 |
||||
|
|
Issue #12 - 1.30.07
Creating a Bonus Program for Your Associate
If you have employed an associate for a year or two, chances are they probably want an increase in the percentage of compensation you have been paying. If you want to maintain a fair profit margin for your associates’ efforts, consider offering them a bonus. Reward the associate for increasing their production just as you increase your profit if you have a great year and good growth occurs.
An increasing number of practices are structuring associate bonus programs based on the concept of breakeven analysis. Breakeven analysis determines the total costs of having an associate measured against revenue, and ultimately desired profitability. No matter the size of your practice, the breakeven point will reflect the annual revenue an associate must generate so that a specified profit margin can be maintained. Armed with this knowledge, you can set bonus percentages that will enable you to preserve your profit, yet fairly reward extraordinary performance.
To determine your breakeven point, make an estimate of the associate’s annual production and collections. Subtract the associate’s direct and variable expenses, such as laboratory and dental supplies, as well as fixed costs such as staff salaries and fringe benefits. After you determine the direct costs for your associate and project a 30 to 33 percent profit margin, the annual revenue figure needed to reach that goal will be your breakeven point.
When calculated properly, breakeven analysis offers a baseline which ensures an associate’s additional compensation is based on the ‘gravy’ rather than the meat and potatoes of practice production. A bonus structure using a carefully calculated baseline helps preserve your profit margins, even as expenses and overhead costs rise. It also rewards the associate for loyal service and superior productivity. In cases where a future partnership is being considered, this approach gets them prepared for the ups and downs of business ownership, namely if you are successful you are properly rewarded.
Creating a Bonus Program That Works
Most associate bonus programs are calculated on a quarterly basis. Associates receive their usual compensation plus a percentage of the difference over the baseline breakeven point. Practices just beginning bonus programs typically start at 10 to 15 percent of the differential over the breakeven baseline, and can offer annual bonus increases of two to three percent until reaching a threshold of 25 percent.
Now you still may be wondering how you can afford to pay the associate a regular percentage of compensation plus 10 to 25 percent in bonuses and still make a profit. Rest assured the math works as long as you calculate the breakeven point correctly. That’s because the costs associated with increasing an associate’s compensation through a bonus program should only be based on the associate’s regular compensation plus their variable expenses. The other fixed costs, such as salaries, are kept constant and are part of the breakeven point calculation. If you opted to increase the associate’s overall base compensation percentage, you are increasing compensation from the first dollar they generate. This approach will eventually erode your associate’s profit margins.
Bonus programs are not for everyone, of course, but for long-term, loyal associates, they can be major motivators for achievement and success. In this scenario, both owner and associate win. For those who use a breakeven analysis in their practice, you understand the power of the incremental profit generated when the breakeven point is reached.
Associate Bonus 101
Increasing an associate’s overall compensation percentage may eventually erode stable profit margins. However, when you calculate rewards on superior performance over and above a breakeven baseline, both associate and owner win. A bonus program offers a better way to reward associates, and ensure profitability. To illustrate, let’s follow the example below. In this example, we are paying the associate 34% of Revenue (Collections) minus 34% of Lab Expense.
| Sample Bonus Calculation @ 15% | ||
|---|---|---|
| Gross Quarterly Revenue Created by Associate | $ 85,000 | |
| Less Breakeven Point (BEP) | $ (60,000) | |
| Performance Differential | $ 25,000 | |
| Differential x 15% = BONUS | $ 3,750 | |
| Bonus Your Associate | ||
|---|---|---|
| Gross Revenue Quarter | $ 85,000 | |
| Staff Salaries | (8,000) | |
| Dental Supplies (6%) | (4,800) | |
| Office Supplies (2%) | (1,600) | |
| Lab Expense | (8,500) | |
| Compensation + Taxes (34% of revenue) | (27,800) | |
| Associate Health Insurance | (850) | |
| Associate Bonus | (3,750) | |
| Total Expenses | $ 55,300 | |
| Associate Profit | $ 29,700 | |
| % Profit | 34.9% | |
Dr. Thomas L. Snyder, is Managing Partner of The Snyder Group, LLC, a nationwide practice transition and financial management consulting firm. With over 75 years of experience in the field, The Snyder Group can provide you a full range of services relating to practice transition matters and retirement planning. They can also be reached directly at 1-800-988-5674.
If you would like additional help regarding implementing an associate into your practice, email Dr. Snyder at Drsnyder@thedentistsnetwork.net.
Interested in having Dr. Snyder speak to your dental society or study club? Click Here.