TRANSITION TO COMMISSION
The hot topic I keep being asked about is how to convert hygiene pay to a commission or hybrid pay. While I have written on this before, I want to take a different approach to it by analyzing this dilemma from a perspective that includes historical facts, business strategy, and the practicality of how to do it.
Why would an office consider this change from hourly or salary to a commission based on net adjusted (after write-offs) production? Historically, 20-35 years ago every person, including associates, were paid in the form of a salary or hourly wage. This was viewed as simply the cost of doing business and was offset by inflation and increased demand for dentistry in a growth market with very little competition. Back then we could afford “cost of living raises” without altering our profit margins. It wasn’t until we started to see managed care whittle down our fees that the smart doctors began to question the validity of continuing this pay structure. The new dental economy we find ourselves in has an ever-increasing graduation rate (6,500+ this year translating to more competition), overhead increasing by 11% annually in the healthcare field over the last 5 years with no end in sight, a decrease in patient spending for dentistry, and higher debt carried in our practices. Ask yourself this: How can I continue to pay an increasing hourly wage or a salary when what the office gets per procedure has continued to diminish each year, while my overhead continues to rise? To really simplify this, we make less every year but we pay our employees more. This is why since 2008 the average independent dental office owner has taken home less every year. Added to the fact that most doctors still give a cost of living raise or even “longevity based” raises (you get payed more because you have been there longer even though the office profit continues to tank) and any “simpleton” can see that there will be a time in the not too distant future when there won’t be any money left to pay ourselves unless we address this inequity and one-sided risk. Consider the burned out or aging doctor that produces less each year and you have an eventual untenable situation.
The fact is that 90%+ of dental offices make no profit. When I ask doctors how much profit they made last year, they generally tell me 25%-35%, which would be amazing if that meant after paying everyone, they had 25%-35% left over. The reality is they were telling me what they took home out of the total collections. However, that is not profit. That is just part of your overhead for a doctor to work there. It is the going rate for what you would have to pay another doctor to do the work. It is your salary as an employee of your corporation. It is not profit. As an owner of a small corporation you are a shareholder, the boss, but you are also an employee, the dentist. In other words, that percentage if it is in the 25%-35% represents the owner doctor’s pay, and most practices find that it is even less than that. Keep in mind that you are not guaranteed this or any fixed percentage if you are the owner. Most doctors are happy if they get this much. Profit is that amount of money left over after paying all the bills (including the doctors pay), and even in a one doctor office it should cost you 25%-30%. That means that if you have a 70% or higher overhead, there is no profit. In case this is not hitting home, it is “BAD”. It’s also “bad” that most of us never look at it this way or realize how tenable our financial future is.
Commission pay, on the other hand, is an algorithm. It is not some predetermined percentage because everyone uses that amount but a carefully analyzed percentage representing a reasonable pay based on an office with a reasonable overhead. But too many offices don’t have a “reasonable” overhead. Done any other way, you will come up short. Done correctly, and it will be a formula that is scalable, sustainable, and fair. It makes business sense and inspires your employees by its impact on what they take home. At the very least, understanding this foundational reality of business will cause you to engage and act to improve your results.
Let’s look at associates first. Most doctors call me asking what percentage or daily pay should they offer. The correct question should concern finding out exactly what your overhead actually is. Let’s assume it is 70% (The average office is 67%-75% which is a red flag in that average offices are not ready to have another doctor and teeter on the edge of long-term solvency). Each of you should assume that if you hire an associate you expect to make at least some passive income off of the young doctor’s work. If not, why would you hire someone? Let’s use a small percentage of say, 5% to 10% profit above and beyond what the associate brings in as our goal for passive income. Most associates, if you explained it this way, would think that makes sense and sounds fair. Ah, but you have a 70% overhead. The most you could pay is 20% if you wanted 10% profit and 25% would be 5% profit. Ah, but wait, you had to finish out that op that no one wanted to work out of and also hire at least another assistant for the additional doctor, so you no longer have a 70% overhead. Hopefully you get the picture. Basing a commission or daily pay without looking at your overhead is a recipe for disaster.
Now we look at the hygienists. I wrote an article a couple of years back called “Learning How To Present Change In Hygiene”, just click this link and read it to get all of the details. In considering the transition to commission we have to do a little home work. I want you to run a “production by provider” report for the last twelve-month period. This will give you all of the producers by name and the total production for that period of time for each of those providers. Secondly, you need to get your CPA to give you each hygienist’s pay for that same period (be sure and include taxes, benefits, continuing education, etc.). Now we go to work. Take the “total pay” for the first hygienist and divide that amount by her production for that same period of time. Example: Total Production for the last twelve months was $137,000 and her pay was $70,000. Do the math and you find that although you payed her $40/hour, effectively her pay represented 51% of her production (probably more if you did not use the adjusted net production after write offs). You don’t make this much of your production and neither should any hygienist. Paying by the hour or salary exposes you to great risks of ever-increasing costs with little or no risk to the employee, even though they are the only ones that could control what they produced. It is human nature. If paid hourly, the hygienist will see one patient per hour. It has nothing to do with the actual time they need for that patient, they just don’t feel the pressure to engineer their schedule to be productive within the reality of a sound business strategy. FACT: Your hygienist(s) should produce three times what you pay them, and the hygiene department should produce about 33% of the total production of the office. So, go and look to see if that is the case. Most of you will find that your hygiene department is falling short and needs some attention. Now go and look out 3-4 months into the future on your hygiene schedule. This will be somewhere in the middle of a typical 6-month recall cycle. Statistically, hygienists paid hourly seem to only successfully pre-schedule about 42% of patients for their recall visit. This is huge. If they go on commission, it’s almost like magic. Recall goes up to 85%, more patients refer, and the doctor has an increase on his or her schedule, too. Next, run a production by procedure report for each hygienist. It will show that hourly paid hygienists fall short on doing a reasonable amount of scaling and root planning. Go to commission and boom, SRP’s go up. If you sell products and they go on commission, sales go up. It’s amazing how human nature and cause and effect come into play with a well thought out commission pay plan for hygienists and associates.
Great practices have figured out how to partner with their associates and hygienists on commission and have blown the roof off of practice growth. A few other pearls before we go. Whether we are speaking about associates or hygienists, I always paid a new employee either a daily salary for about 90 days or the commission, whichever was higher. But at the end of that period of time they went directly to a commission pay basis. If you spoke to any of my 10 hygienists, each and every one of them would never go back to hourly pay. They were given a career, the training, and paid well for what they did. Instead of just an hourly job, they felt like they were more in control of their career. The last thing is the miracle of the “ripple effect”. When hygienists go on commission your recall rate increases, cancellations and no shows almost disappear, overhead drops, staff turnover goes away, and stress goes way down. Commission based pay encourages an ownership mentality that goes a long way to getting you to the practice you always thought you would have. This is how you Summit.
Michael Abernathy, DDS
PS. By the way, on the home page of our website (www.summitpracticesoltions.com) we have a search function to 400-500 articles we have written on just about every aspect of a Super General Dental Practice. Give it a try!