THE ASSOCIATE PAY FORMULA MYTH
Those 6,500 graduates that I wrote about last week are looking for jobs and many established practices are looking to hire. Over the last few weeks, the number one question I get from senior doctors is: “What is the going rate for a new associate?” A seemingly simple question without a simple answer.
From a new graduate’s perspective, they base their pay request on some outdated suggestion from some dental school professor who has never had multiple doctors, or possibly from a rumor from the previous class that has been out in the work place for a year. Their answer is usually in 30%-35% range of net adjusted production/collections (The production or collections after discounted fee from third party insurance companies, lab, and outside financing companies are subtracted). This approach obviously has no basis in fact and does not take into consideration the practice: location, profitability, business, benefits, or any number of other factors that would need to be included and considered.
From the hiring doctor’s perspective, they are basing their offers on what one of their classmates is paying their associate and/or what the new applicant says they want. Again, obviously this has not included any factors affecting a prudent business decision. So, let’s take a look at how you determine the pay offer and what benchmarks we need to include in our calculations.
There is a percentage or dollar amount so low that no one will work for you. But there is also no usual or customary or standard pay level. The first thing I would look at is your actual overhead. No monies for your spouse, kids, or cars, just the real overhead. Let’s assume that your overhead is 70%. The average overhead in a dental practice is 67%-75% (this is not good). Let’s also assume that you will need to make at least 5%-10% profit or more on your associate’s production. If not, why would you hire someone else when it costs you and drives your overhead up and your take-home down. Finally, let’s assume that you might need to hire an extra assistant and fix up that op that no one really wants to use. If these are true, the result will clearly be increased overhead. In this example, the most you could offer the new doctor is 20%-25% as a pay level if you still want to make 5%-10% and that might not be enough. If you are actually getting the picture: If your current overhead is not less than 63%, you should not consider an associate. Your office is not at a point of competence in a business model that is sustainable or profitable enough to support another doctor.
What about the dentists that want to offer a per diem guarantee (a fixed amount per full day of work or 8 hours)? The going rate will be $550 to $650 a day. While I would be glad to give an associate a safety net of that much a day, it would only be for the first 3-4 months. At that time it would go to straight commission basis. Paying a guaranteed daily, monthly or yearly salary is the biggest mistake doctors make. I have yet to see this working as a strategy for pay that would encourage growth and high production. In fact, just the opposite occurs. It encourages a culture of just getting by and settling for average. If you have already stepped off the deep end by doing this, here is a great exercise to see the folly of your actions. Take a 12 month period and run a production by provider report for that associate (make sure it is adjusted net production) and divide what you paid that doctor over the same time period (include pay, benefits, taxes, etc.) and this will give you’re the percentage of their production that you pay as a guaranteed salary. Most are surprised that they are paying them 40%-60% of what they produced. You don’t make that yourself, and it is even crazier for you to do this for them. You can lose your shirt with this silly strategy.
I am going to assume that you have seen the light and are going to give them a guarantee for the first 3-4 months and then switch to a fixed percentage of adjusted production. Other than overhead, what other considerations should we consider in getting down to the precise number? You know your overhead is 63% or lower which allows you to pay close to 30% as a percentage. Now the other shoe drops. If your collections are anything less than 100%+ we need to factor in the historic percentage that you never collect. In a million dollar a year practice, each percentage point is $10,000. If you only collect 98% then you historically leave $20,000 a year on the table. If you are going to pay a percentage and know that you never collect 2% then we need to adjust what we can pay by lowering it by that 2%. If not, it comes out of your take home. I have seen practices that only collect 92% and pay associates 32%. How does that make sense? Think about it. If you were planning to pay 30% and your collections are always 2% off, we need to lower that to 28%.
Secondly, we need to consider other costs that are not typically factored into what we can pay. The associate has to be an employee (they cannot be an independent contractor) therefore we need to include what you pay in taxes for them. That can include a wide range and varying percentages depending on your state. Benefits like pay for continuing education, malpractice premiums, insurance, vacations — any other benefit or cost you can think of needs to be factored into what you can afford to offer the new doctor. Think of this as a “total pay package” before coming up with your offer. Then, and only then, can you come up with a realistic offer of pay for your associate. It literally comes down to this: Will this fit my business plan, overhead, and facility? Associates need to understand that they get a percentage of what they kill and clean. It just won’t work any other way. This is how you Summit.
Michael Abernathy, DDS
PS. There is one last thing that I always do when making an offer. Once we get to the correct pay by percentage of net adjusted production, I always ramp the percentage over different levels of production. Keep in mind that the first $20,000 they produce is almost always eaten up in overhead. So I might pay 25% for the first $20,000, $21,000 to $35,000 at 27%, $36,000 to $50,000 at 28%, $51,000 to $65,000 at 29%, and anything over $65,000 at 30%. As production goes up, a larger percentage of that production creates ever-increasing profits.