It always starts with a short email or call from a doctor asking me how to structure his/her bonus. I always answer: “Give me a call, because it will take too long to type it, and you will end up sending me six more emails all starting with “Yeah but, what about __________________?” It happened again so I decided to go ahead and type an answer that should clear up the myths, misconceptions, and outright lies about when, where, and how to start or fix a bonus system.
First, and to help us all get on the same page, I have included an article that I had written on profit and overhead in a successful general dental practice. It creates benchmarks and helps you manage your practice through statistics. A bonus should only be considered when the numbers make sense. Incentivizing staff can take many forms. Money is just one of them. You must put your house in order before utilizing a bonus plan to incentivize your staff. Get the right people on the right bus and in the right seat. This often requires you to make the “hard decisions” about keeping great staff members, or “freeing up the future” of marginal staff. There are only two types of employees: Ones that need more training and those who should leave. It is far more expensive and stressful to keep marginal staff compared to letting them go. We are not looking for super stars. We are building a team. It is no longer a good idea to have just good employees. Each and every one of your staff must be great, and great in the sense of working well as a team. You will never go any further than the one staff person with the lowest commitment to your office’s goals and vision. Don’t wait. Act now. (MA)
Benchmarks, Management, and Accounting by the Numbers
Steven Covey in “7 Habits of Highly Effective People” identifies the number one trait to make you successful in any endeavor: “Begin with the end in mind”. In other words, if you can define, or create a picture of where you want to be, you will shorten the path and define the result. The same is true in overhead. Your overhead should be 50 to 55 . This is realistic in any practice that is 5 years or older. I find too many doctors bragging about huge production numbers, but the truth is they take very little home. It has always been and will always be about net, not gross. You should be able to keep approximately half of every dollar you produce. One of our mottos at Summit is: Produce More, Collect All, and Keep Half. Remember: You should collect over 98% of all fees charged out (after adjustments). An increase in productivity is of no value if the cost of overhead is not contained. We also believe strongly that you need to be debt-free. It’s amazing how much less stressful every day is when you’re out of debt. When working with young doctors to start a practice, we insist on a plan to make them debt-free within 3-5 years. When working with established doctors, we fight to get them to put their house in order, live within their means (spend less and save more), and concentrate on the systems that guarantee an increase in net and a decrease in overall overhead.
Looking at hundreds of practices and their numbers, I am very often surprised at the lack of information the doctor can lay his/her hands on. The profit and loss (P&L) statements are not available until 90 days after the closing of the month. The doctor cannot read the P&L, or glean the information he/she needs to make decisions, and does not realize that a profit and loss statement does not reflect true cash flow (what you collect and what you spend). They do not use software like QuickBooks to write checks and create a cash flow analysis. They are being overcharged and underserved by CPA’s that do not understand the dental business and seem to be in no hurry about getting the numbers to the client. If you want to lower your overhead, manage your practice for profitability, and control your future, you must have accurate, timely, real world numbers to guide you.
In pro sports today, the standouts are referred to as super stars. Howard Hill was a super, SUPER star. He is one of the few men to become a genuine legend during his own lifetime. Having died in 1975, Howard was referred to as the “World’s Greatest Archer”. He is the only person to win 196 archery field tournaments in succession. He would perform by doing difficult trick shots like shooting an apple off someone’s head from 60 feet and then top that by shooting a prune from the same distance. He was the archer who would split an arrow with an arrow in “The Adventures of Robin Hood” with Errol Flynn in 1938. You could say there was no target he could not hit. He could out shoot anyone, any time, under any conditions.
I would like to propose a bet. I can teach you how to hit a target better than Howard Hill in a matter of minutes. The trick: I would blindfold Howard, and you would be able to see the target. Silly bet, but every day I see doctors trying to hit a phantom target they cannot see or locate. No one can hit a target that is not there. That is why we all need benchmarks. We all need a target to hit: A goal to strive for. How are you going to know how you are doing if no one sets the bar? Benchmarks define the game we are playing. What does it take to win? Where are the goals, the yard lines and hash marks, and where are we starting from?
No matter how many employees are on your payroll, or what your financials looked like last month, if you believe that “organized chaos” and creativity alone will drive your business toward success, it is time to shift gears. Businesses without systems can only react. You want to forecast, measure, set goals and beat them. (And, of course, earn more money while doing all of this.) Benchmarks give you a ruler with which to measure your progress. They help you create black and white answers to grey questions. Let me give you a few benchmarks to help set a target for you General Dental Practice.
OVERHEAD: I tend to look at overhead from the perspective of cash flow: What comes in and what goes out. Not the way a CPA does it in a P&L statement with 100% of the focus on TAX concerns. You don’t write a check every month to depreciation. You don’t pay only interest on loans (hopefully). Those very important tax considerations really have little to do with cash flow and usually only serve to further confuse most dentists about the fiscal health of their practice. YOU SHOULD FOCUS ON CASH FLOW. A cash flow statement creates a management tool to help you manage your practice day to day and should be shared with the staff.
