Issue #22 - 6.19.07


Thomas L. Snyder, DMD, MBA
Managing Partner
The Snyder Group, LLC
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Partnership Compensation

Over my career I have often been asked to assist failing partnerships.  The root cause of many failures has been related to income sharing.  Historically, partnerships were always relationships based upon partner income being shared equally.  This approach, in many instances, did not succeed in the long-term.  Not all partners contribute equally to their practice whether it’s due to the number of patients or how efficient they are. Basing part of partner income on production is a fair approach to solving that problem.  Being an owner should reap some rewards as well, so basing partner income on a blend of personal clinical production and ownership share is the best way to address this issue.  We’ll present two methods of sharing partner income in this article. 

Method I
Payment on a Proportion of Personal Clinical Production and Profit Sharing
In this method we calculate available partner compensation, which is defined as all income available after deducting the practice’s operating expenses.   We term this as Available Partner Compensation.  It is then divided in the following way:
Component I – Calculate the Personal Clinical Production Ratio of Each Partner

Based on the partners’ philosophy towards emphasizing clinical production on their relationship, the proportion of Available Partner Compensation that will be allocated toward production, is anywhere from 20 to 80% of available partner compensation.  The remaining balance of available partner compensation will be shared based upon the percentage of partnership interest.  Many of our clients, however, select 50 to 60% of available partner compensation to be allocated to the production equation. 

The next step is to calculate the ratio of personal clinical production.  So, for example, if one partner produces 55% of clinical production, the remainder will obviously be paid at the rate of 45% of clinical production.  These percentages are multiplied by the proportion of available partner compensation that is allocated to clinical production.  In certain instances when there is a significant difference in the size of the partner’s patient base, the respective hygiene production may be added to this calculation.  The remaining balance of available partner compensation then is allocated to each respective partner’s interest in the practice.

Method II – Pay Partner’s a Percentage of Production
Another method of compensation uses the approach that most associates are paid, namely applying a percentage of net production or collections with an adjustment for lab expenses.   Select a compensation rate between 33 to 37%, overhead permitting.  Lab expense is deducted at the same percentage rate as the selected compensation rate.  In cases where a severe discrepancy exists in lab expenses, it may be wise to deduct 100% of the lab.  This would be done by paying the percentage of compensation first, then deducting 100% of the lab costs.  In either case after you apply the percentage calculated to personal clinical production the remaining balance of available partner compensation is split, based upon partnership interest.

Below are illustrations of two examples to show you how the math works for both methods.

Method I

Payment on Split of Production
and Profit Shared on Ownership %
   
Revenue
$1,500,000
Operating Expenses
$900,000
Available Partner Compensation
$600,000
50% Production Allocation
$300,000
Equal Partners – (Sharing Profit Equally)  
50% Profit Allocation  
   
Calculate Proportion  
Dr. A. - $556,500 / $1,050,000 = 53%  
Dr. B. - $493,500 / $1,050,000 = 47%  
   
Calculate Production Compensation  
Dr. A. - $300,000 X .53 = $159,000  
Dr. B. - $300,000 X .47 = $140,000  
   
Calculate Production Compensation  
Dr. A. Compensation  
$159,000  
+150,000  
$310,000  
   
Dr. B. Compensation  
$140,000  
+150,000  
$290,000  

Method II

Payment on % of Production
and Profits on Shared Ownership
   
Revenue
$1,500,000
Operating Expenses
$900,000
Available Partner Compensation
$600,000
Equal Partners
Dr. A
$556,500
Dr. B
$493,500
Dr. A Lab
$80,500
Dr. B Lab
$55,500
Compensation @ 37%  
   
Calculate Production Compensation with Lab Deduction  
Dr. A. - ($556,500 - $80,000) X 37% = $176,305  
Dr. B. - ($493,500 - $55,000) X 37% = $162,245  
Total Production Compensation : $338,550  
   
Calculate Available Profit Share  
$600,000 Available Partner Compensation  

$338,550 Partner Production Compensation

  
$261,450 Partner Profit Share Pool  
   
Calculate Production Compensation  
Dr. A. Compensation  
$176,305  
+130,725  
$307,030  
   
Dr. B. Compensation  
$162,245  
+130,725  
$292,970  

Summary
At the end of the day, the most important issue to carefully analyze when forming your partnership is to develop an equitable way of splitting income.  At the outset, typically, in newly formed partnerships the “senior partner” will be the big producer thus receiving a greater portion of available partner compensation.  However, as the senior partner begins to reduce his/her time in the practice, the junior partner will more than likely receive a larger proportion of income.  In balance, over the life of your partnership, this appears to be the fairest way of sharing income.

Next month we will look at innovative ways to buy out the senior partner.

This article shall not constitute a solicitation in any state or jurisdiction in which such solicitation would be unlawful prior to registration or qualification under the laws of such state or jurisdiction.

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