Compensation Models: How practices pay for your work
by Jan Thomas
“I will never pay anyone as much in straight salary as I will in production-based compensation."
– Joanne Roesner, DVM, Dipl. ABVP
Owner-Loving Hands Animal Clinic
Hmmm… Does that quote give you pause?
It should, particularly if you’re looking for your first job after veterinary school and most of your top job picks offer flat salary compensation.
Of the four compensation models used by veterinary practices today — flat salary, straight commission, percent of revenue generated and base salary plus percentage of production (ProSal) — the traditional “annual salary" model was used most often until quite recently. In fact, according to AAHA’s Compensation & Benefits study, 49% of full-time associates and 67%of part-time associates were paid using this compensation method just three years ago.
One reason for flat salary’s decline is that while a guaranteed flat salary is a concept that credit card companies, loan officers, mortgage brokers and landlords understand, it may not be the most equitable way to compensate you for your work.
Joanne Roesner, DVM, Dipl. ABVP, owner of AAHA-accredited Loving Hands Animal Clinic in Alpharetta, GA, says the drawback of flat salary for business owners is that “all the risk is with the practice." If new hires fail to live up to their potential, either in generated revenue or in quality of services provided, the practice is still required to pay the same salary, month after month, until employment is severed.
The drawbacks for veterinarians are equally important because star performers aren’t fully compensated for the extra value they provide. Generate more revenue because your client communication skills increase compliance? Great. But if you’re on flat salary, the fact that you’re seeing more patients, working more hours and making the practice more profitable won’t affect your wallet in any way.
So does that mean all flat salary job offers should be tossed aside?
Roesner doesn’t think so.
“There’s no absolute right answer," she says. A flat salary may be the perfect arrangement if new hires receive intangible benefits such as extra mentoring, research opportunities, a dream location, a partnership fast track or trailing spouse job assistance that offset lower total income potential. Flat salary pros & cons
Straight Commission and Percent of Revenue Generated
According to Compensation & Benefits 2005 data, only 14% of full-time and 13% of part-time associates were compensated solely for personal production, either through per-item commission or via a percentage of the total revenue they generated for the practice.
One reason for this model’s relatively low popularity is that new hires hesitate to accept an arrangement where so many factors are beyond their control.
"I wouldn’t want to be paid on production-only unless I could demonstrate what my production would actually be in that environment," says Dick Goebel, DVM, president of Simmons & Associates Great Lakes. “For the new graduate or the new associate, you really don’t have any idea how much production you can generate. Part of [the reason for that] is you, but part of it is the environment you work in. if you don’t have a receptionist making appointments for you and you’re not getting opportunities to generate revenue, that can be beyond your control. You’d be short-changing yourself if you went on production basis."
Another concern for Goebel is that production-only compensation may bring out qualities in associates that benefit no one.
“The big disadvantage to production based pay is that it rewards individual effort and ignores team play. Somebody who is an outstanding producer can be a real jerk to work with and might step on toes to gain more personal production so income can be enhanced," Goebel says. “In my view, some compensation has to be linked to playing well in the sandbox. You have to come to staff meetings and do other things that don’t necessarily contribute to production. Part of the privilege of working here is that you behave professionally, you help grow the practice and you look out for your teammates."
While he doubts many veterinarians would compromise patient health for income, Goebel says there should be no room for negotiation if veterinarians prescribe unnecessary medication or perform unnecessary treatments to earn more money. “You lose your job over that. That’s how it needs to be handled," Goebel says. “You can’t tolerate unethical behavior. It’s incumbent on the practice owner to make sure that’s the case." Production-based pros & cons
Salary plus percentage of production (ProSal)
"My favorite strategy of compensation, especially for young doctors with less than 3-5 years experience, is ProSal," practice owner Roesner says.
Other practices seem to agree. According to Compensation & Benefits data released in 2006, this is now the most popular form of compensation. ProSal, or salary plus percentage of production compensation, combines a guaranteed base salary with an opportunity to earn more when the amount of revenue an associate generates exceeds the amount of revenue required to justify her or his salary.
If that process sounds complicated, it’s because the amount of money required to justify your salary is far greater than the base salary you’ll be paid.
“Let’s say you’re promised $70,000 as a base and the fair market compensation should be 20% of your production,” Goebel says. “Do the math: 5 X 70 is $350,000. You would have to generate $350,000 to justify that guaranteed base. You would be entitled to 20% of any production beyond $350,000. That would be your production incentive, and that would be paid as a bonus either monthly, quarterly or semi-annually.”
“Recent graduates vary from ‘I know everything. Pay me $100,000 per year even though I might only generate $280,000’ to those who are grateful if you offer $50,000,” Roesner says. “The problem with the former is that they believe they deserve a certain amount of compensation without understanding what they have to do to earn it. You can’t hope for $100,000 unless you can generate $400,000 your first year out of school.”
Because the net cost to a practice of employing an associate includes state and federal payroll taxes, benefits, fees, subscriptions, life insurance, malpractice insurance and workers compensation, among others, practices demand high levels of productivity to offset salary.
“What ProSal does is incorporate the stability of salary for new graduates whose earning capacity is still a question and allows them, if they are motivated, outstanding people, to capture the additional income associated with improved performance,” Roesner says. ProSal pros & cons
The bottom line on your bottom line
Understanding the pros and cons of different compensation models and negotiating the right total compensation package may seem daunting. So much so, in fact, that some new graduates prefer to take what they’re offered the first year after graduation with plans to prove their worth then petition for a higher salary in their second year on the job.
That’s a strategy that AAHA’s incoming president, John Tait, DVM, doesn’t recommend.
“Most raises are based on a percent of what you’re currently making, and a percent of a lower figure is a lower figure,” Tait says. “Even though your productivity will be higher after a year on the job, new veterinarians actually have more leverage when they’re first coming out because hiring practices are in a state of need.”
Instead of selling yourself short during initial negotiations, Tait, Roesner and Goebel suggest the following:
Before interviewing anywhere, write and prioritize a list of tangible and intangible compensation elements.
"I consider the ability to do excellent, quality care and [have] mentoring to be intangible." Roesner says. "I want those kids to know before they walk into a clinic what is important. If you don't know that, you're not going to be able to maximize it in your employment and you're certainly not going to be effective in negotiating because in negotiating you're always looking for a high value, low cost trade. If you don't know what's of high value to you, I can't tell you."
Do the math.
"Become familiar with market norms for graduates with similar experience levels so you're not selling yourself short or gouging the practice," Tait says. "Understand what you need to meet your debt obligations and lifestyle expenses. And, be sure you understand the production based formula and what it means to you, even if you have to get help to do so."
"With regard to compensation specifically, you need to ask 'Is the base adequate?'" Goebel says. "The things that drive that are what you have to pay all your bills plus service education debt.
"The other factor is cost of living where you're going," he adds. "If you take a job in South Bend, Ind., for example, the cost of living there is less than 90% of the national average. If you go to Chicago, it's at least 50% above the national average. You have to index your compensation according to the cost of living because your expenses are going to go up by the same amount."
Think carefully, then decide.
“We’re talking about something that will influence your career for the rest of your life,” Roesner says. “Never say yes immediately. There’s no job offer that’s going to go away tomorrow. Make sure you understand the offer. The offer is not just what you’re going to be paid. It’s also how many hours you’re going to work, how many technicians there are, how many receptionists there are, the character of technology available, how committed to mentoring you are the practitioners, [and] the quality of care provided."