Let’s take a look at overhead and the way we suggest you have your CPA organize a cash flow statement. Keep in mind, a cash flow statement is not used to do your tax returns. It is a minute to minute accounting of the in-flow and out-flow of money. We believe all operating expenses should be contained in just 6 categories. Attached to the categories is an ideal benchmark to help you move toward that 50% overhead. These are the categories:
- Staff Compensation 24-25%
- Facility 7-9%
- Lab 8-10%
- Marketing 3%
- Office Supplies 2%
- Dental Supplies 6%
Staff Compensation includes everything you spend on staff: Taxes, continuing education, bonus, trips, normal pay, benefits, and uniforms. It includes everyone but the owner doctor(s). Hygienists and associates are included here. They are employees.
Facility includes all the physical plant and its costs: Taxes, note payment of the building itself, maintenance, lease, servicing note for the purchase of a practice, utilities, equipment purchase or lease, repairs of equipment or building, etc.
Lab should include everything you spend on lab, including Cerec or E4D payments, supplies, outside lab work, and anything else related to that side of your practice. If the benchmark seems low, or you spend more on lab than the 8-10% you are probably limiting your practice to adults and a greater portion of you practice is C&B. This means your ability to market your practice is limited to a smaller, more lucrative audience and should reflect these demographics. If your lab is lower, you may not be assertive enough in your case presentation or not clinically mature enough to present more ideal treatment. Each of these numbers means something, and creates a picture of the health of your practice. (Rule of Thumb: Your crown fee should be 5 times what your lab charges you to fabricate the crown. Another way to view this would be that your lab fee for a crown is 20% or less of what you charge for the crown. Be sure you’re not overpaying for crowns and be sure your fees are at about the 80thpercentile of UCR.)
Marketing would include all internal and external things you do to inspire and reach your potential clients: Print ads, giveaways, mailings, signage, promotions, phone book, internet, social media — everything. It is said that everything you do, from answering the phone to staying on time communicates a message to your clients.
You cannot, not market. While 3% is the benchmark, it is not unreasonable to do more. A higher end practice may spend more here, and less in compensation. Do not cut back on putting your message out there. In providing a service or product: Do what you do so well that people cannot help but tell everyone they know about you.
Office Supplies are self-explanatory and are not usually a problem for most offices. Watch what you spend, and spend wisely. Only one person should be in charge of ordering office supplies, and they should have a written budget that is adhered to.
Dental Supplies and the money spent for them are often abused. Make a budget, monitor spending, and designate one person do ALL of the ordering. If you have a sales rep that calls on your office, simply communicate with that person that you will closely monitoring the dental supply bill every month and if it isn’t averaging about 6% of collections you’ll be switching to a new supplier. Hold their feet to the fire. There are numerous “buyers clubs” for dental supplies that will give you discounts off of their already low mail order prices and also give you back a percentage of yearly purchases.
Remember: Every operating expense should fit into one of these categories. Your first question will be: “What about all those things I run through the practice so I can write them off?” The answer: Everything below the line is yours. You can choose to spend it on cars, club memberships, trips and a host of other non]dental expenses. We are looking for a report that helps you manage your practice’s overhead.
Practice Benchmarks for a well run General Dental Practice:
• $25-$30K production per operatory/month (5 Ops = $100K-$150K/month): If you are not at this production level, it does not mean you are a failure. It does mean you have room to grow, and there are no physical capacity problems. There is no need to add more room to produce more until you meet or exceed this ratio.
• $20-$25K production per employee/month: If you are not meeting this benchmark, you are either overstaffed, or under producing, or both. Once again, you have no staff blockages (too few people) if you fall short of this goal. It is possible to increase production without adding a single staff member.
• 50-75 new patients/doctor: (Remember: we are talking about a well run general dental practice, not a “Boutique” practice.) Normal dental practices have a mixture of treatment and ages. As you and your practice age, it is normal to see fewer children. Along with this increase in age, confidence, and competence, comes more and more crown and bridge. The negative is that you have limited the size of the patient pool that you can vie for. Generally speaking, a dentist will only attract and inspire patients who are about 10 years on either side of his/her age. Open up a practice and still be in the same location 15 years later and you are probably in the wrong location. Demographics will change and before you know it the neighborhood has gone downhill and there is a dentist on every corner (To help you compete, you need to have a ratio of 1 doctor for about 2000 patients or 1:2000). Go to www.zipskinny.com, put in your zip code, and up will pop all of your demographic information. This will be a revelation for most of you, and an aid in getting more new patients from updated marketing for others. Then, go to www.aftco.net, click on “Resource Center”, and then “Dentistics”. Enter your zip code and get the General Dentist to Population Ratio. Bottom line: There is no excuse for not getting your share of the new patient pool. You either grow or die. There is no way to just stay at a particular production plateau. Inflation, demographics and the economy slowly erode your business until it is too late. It is like cooking a live frog. You can’t drop him in boiling water because he will just jump out. Put him in cold water and slowly raise the temperature, and he never realizes his plight until it is too late. Welcome to the story of the average dentist. No one ever left dental school wanting to end up an average dentist. L.D. Pankey said: “The average dentist is either the best of the worst, or the worst of the best.”
