Avoid these pitfalls when switching a veterinary associate to production-based pay

Avoid these pitfalls when switching a veterinary associate to production-based pay

Don't dodge the details when negotiating a production-based employment contract for your associates.
Jul 01, 2013

When a practice owner and her associate are trying to figure out the best compensation strategy under an employment contract, there are a few fairly universal assumptions flying around.

First, a newly graduated veterinarian or one with just a year or so of practice experience usually wants the comfort of a secure base salary. It's a known quantity of income that meets most economic needs, especially those looming student loan payments.

Second, the practice owner usually knows that newly minted veterinarians tend to be unsure of themselves, taking extra time to evaluate each case and proceed at a fairly slow pace during even simple surgical procedures. So a guaranteed salary takes some of the pressure off in these early years.

But before long, a straight salary becomes less useful for both the employer and the employed veterinarian. As the associate becomes quicker and more confident, a compensation formula that rewards his experience makes more sense. The practice benefits when the employed doctor sees more appointments and performs more procedures. The associate can usually take home a lot more money if he gets a negotiated portion of all of the work he produces.

As they say, though, the devil is in the details. And probably the most devilish detail is determining the percentage of the associate's production that he should receive above and beyond any benefits such as vacation time and health insurance. Determining the appropriate percentage is key but beyond the scope of this article. (Head over to http://dvm360.com/prosal for help figuring out production-based pay percentages.) Rather, my goal here is to examine the less obvious issues that present themselves during negotiations over compensation—issues that need to be identified clearly in the employment contract but are frequently overlooked.

Avoid these veterinary practice owner pitfalls

Practice owners often make two mistakes when determining reasonable and fair compensation for an associate.

1. Not budgeting for the change. While a percentage-pay package encourages production, it also introduces additional ancillary costs. Extra money must be set aside for workers' compensation insurance, unemployment insurance, the employer's portion of social security and Medicare, and any 401(k) or Simple IRA match that's been promised. For example, if an associate was making $100,000 and suddenly started making $150,000 under a production-based contract, workers' compensation costs alone can jump $3,000—a tough pill for unprepared practice owners to swallow.

Also, percentage-compensation programs often involve a base salary plus monthly or quarterly "bonuses," which are paid less frequently than the weekly or biweekly paycheck distribution. If extra funds haven't been set aside for the lump sum payment (the difference between the associate's gross production percentage and his base salary), the inadequate planning can leave the practice short on cash. This is especially true if payroll is on a biweekly schedule and three paydays occur in a single month.

Simply put, being aware of these additional costs and allotting the appropriate funds for them ahead of time can save a lot of frustration for employers and keep the practice's budget safely out of the red zone.

2. Not anticipating an encore. When an employer places her associate on a percent-production formula, she may think this is the end of the line for pay increases. She considers the associate to be in charge of increasing his own paycheck for the indefinite future—the harder he works, the more money he'll make.

Associates often see the switch to production-based compensation differently. They look at the change as an opportunity to show the owner how well they can perform in the revenue-generating arena, thinking, "If I show the boss how productive I can be, she'll find me valuable enough to keep and offer me another percent or two each time contract renewal comes around."

When a misunderstanding of this type isn't addressed at the outset of the production-based pay discussion, subsequent contract talks can take a nasty, unexpected turn. The boss will see the meeting over the next contract as a formality, while a well-performing associate will be expecting a big jump in compensation since he proved himself during the previous year.

It's much better to broach the subject of future raises earlier—ideally, as soon as the associate is put on production-based pay. It's a pretty significant disconnect when the owner thinks raises are over and the associate thinks they've just begun.