bonus is so high as to be unimaginable for them to reach.
2. Figure out the overhead for staff compensation and multiply by 4. This would give you a compensation overhead percentage of 25%, which is your ideal goal. In most offices the main category of compensation is the biggest overhead struggle. Get this in line and you are 75% of the way toward the perfect overhead. Once again admirable but when 90% of the offices are overstaffed or drastically under producing for the number of staff that they have, you are most likely creating a demoralizing base that the staff will find impossible to obtain. We must figure out a way to do this so that the base is obtainable, motivating, and inspiring without dragging everyone down.
3. We could figure out what the average production/collections per month were over the last year and add about 10% and use that as our base. They do not deserve a bonus if they do what they did last year so 2x adding about 10% to the average to take care of any unexpected expenses in the future, this might make sense. If you think about it, this formula really does not take into account the benchmark and goal of our ideal overhead model. It is done without actually taking into account the goal of lowering your overhead to a particular overhead target percentage. It would affect different office overheads and challenges differently.
In an office with a very high compensation or overall overhead, we could figure the base this way but limit the difference between the base and amount above the base to a lower percentage. In other words, if the overhead is good, we would use the 15% number. If we had a very poor overhead we might use maybe 5% for the first 5 or 10 thousand dollars over and then go to 7-10% for the next $10,000 and finally when we got the ideal production number we would max out at 15%. We figure out a ramp to make this work by rewarding their progress but not killing our overhead. The percentage and dollar amount would be designed to pay bonus with the target overhead goal in mind. This sliding scale allows you to give a monetary bonus while inspiring staff and working toward a future production goal and overhead amount leading to increased profitability.
There you have it: Five articles laying out the matrix and foundation for a successful bonus system that you will not have to alter as you grow. I know there will be a lot of questions, so feel free to give me a call and we can cover each and every one of them. This is how you Summit.
Michael Abernathy, DDS
PS. A few weeks ago, we indicated that planning had commenced for a “live” seminar event this fall. The dates are now set: October 26 & 27. The location is Allen, TX, a Dallas area suburb. We hope you will check your calendar and pencil it in. Watch this space again next week for additional details. See you in October!