• 2 Hygienists per doctor: This indicates a healthy recall, new patient flow, and shows that you have the back door closed. This is the life-blood of a healthy practice. If you have been in practice for more than 5 years, and have not found the need to hire another hygienist, you are not inspiring your patients. With the average new patient flow of 25 new patients per month, you would need to add a new hygienist every 24 months just to service them. If you are not seeing this, then you have as many patients leaving as you have coming in. You have the back door wide open. This usually indicates a lack of systems, poor internal marketing, and limited ability to inspire the patients you have. It is black or white: You are either growing or you are not. This is one of the reasons I believe that every practice needs to invest in a coach: Someone to help fine]tune your practice and move you to the next level (there is always a next level). I would have to say that the success of my own practices is directly related to practice management coaching, meeting with a mentor, and hiring for attitude. Without exception, everyone needs a mentor: Practice consulting is not expensive, it is priceless. It is the best investment you can make in building a successful practice.
• Hygienists are producing $1100-$2500 per day unassisted: For our Summit clients we are now able to bring in one of my hygienists who regularly produces $25K-$45K per month unassisted at no additional cost to you. We will just let them replace one of our regular consultant visits.
• Hygiene department produces 33% of the total production of the practice: Whether it is 1 or 10 hygienists, you should be getting at least one third of your production out of your hygiene department. If you are not monitoring this, you will be surprised at how easy it is to lower your overhead and increase production when your hygiene department is running on all eight cylinders.
• 60% of your day is filled with substantial cases: A substantial case is anything that is about the fee of a crown. For Example: Your production goal is $5,000/day. If a crown is about a $1,000, you would need to have 60% of $5,000, or $3,600 (3.6 crowns or their equivalent) booked each day to reach a significant goal. This is also true in hygiene, except the dollar amount would be different. A substantial case for hygiene might be quadrants of sealants, or soft tissue management patients, not normal every day recall patients. 60% of their day must be in substantial cases also. Fail to do this and you are guaranteed to not make a significant goal for you and your hygiene team. Your hygiene department should account for about 33% of total practice production. Each hygienist should produce at least 3 times what they are paid. The best strategy is to pay the hygienists on commission.
• Recall effectiveness of 80%: (Nationally you see the average general practice at 42%.)
• 50-60% of your new patients come from direct referrals from a patient of record. Practices that are not inspiring patients to refer find themselves “advertising” driven. You are paying for patients to come in the door, and they are leaving just as fast. If you are not growing you are not inspiring your patients. In a society that votes with their feet, you cannot afford to have a majority of your patients getting second opinions or not scheduling for treatment. You cannot get better at giving patients what they do not want. Change your direction and reap a new outlook for your practice.
• 98% or greater collection rate: (The average practice collects 94%. This is unacceptable.)
• Consumer hours: 7-10am and 3-6pm, Monday-Friday, plus Saturday hours. This is difficult without multiple doctors, but 9-5 Monday thru Thursday will not meet your patient’s needs. Consumerism is a creed you need to adopt to prosper in any economic environment. Convenience is huge in today’s practice. Patients show up where their needs are met.
• A small incremental fee increase every January and July: Inflation and subsequent costs of operating a practice continue to climb. Review and update your fees on a regular, systematic basis. A usual scenario would be to compare your fees to our fee study and place them in about the 80th percentile. You would then raise your fees a couple of percentage points every January and July. This would offset the effects of inflation and cost of living.
• Pricing – Keep comparables comparable: Do a fee analysis (this is available to our Summit clients at no charge — just give us a call). Try to keep your fees in about the 80th percentile. Consumers shop and price is important. As a note: An increase of 10% creates a 9% decrease in overhead. Over the lifetime of a practice, millions of dollars are lost from having fees that are 5% too low. The cumulative effect could fund a substantial portion of your retirement.
• Production of $600-$750 per hour per Dentist.
