Published in Dental Economics, Feb 2024
This is going to be blunt. If you’re wondering whether you can afford the salary of your next employee or how you can financially justify raises for your current team, it’s possible that you don’t have a compensation system.
You have a method, not a system, if your approach to compensation is to:
- Mechanically give every employee an annual cost-of-living increase and hope for the best.
- Hide out until employees approach you for a raise.
- Dole out raises piecemeal at each employee’s anniversary date.
- Use a bonus plan in lieu of raises and hope that will satisfy employees.
- Give new employees any salary they demand just to fill an opening.
When you don’t have a compensation system, you don’t understand your true payroll costs, and your salary decisions can be reactive, subjective and frequently unfair. Without a system, everyone approaches compensation as gingerly, and with a similar amount of dread, as an unexploded bomb.
Tenets of a Healthy Compensation System
Just like any other operating system, a compensation system should be perceived as fair, objective and transparent. It should support employees’ financial, social and emotional well-being and, crucially, it must be affordable for the practice.
A healthy compensation system is based on these tenets:
- Compensation matches the attributes/skills of the employees you want to attract and retain. The way you compensate employees should reflect your values and business philosophy. For example, if your fees are at the 80% range, then your salary levels should be as well.
- Raises are linked to employee performance: This tenet is controversial and it’s also essential if you want to ensure that payroll is affordable and tied to employee efforts. To earn a raise, an employee must improve their contribution. Simply doing the same thing year after year, may keep an employee employed but it doesn’t merit an increased investment from the practice. Raises should award growth – not simply longevity.
- Raises must be affordable for the practice. In the last few years, due to inflation, many dentists have given everyone a cost-of-living increase and justified it by increasing their fees. But doing this every year is not sustainable. (I can introduce you to a long-term dental assistant who makes $90,000 a year.) In general, raises should only be given if the practice is profitable and an employee merits it by their performance.
- Affordability is determined by an increase in collections. A practice is defined as profitable if there is an increase in collections compared to the previous year and if the amount collected exceeds expenses. This means that raises are considered at the same time of year for everyone once you have your final collections number.
- Raises are drawn from a salary pool, created from a portion of the collections increase. Dentists choose how much they want to allot towards a salary pool with the rest of the collections increase re-invested in the practice.
- Employees understand the compensation system and how you determine raises. Employees must know if the practice is profitable enough to offer raises and the standards you use to determine whether an individual merits a raise. For this system to succeed, you must provide frequent, individual feedback so that employees can achieve their performance goals. It also means that the team can track the practice’s production and collection numbers.
If Your Team Expects Annual Raises
It’s healthy and normal to want to make more money and be recognized for your performance. Partner with your employees and explain that if they want raises, they need to collaborate to ensure that they collect more this year than last year. This will generate a salary pool for the whole team. If they personally want a larger slice from that pool, then they need to develop and achieve performance goals.
When the team truly grasps this they:
- Pay more attention to the practice statistics.
- Comprehend (and are usually shocked) by the impact of reduced fees.
- Commit to helping the front desk team collect.
- Connect their daily actions to their compensation goals.
- Stop knocking on your door throughout the year asking for raises.
- Begin to think and act like entrepreneurs.
If Job Applicants Want Higher Salaries Than You Expect
Don’t do what this dentist did. I work with a dentist who felt backed into a corner and agreed to pay a newly hired hygienist $93.00 per/hr. This means she’s making more than $800 per day when you factor in benefits. Since hygiene salaries are ideally 30% of their production, she will need to produce $2,400 a day. That’s $1,000 more than his hygienists currently produce and it won’t be achievable.
If an applicant or employee asks for more money than you can afford, use that request as part of the interviewing process.
- Hmm, that’s interesting. What led you to ask for that specific amount?
- That salary is much higher than I pay other hygienists. If I were to offer you that, what would you do in my practice to merit it?
- Hygiene salaries are typically about 30% of their production. Walk me through how you will produce the amount required to keep you within a healthy range norm.
- Aside from the salary, what are other reasons you would accept or not accept a position in our practice? What else are you looking for?
- How willing are you to consider a lower salary in lieu of other benefits?
Asking these types of questions communicates that you want to pay employees fairly but that you also expect they will provide a return on your investment in them.
What Are Your True Payroll Costs?
Many dentists and employees equate compensation only with an hourly wage. When I ask dentists to tell me how much they spent in payroll taxes, most respond with wide-eyed confusion. (It’s generally 8% of an employee’s gross salary.) And dentists, like their employees, often under-estimate the value and costs of benefits. This means that when employees declare they are under-paid, it may be because they don’t appreciate the dollar value of their:
- Dental treatment at the practice
- Sick and vacation benefits
- Health benefits
- Retirement benefits
- CE classes & certification
- Holiday “bonus” or gifts
- Uniforms
Interestingly, employees might not know the value of these benefits because the dentist doesn’t either! This underestimation leads to all sorts of misperceptions and problems.
The Dental Wage Planner Tool
Ideally, dentists show employees the value of their entire compensation package at annual salary review conversations. I developed a Dental Wage Planner Tool so that dentists can:
- Identify the total payroll costs of every employee including taxes and benefits.
- Detect any compensation inequities between employees.
- Forecast the financial impact of new staff or raises and compare it to production and collection.
- Experiment with different salary scenarios to ensure affordability.
Knowing and communicating each employee’s total compensation is essential; but remember, that compensation is not only about money. A robust compensation system includes all the ways an employee is rewarded and recognized in the practice.
