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Third in a four-part series- Associate contracts: salary vs. production-based compensation

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Mar 01, 2003

The initial two articles in this series on associate employment contracts dealt primarily with legal details of the contract; contract periods, renewal provisions and other esoteric elements that are commonly ignored when a new associate is considering a job offer.

This month, we'll review the contractually specified salary and production-based compensation items and a few pitfalls that should be considered in the negotiation process.

Base or percent?

New graduates and their employers often have difficulty in deciding whether an employment agreement should contain a pay provision which is based on a base salary or a percentage of an employed veterinarian's produced revenue.

It is very difficult to make a blanket statement as to which is more beneficial. There are however, some basic considerations for both employer and employee to take into account in making the decision as to which they should aim for.

There are a number of pros and cons associated with both an established base salary and a production-based formula.

Straight salary compensation

First, it is often desirable for a new graduate to seriously consider the reliability of a straight salary system. In a situation where a significant educational debt service obligation exists on top of travel costs and living expenses (frequently in a new town), it is often nice to know that every other week a certain, finite amount of money can be expected.

Second, any veterinary employee who accepts a straight salary is establishing something of an "insurance policy" against his or her own professional shortcomings.

New graduates, for example, are frequently less sure of themselves than their experienced counterparts and may consequently take longer to conclude an office visit or surgery. Also, they often are assigned the less lucrative, more "price-shopped" commodity types of surgical procedures, such as spays and declawing procedures. A new graduate who did not receive a great deal of experience in surgery during training may take more than average time in completing even these low-gross tasks at first. A straight salary protects such a person from getting hit in the pocketbook for starting out as a slow surgeon.

Third, the newly employed veterinarian only has the word of the practice's owner that it is sufficiently busy to permit the new doctor to generate the amount of revenue needed to satisfy the employee's financial obligations. Also, there is no way for the new doctor to know how effective the practice staff is at charging records and collecting accounts.

General rules on salary alternatives

When reviewing a contract for employment with a new practice, it is frequently beneficial to follow these general rules:

1. As discussed previously in this series, be sure that it is clearly explained in the contract that the salary or compensation formula will require review in one year. That way, if the initial contract arrangements aren't working as planned, there is a set date for renegotiation.

2. New graduates should undertake some vigorous self-appraisal on their experience and skills. If a new grad was formerly employed as a technician in a hugely successful practice and is very comfortable with her speed in the exam room and surgery suite, there is probably no reason not to dive into production-based compensation. If a new doctor tends to spend 35 minutes in a routine vaccination call, a minimum base salary should probably be sought.

3. A hybrid salary/production arrangement should be carefully considered. An arrangement such as a minimum base pay figure, coupled with production bonus when goals are achieved may protect the new associate from suffering a financial burden while allowing the employer to offer an incentive for good productivity.

Legal minutia to consider

Imagine now that you have identified the ideal salary arrangement and that some portion of your income or bonus will depend on your production (your gross-generated revenue). You and the boss write the elements into a succinct employment agreement, and you are all set for a harmonious first year at the new practice, right? Possibly not.

As viscerally appealing as a short and sweet employment agreement may seem, there are benefits to carefully examining the details of a salary offer. Let's briefly look at some problem areas that have crossed my desk over the years.

* 1. Collection: Does the agreement specify whether the gross revenue calculation includes uncollectable charges? You won't care until you spend three days working up a parvovirus case and the owner stiffs the clinic. Unless your contract states otherwise, 24 percent of an uncollected $1,000 may equal $0.

* 2. Time-dependent percentage bonuses: If you are extremely productive and are generating (and expecting) a bonus for your work through the end of October, you could get a nasty holiday surprise. All your overtime may be for naught if you take a few personal days around Thanksgiving and the clinic's business trails off around Christmas. Maybe it would have been wiser to have quarterly or monthly bonus periods? On the other hand, your clinic might view an annual calculation as amounting to an incentive to take some extra holiday emergency hours or encourage salesmanship during lean periods. There is no one right answer.

* 3. Specification of sales attributable to associate work: Employment contracts that use a productivity-based compensation system often fail to specify what constitutes doctor-generated revenue. Example: Dr U sees an old dog with a bad mouth. She sends home antibiotics and schedules for a technician to perform a dental cleaning during which Dr. U will examine the mouth. Dr. U is credited for generating revenue for the exams and the antibiotic. Does she get her 22 percent of the cleaning? The refill of Antirobe? How about the diet food the receptionist suggests at the dog's discharge? Surely the doggy toothbrush will be credited to Dr. U?

Dr. Allen is a partner in Associates in Veterinary Law, P.C., a law practice specializing in business and legal counsel for veterinarians and their families. He can be reached at www.veterinarylaw.com or call (607) 648-6113.