• A goal of 15-20% growth per year in productivity: Growth is a sign of meeting your patient’s needs. No growth means you are not inspiring your patients. Lack of growth means there is something drastically wrong. Managing a practice by the numbers to establish goals to insure growth and the proper overhead is the only logical choice. Insurance company statistics tell us that 97% of the population at age 65 will either be “dead or dead broke”. Only 2-3% will become financially independent at that age. Failure to plan is a plan to fail. You must start from day one to define a strategy for financial success. No one else can do this for you. The one saving grace is that it is never too late to start. If you have reached that age where you are closer to your “use before date than your born on date”, or even a young doctor or mid-career doctor who has an entrepreneurial bent, we have the number one wealth building strategy to share with you: Ways to remove equity from your practice, while producing more and lowering your overhead to insure a comfortable retirement at any age. You cannot discount a life with “choices”. A secure financial future is the best choice you can provide for yourself and your family. Give me a call and let me show you how. (972-523-4660).
• Production of $2,500/New Patient: (National average is $1,100/New Patient.) Divide the monthly production by the number of new patients and this will give you a ratio of production per new patient, not production on each new patient. The $2,500 per new patient is a lofty goal for a great general practice, but is very doable. Production over $2,500/New Patient puts you in the realm of a boutique practice. Along with a fee survey, we can help all our clients see how a failure to do a certain type or number of procedures indicate a lack of planning. We can help you restructure your fees and treatment modalities to maximize your demographics to create a lower overhead and increased production without more staff, facility, or stress.
• 90% case acceptance: The “monkey score” is a case acceptance of 67%. The number one reason people do not have dental work done is that they were never told what they needed to do. Just tell them what they need and statistically 67% will say yes. Add in consumerism, and the scripts that Summit clients are given and it will always go up.
Now that we have looked at the benchmarks for overhead and practice management, I would recommend that you try to get as many of these benchmarks in line as possible before enacting any “bonus” system. You should consider this as a cautionary prerequisite for a successful bonus plan. While having them all in place would be nice, but difficult, there is a way to create a modified monetary bonus until your benchmarks show improvement. In other words, each and every benchmark or overhead item need not be perfect, but you should share these with the staff and establish a plan to add each one to your goal list. I say this so that you understand that a bonus or profit sharing scheme must be a strategic step that insures a decrease in overhead, while inspiring your staff to raise productivity. Without most of these benchmarks in place, you will struggle and probably fail to make this a successful strategy. With that being said, let me add one warning: Be sure that whatever system of bonus or profit sharing you implement is actually less than you are willing to give. What I mean is that this money must be an amount that will not need to be modified or taken away from your staff in the future. It is far easier to give something than it is to take it away at a later date. You can always increase the amount if it proves successful, but it is devastating to the morale of your team if you are forced to revoke it due to poor planning or any other reason. If you decrease the amount or change the conditions by which it is obtained in a way perceived as unfair by the staff it will create a very negative, perhaps even hostile, scenario. We will give you a step]by]step approach. I assure you that each step is important. Get it right the first time, and this will be a cornerstone to taking your practice to the next level. Stumble and you enter the ranks of most offices that have failed in an attempt to inspire their team by sharing in the increase of production and profitability. It is very difficult to recover from mistakes in a strategic plan like this. Fail and you will see an increase in stress, staff turnover, overhead, and a general loss of esprit-de-corps.
Successful Bonus Principles
• Money is a reward, not an incentive: For someone to own this process, and they must own it to make it work, they must understand the “Business of Dentistry”. Your Cash Flow Statement and Profit and Loss Statement should be shared with the staff each month. They need to start to develop an “ownership” mentality. This is one important way to make them feel that this is their practice and a career, not just a job. They decide when people are hired or have their future freed up. You consult with them on overhead and profitability. You constantly revisit the reason for the “bonus”, and why and how it is paid. They are your partners in this business, and as a partner they should share in the perks that success brings. The bonus is their monetary reward for going the extra mile (not just what they have always done). Money is not an incentive, your mission and purpose as a team is the incentive. Money is just a way of measuring the amount of service you deliver to your clients. Don’t be misled into thinking that you can inspire your staff with just money. You have to become a great leader and a better manager. Like it or not, if a practice is floundering, it is always the doctors fault. Forget the economy, demographics, facility, staff, patients dental IQ, etc. It is always the doctor who is at the center of any challenge in your practice. By commission or omission the doctor has created the situation he finds himself or herself in. It is my job to put a mirror in front of each doctor and for many of you, for the first time, to help you see the real reasons and solutions to your practice challenges.
• Staff must feel in control of practice development: Your job is to hire for attitude, train to a skill level, give them the authority and permission to do their job, and get out of the way. What’s funny is that most of you will hire for skill level or number of years in a dental office, only to be disappointed again. Dentistry is a small, consumer driven business. Our staff’s main job is to handle people, not suck spit. Sucking spit and using a computer is just what takes place while they are doing what I hired them for. They were hired to escort my patients through our practice and their appointments in such a way as to create a bond with a patient who always shows up, pays us, and refers everyone they know. Some of my worst hires have been those who on paper looked great because of years in the profession, only to find out that they were constantly changing our successful systems back to the way that they did it in their previous office, and had extremely poor people skills. Most of my best hires were those with incredible people skills and the desire to learn. No preconceptions, no changing our systems, just a hard worker whose goal in life is to make our patients love us.
