Exploring Compensation Options For A New Employee
When you decide to hire a new podiatrist for your practice, one of the most important decisions you will face is deciding how much to pay your new hire. Ideally, you want to pay a base salary and offer an incentive that encourages the new podiatrist to work hard, pay for him- or herself quickly and then participate in the collections above his or her costs to the practice. Potential employees are looking for compensation that will allow for a reasonable lifestyle along with loan payments. The challenge is how to take both of these concepts and create an agreement that is acceptable to each party. Employers likely go into the hiring process because they: • are five to 10 years away from retirement and need someone to buy them out; • know that the practice is too busy for the number of providers it currently has; • want to open a satellite office and cannot be in two places at once; and/or • are referring out too much surgery. Obviously, employers want to hire someone who will be a good addition to the practice in terms of both professional and personal skills, someone who works hard and gets along with the staff. Still, the prevailing issue during the interview process will undoubtedly be compensation. While some employers like the idea of paying a straight salary, if you are truly looking for someone who wants to develop his or her own practice and not just handle your overflow of patients, you should offer incentives. When a new hire asks you how he or she is doing in collections after the first and second years, it demonstrates his or her interest in working and expanding your practice. Assessing The Impact Of The New Hire On Overhead Expenses There are several factors that go into determining a compensation package for the new employee. For example, your office overhead likely includes rent, supplies, staff (and benefits), utilities and malpractice insurance. If you estimate your office overhead at 50 percent, that means you take home $50,000 out of every $100,000 in collections. Employers may have the mindset that if a new podiatrist’s collections at the end of the year are $100,000, then $50,000 will go to the overhead and $50,000 will pay the new employee’s salary and benefits. For this reason, most employers require at least twice the costs of the employee to be collected before a bonus/incentive is implemented for each year. However, the problem with this thinking is that when you hire a new employee, your rent, staff and utilities do not increase 100 percent. Your overhead will increase but the increase will likely be more in the range of 15 to 25 percent. Actually, after you pay for the direct costs of the employee (salary, FICA, health insurance and malpractice) and your new incremental overhead, there will be more money left over for a larger contribution from the employee to your fixed overhead. This translates into more take home pay for you. If you calculate the exact increase in the overhead and direct costs of the employee, it will result in significantly less than the aforementioned 50 percent projection. You will actually make more money from the employee’s services than you think and you should. When you bring a new podiatrist into the fold, you are taking a risk. You are investing in the employee by paying a salary, health insurance, malpractice insurance, marketing costs and providing a place for him or her to practice before any collections come into the office. When you make an investment, you do so with the idea that you will make a return on the investment. The tricky part is deciding at what point can you say that you have been paid back for your initial investment and begin to share it with the employee. Be Cognizant Of The Potential Employee’s Expectations When making this decision, it is also important to be aware of the potential employee’s expectations. New employees coming out of a training program will not have a salary or health insurance but will usually have debt from school loans and need to be paid a reasonable amount for their services. They are also taking a risk. They may have moved their entire family to a new location and signed an agreement that requires them to move again if it does not work out between their employer and themselves. A prospective hire may have the following thought process when seeking employment: “In the past year, the last year of my residency, I was paid between $35,000 to $50,000. On this salary, I was barely able to pay the rent, my car payments, take my spouse out to dinner occasionally and keep up with my loans. I have just completed a difficult surgical residency and now have good marketable skills. I should be able to find a position that will pay me a nice salary and perhaps get a bonus for hard work.” These are reasonable expectations. A Guide To Sample Contract Language On Compensation As an illustrative example, the following may be written in the compensation section of the Employment Agreement. “Employee will be paid a base salary of sixty five thousand dollars ($65,000) for the first year of the contract. In addition to the base salary, Employee will be paid a bonus based on the following formula. “At the end of Employee’s first year (12 months), the collections of the Employee will be totaled. This total will be after patient refunds and any adjustments. This number is Total Collections. “At the end of Employee’s first year, his or her direct expenses (salary, FICA, health insurance, malpractice, moving expense, and CME paid by the practice) will be totaled. This number is Total Expenses. “In any contract year in which the Total Collections exceed twice the Total Expenses, Employee shall receive a bonus equal to twenty-five percent (25%) of the collections that exceed twice the Total Expenses up to three times the Total Expenses. Employee shall receive forty percent (40%) of those collections that exceed three times the Total Expenses.” Case Example: What Do The Numbers Look Like After The Second Year? Due to the lag time in collecting claims submitted for the employee’s services, few if any employees reach the bonus threshold in the first contract year. In the second year, if the employee’s expenses include $80,000 for salary, $4,000 for FICA, $20,000 for health insurance and malpractice insurance and $500 for CME, then the employee’s total expenses would be $104,500. Now assume the new podiatrist’s collections are $350,000. To see how this would be broken down in a compensation package, see the table, “Case Example: Compensation Projections For A New DPM,” below. In this example, the employer receives $204,775 after all expenses and the employee receives $145,225 in his second year. This is a win-win situation. The employer has been paid back for his or her initial investment and for the risk he or she took in hiring the employee. The employee has received a reasonable total compensation in his or her second year and understands the connection between working hard and compensation. Final Notes Looking for the right employee is difficult and arriving at a suitable compensation package for both parties can be tough. However, it’s important to arrive at a compensation arrangement that is agreeable for both parties. When the employer and potential employee put themselves in the other party’s shoes and there is flexibility on both sides, there is a good chance that they will be able to craft an acceptable contract. Mr. Peltz is the president of Peltz Practice Management and Consulting Services. He can be reached at (845) 279-0226 (phone), (845) 279-4705 (fax) or via e-mail at email@example.com. Editor’s Note: This article is designed to give educational and illustrative information only and not to give legal advice.