• No way to manipulate the plan: Our profession is littered with offices that started a bonus plan, set a goal, and then after the staff successfully completes the gauntlet, finds that the doctor changes the rules so that they get no bonus. Kind of like playing cards when you were a little kid with your older brother or sister. No matter how you think you understand the rules to win, you always lose because the older sibling changes the rules after the fact. You must think this thru and make sure you never, ever manipulate the outcome of your bonus plan.
• Doctor is accountable as a team member: You are not above the law. You are one of the troops. I was always the first one there every morning and the last to leave in the evening. At the end of the day, I was taking out the trash and helping to suck that soapy solution thru the vacuum lines. We were a team, and I held up my end of the deal. I never asked anyone to do something I had not done or wouldn’t do myself. If you let the team down you need to apologize, and do better. The yardstick you use to measure the performance of your team should be even more challenging for you. Leadership and enthusiasm filter down from the top, not up from the bottom. I always thought that if I was flying back from a speaking engagement, and the plane went down, they would go the funeral and be back the next hour producing just as much without me as they did with me. I was just a pair of hands and a member of the team. You can always tell when the staff embraces your bonus system and owns the process. When this happens, they push you to produce more and they come up with ideas to manage the practice. They will even be upset when you take time off from the practice. A successful bonus system is built on a new commitment from the doctor. You have to show up and deliver every day. It is “show time” all day long. The staff will take their cue from you. Don’t start this process if you don’t have the energy and commitment to take it all the way.
• Doctor places the bonus ahead of his/her income: Remember the overhead chart back near the beginning of this article? If not, go back and memorize it. You get everything below the line. Our bonus check was always paid by the 10th of every month. Their normal checks were cut on the 1stand 15thof every month. That bonus check was paid separately so that the staff would understand that it represented an effort and skill that went beyond their salaries. That bonus check should be something you look forward to writing. We had a doctor from Chicago a few years back who went from collecting $30,000/month to over $90,000/month after implementing our bonus plan. I got a call about 9 months into this super successful strategy from her: “This bonus thing is just not working at all. I had to pay $7,000 in bonuses last month. I’m paying way too much money to my staff”, she said. I asked her if she was following our bonus strategy exactly. I reminded her that while the amount she spent on her staff was increasing, the percentage of the collections dedicated to staff compensation was actually going down and lowering her overhead. She said: “Yes, but that is just way too much to pay a staff. They do not deserve it. No office I know pays that much.” I asked if she was just paying 15% to the staff above their base or BAM number. She said: “Yes”. I reminded her that while she was giving them 15%, she was adding 85% to her take home pay. Even though I tried to show her the insanity of removing the very strategy that tripled her production, stopped staff turnover and dropped her overhead by 17%, she did away with the bonus. It only took 45 days for her production to drop back to about $30,000/month. The money you spend on a successful bonus system will be the best return on investment you have ever made. Make sure there is no way you can mess this up.
• Doctor has the goal of having the highest paid staff in town: I modified it so that my staff was one of the highest paid in the United States. I was proud that my staff helped me maintain a low 50% overhead while allowing them to make more than any staff I have ever seen. They were averaging over $2,000/month/employee in addition to an incredible base salary, 401K, health insurance, and 2 weeks paid vacation, uniform allowance, continuing education, and a 1 week cruise every year. The average team member was with us about 14.5 years. Many were with us for 20 plus years. That is a commitment and a sign of a healthy practice. Be advised: Your patients notice when the same people work for you for years and years. They notice even more when they don’t!
• Doctor is committed to all changes necessary to facilitate the bonus: This could include changing the hours, incorporating new systems, hiring a consultant, making a new level of commitment personally, freeing up someone’s future, or spending money on the facility. Get yourself a T-shirt made that says: “Whatever it takes”. That is your new commitment. To reach the next level in practice productivity and profit, there must be a new level of commitment from you and your team. But yours must come first. You are exactly where you want to be. If not, you would change. Take responsibility and make it happen. Excuses are overrated.
• Doctor must act quickly to eliminate incompatible staff: You are going to have to make the hard decisions and make them quickly. Waiting means a lack of direction and commitment by the doctor. The good thing is that when your staff sees this new commitment, they will see the leader in you beginning to emerge. Done correctly, you will see them lining up to follow you. You will see a consensus of commitment. Most offices seem like each staff member has a rope they pitch over a big rock and then begin pulling in different directions. This is a sign of a lack of leadership. Become the leader, and everyone will begin to pull in the same direction. This is called synergism: Where 2 or 3 get the work done that would have previously taken 5 or 6. This synergistic effect is an effort multiplier. It takes less stress, effort, and people to get the results that previously seemed impossible.
• The bonus must benefit each team member each month: The ideal way of rewarding someone for what they do is to catch them doing what you want and pay them. Waiting to pay a bonus quarterly or yearly does not reinforce the behavior you want repeated. As I said before, we pay the bonus every month by the 10thwith a separate check from their regular pay check.
• The Doctor must stop bartering: By trading for services or other items you are manipulating and stealing from your staff. If they understand this system, they know that any unrecorded production directly affects the amount of bonus they receive. You cannot keep two sets of books. You have, in a sense, taken on a partner who will monitor your overhead and watch closely how you conduct your business. Keep your integrity foremost in your mind. Treat your practice and team the way you would like to be treated.
• The bonus must have the power to change someone’s life: Small bonuses get small results. You must get your practice to meet or exceed the benchmarks we have given you. Unless you have tamed the overhead monster and learned to drive profitability, you will never be able to pay enough to change their lives. My staff drove better cars than I did, and probably paid for nicer colleges for their kids than I did. When other practices asked me how I assembled such a great team and partners, I would have to say that they found me. We had an incredible reputation for our team and doctors built on sharing the profits and encouraging an ownership mentality through transparent leadership and management built on systems that were constantly improved by our staff with feedback from our patients.
The Nuts and Bolts of the Bonus System
(Collection/Production must be at least 98%. If not, we use collection average only (<97%). If 98% or greater, we use the average of collection/production.)
– $50,000 Base or “BAM”
= $1,550/5 staff members = $310/person
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 through the years via the speaking and consulting we do. It has survived with little or no modification for over 30 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, ideally within the first few days of the new month and in a separate check. This helps with motivation for the new month. As you can see, even though the bonus is paid monthly, the numbers are averaged over 3 months. 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 the staff or the doctor from manipulating the system. In this example we will be paying the May bonus with the check issued in the first week of June. We go back and add the Production and Collection from 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 many times 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 Collection figure. You cannot pay money for something you did not collect. The staff will understand and your collection rate will climb dramatically. Once we have our final number, we subtract the base or BAM.
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 -74%). The base is the amount that must be exceeded before any bonus is paid. Produce and collect the base or do less and there is no bonus. Let me give you a couple of ways that usually do not work in the beginning, but might be an option.
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. There is too great a difference between reality and the goal. It also would not motivate your staff if the amount of increase before bonus was so high as to be unimaginable for them to reach.
2. Figure out the overhead for compensation and multiply by 4. This would give you a compensation overhead percentage of 25%, which would be your ideal goal. In most offices the main category of overhead that presents the biggest challenge is staff compensation. 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 us 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, and if we raise our fees 2x/year for inflation or cost of living, and add 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.
Increasing your Production and Collections, while keeping a close eye on spending will, by simple mathematical rules, lower your overhead. The goal of the profit sharing bonus plan is to accomplish exactly that — lower your overhead. No bonus formula will last over the long haul unless the overhead is in line with your goals. But initially you have to establish a base number that is at the same time aggressive AND believable, allowing your team to taste and feel success. In most cases, I recommend starting the bonus based on the Production and Collection numbers for just one month, working into the three-month average. I pick target Production and Collection numbers that allow the base to be subtracted and still provide a bonus of at least $150 per person. So you sort of back into the original base number by knowing the total dollar amount needed to provide $150 per person while at the same time not presenting Production and Collection numbers that are outside the realm of possibility. If the best month ever in your practice was $87,500 Production and $87,300 Collection, then it would seem ridiculous to set your bonus goal number at $115,000. No one would think it was possible and the game would be over before you ever get started. Usually the Production and Collection goal numbers can be arrived at by taking the highest 3 Production numbers from the prior 12 months and the highest 3 Collection numbers from the past 12 months. Average the 3 Production numbers. Average the 3 Collection numbers. Then take an average of those 2 numbers. This will yield a target number that the team can believe in and perceive as believable. After all, these are numbers you have already achieved. Then take this target monthly number and perform a little simple math to determine the base number.
A = target Production and Collection number (average of highest 3 months)
B = base number
C = difference between target and base
D = bonus dollars available to staff
E = number of employees to receive bonus
F = bonus dollars per person
A minus B equals C
C times 15% equals D
D divided by E equals
As stated earlier, you want “F” to be at least $150 when starting the bonus. So simply work back to solve for “B” — the base number. Let’s say “A” is $97000 and you have 4 employees (“E” = 4).
$97,000 minus B equals C
C times 15% equals D
D divided by 4 equals $150
$97,000 minus $93,000 equals $4000
$4000 times 15% equals $600
$600 divided by 4 equals $150
Your base is now established at $93,000 and the target for the first month is $97,000. At the end of the month, simply do the math based on this first month. After the second month on the bonus plan, you will average month one and month two to arrive at the number to subtract the base number from. After the third month you will average the three months together. Beginning in month four, you drop the oldest month and add the month just ended. This is the “3 month rolling average” that you will continue to use to calculate the bonus each month.
When should you raise the base number? Great question There are only two reasons why you would raise the base number. First, raise the base number if you add employees. Raise it by four times the amount you will be paying the new employee. Following the example above, if you hired a new assistant and she will be paid approximately $2500 per month, then raise the base number by $10,000. If a new assistant can’t help you produce an extra $10,000 per month, then you didn’t really need another assistant. Don’t forget, you now have to add the new employee into the bonus distribution. This means you divide the available dollars by 5 now instead of 4. So if the production didn’t go up, then everyone’s bonus just went down. This causes the staff to think twice before running to you for “more help”. The second allowable reason to change the base number is if you add productive capacity. Let’s say you add two operatories and the total cost of construction plus equipment is $100,000. Also assume your monthly payment on a note for that $100,000 is $2500. I would raise the base number by twice the payment amount, or $5000. If adding 2 ops doesn’t allow you to immediately produce way more than an extra $5000 per month, you didn’t really need the extra space.
One other point to consider is your daily goal. Take your target number (A) and divide by the number of working days in the month when you are starting the bonus and you have your daily goal. You will never consistently hit your monthly goal if you consistently miss your daily goal. And if you work too few days in a particular month, you should balance it by working extra days in the month before and the month after. This keeps the three month average workable.
You’ll know the profit sharing bonus plan is successful when you walk into the staff break area about midway through the third week of the month and two or three employees are sitting there with daysheets and calculators deciding how much more they have to produce and collect to get the bonus they want (a bigger bonus than last month).
When it is working really, really well, you can stop ever giving raises again. Every time you raise your fees, they’ll get a bigger bonus. Their “pay raises” will be totally dependent on how well the practice is doing. Keep producing and collecting more and the bonuses will keep going up. Let the production and collection drop and the bonuses go down. They will finally realize the connection between hard work and income. If not, then “free up their future” and get a better player on your team. In fact, most of the time the other team members will handle the “problem” among themselves because they won’t let one “bad apple” drag their bonuses down.
And don’t forget, after you give them the 15%, who gets the other 85%? That’s right, it’s little old you Remember this when you’re signing checks for hundreds, even thousands of dollars in bonus money each month.
What happens if the production and collection numbers do drop over an extended period of time? Do you fire someone to maintain the proper percentage for the Staff Compensation portion of the overhead, and also to maintain the desirable 50-55% total practice overhead? The short answer is yes, if you experience a serious drop over a 3-6 month period you will have to make this very difficult choice. But remember that everyone should be constantly monitoring the numbers (production, collection, and overhead). You are developing a team that has an “ownership mentality” and that shares all of your concerns about the viability of the practice. When you get a team like this, you are much less likely to have to terminate someone due to a drop in the numbers because the team will have banded together and worked side-by-side with you to fix the problem. Not only do they want to keep their jobs, they want to keep receiving a very nice bonus. Because no matter how much you stress that the bonus is “extra money” and is not guaranteed, human nature will eventually take over and they will make certain commitments with the bonus money. Maybe it’s a new car. Maybe a bigger house. Maybe a boat. You get the picture. After they get several hundred dollars every month for 8]10 months, they will begin to expect this money and will make purchases requiring them to never let the bonus dollars decrease. HINT: You should also fight the urge to spend the “extra” money you’ll be getting. Don’t forget the amazing power of compounding interest (geometric progression). Set a positive example for your team by saving more and spending less. Someday you’ll be glad you did (or sorry you didn’t).
There are also often questions regarding what to do about part-time employees, or what to do in any scenario where some of your team members work more hours than others or some work less. Ideally, the plan works best when everyone works close to the same number of hours. Then you can just very easily and simply divide the total dollars available by the total number of people. You can prorate the bonus dollars based on total hours worked. Let me give you a simple example of how that would work.
1. Use the exact same formula presented earlier.
2. When you arrive at the number representing the total bonus dollars available (“D” in the earlier example) you add an extra step.
3. Say you have 4 employees and in the month just ended the total number of payroll hours was 512. Take your “D” number ($600 in the earlier example) and divide it by 512. The result is $1.17.
4. Take each individual’s hours for the month just ended and multiply each individual’s hours worked by $1.17. This will give you the bonus amount to pay each person. Let’s say that 3 of your people worked 36 hours per week or 144 hours in the month. Each of them would receive $168.48. Say the 4thperson only worked 20 hours per week or 80 hours during the month. That person would receive $93.60. Hopefully you can see how this works.
Should the hygienist(s) be included in the bonus? I say yes. Otherwise it will be very difficult for them to feel a part of the team you are trying to build. It will also be easier to persuade them to do all of the other things they should be doing if you include them in the bonus. But that’s a topic that deserves much more exploration and explanation. We’ll save that for another day.
Another common question we hear is “Should the production of any Specialists employed in the practice be included in the total production and collection numbers?” Since the most typical scenario is for the GP office to provide basically all of the support services (assistants, collections, scheduling, etc.) to the Specialist(s), then, yes, their production and collection should be included in the bonus numbers.
What about adjustments that come later (insurance write]offs, senior citizen discounts, coupons, etc.)? Just take them in the month they are recorded. It averages out over time. You cannot possibly reconcile everything within each month.
OK, that’s a lot of reading a lot to digest. If you remember, this all started with another call or email from another doctor with multiple questions about structuring a successful bonus system. We will typically request the doctor to fax or email a copy of his/her most recent P&L (as mentioned earlier, this should really be a Cash Flow report, but no one ever has one of these). We will spend the necessary time to categorize and understand the practice expenses before relating our findings to the questioning doctor. Below, you will find a very typical scenario and also a very typical response from us. Armed with your new knowledge from everything you’ve read so far, see if you can follow and understand the steps that will be necessary for this doctor to implement a successful bonus plan. Read it as if YOU are the questioning doctor.
For the first 6 months of 2011 you currently have a 75 + overhead. The majority of the problem comes from the cost of Employees and Facility costs. You are currently overstaffed or have an overpaid staff for your current production level.
|Current %||Ideal||Probable Reasons|
|Staff: 35.6%||25%||Too many staff, under producing, poor systems involving job descriptions and results measured|
|Facility: 25%||7-9%||Too much facility for production, accelerated pay off of building, over built the finish out|
|Mktg: 2%||3%||Lack of money or poor results from current efforts|
|Lab: 4.4%||8-10%||Young or non-confrontational doctor and staff. I saw little or no C&B on your schedule|
|Dental: 6.9%||6%||Pretty good. Make sure that one person orders and is given a budget amount per month|
Currently you need to concentrate on controlling and then lowering overhead through cost control and increasing productivity. More new patients, comprehensive exams and case presentation improvement involving staff would be key. Your question about a bonus is difficult. The goal should be to get your cost for staffing down to 25% ASAP. That would mean dropping the amount you pay by at least 10% or freeing up some staff. Another way to look at it would be that at your current overhead numbers, you would need to increase collections (without increasing overhead) from $37,370 to a little over $46,000 per month.
For the time period January 1 to June 30, your collections were $224,220 with a 75+% overhead. If they had been:
|Collections||Projected Total Overhead|
Assuming I did the math correctly, and that’s a leap of faith, and you don’t increase your overhead in the process, your goal at a BAM would be about $275K or $46K/month in order to lower your overall overhead to the 60% range, an admirable goal considering your current situation. This would require making 20-30 different changes in how you now operate, as well as improving your ability to present more comprehensive dentistry and having the patients accept it. A 25% increase in production per month is huge but doable with the right actions.
Back to your original question about the bonus: A bonus should act as an incentive for your staff by allowing them to take home more while actually lowering your overhead percentage dedicated to compensation. It should encourage them to look for ways to increase production, collect it all, and inspire the patients to refer everyone they know. This is not as difficult as it might sound, but the “end” must be kept in mind. In order for you to start the bonus and also not deflate the staff’s expectations by making the BAM so large as to be unobtainable, you would need to ramp the bonus from your initial BAM level in order to not over pay at any point in the journey to a more profitable production level.
For example, if you are using our bonus model of paying about 15% (this is less than the goal of 25% for Staff so it will lower the overall % payroll while paying them more) over the BAM number to your staff, we cannot use the 15% initially because your current Staff overhead is already too high at 35.5%. My suggestion is that you use a smaller percentage and have benchmark for production and collection numbers that when hit, they get an increase over the starting percentage. For example: If your goal was to go from $37K to about $46K per month you might start with a percentage of 5% for the first four thousand over your current production ($41K/month). You would then add another 5% if they exceed it by another $4K or $8K in increased monthly production. You would finally pay a full 15% once they exceed the goal of hitting the $46K. Keep in mind that this will take care of the Staff Compensation category. You still need to lower Facility costs, increase marketing, and sell more crown and bridge. One last thing: Make sure you reread the article on “Bonus or No Bonus” and understand the subtleties of running a three month average and collection/production goals and how that would affect how you figured the bonus. Pay this bonus on a separate check at a separate time than their normal pay. Revisit the formula and strategies of profit sharing with your staff frequently so that they never loose sight of what and why you are using it.
How did you do? Does it all make sense now? Hopefully this has answered the majority of common questions and issues related to the topic of “bonus”. That said, there could be readers who have additional questions. Please send those questions via email or give us a call. This is too important to ignore. The right bonus system will probably do more to increase profit and decrease stress than any other single thing you will ever do. (MA and MG)