The Do’s and Don’ts of Practice Bonus Plans

How to Offer a Bonus Plan to Your Staff

The subject of bonus plans has bewildered practice owners for quite a long time. The theory—creating an incentive for staff to do exemplary work—generally makes sense. The difficulty is in the implementation. When you tread into the realm of bonus plans, you are entering a minefield. Constructing a bonus plan can be a handy tool for you, the executive. But when done incorrectly, it will blow up in your face and create a terrible work environment; your staff will be livid. And when the dust settles, you, the besieged practice owner, will be likewise incensed, as you will feel unfairly attacked when all you were trying to do was to find a way to pay your team more.

Why does this all go so wrong?

First, let’s look at this from the staff member’s perspective. No matter how the bonus system is structured, it’s all about money. While the adage, “Never discuss politics or religion at the dinner table,” is sage advice, neither of those subjects provokes as much emotional reaction as when you tamper with someone’s pay.

Consider how businesses set up salaries and wages. It’s fundamentally based on exchange. You hire someone to do a specific job. In return, they expect remuneration, and they expect it to be consistent. Employees would understandably be upset if an owner constantly changes the pay scale. In other words, agreements are in place that are a matter of routine: work ‘x’ number of hours and get paid ‘y’ amount. When and how much they receive is predictable and dependable. There is nothing arbitrary or capricious about it.

A Fundamental Problem

Employees know they must show up and do good work to earn their basic check. On the other hand, owners often doled out bonuses on a whim. Here’s an example: the owner feels that this month’s production was better than usual, so he wants to share his good fortune with his staff by distributing some of the profits to them. They obviously like this and want to experience such generosity again. The next time monthly production is exceptionally high; there would understandably be an expectation of a similar bonus. When it doesn’t materialize, resentment ensues.

What the owner violated is “predictability.” The practice had a similarly good month, but the owner did not reward them as before. Now they resent the owner and view him as a cheapskate; the owner, in turn, wishes he had never doled out a bonus in the first place. So, what started as a generous act on the owner’s part has now become a source of dissatisfaction on everyone’s part.

Predictability is the Key

So, this brings us to one of the fundamental problems with many bonus systems: bonus plans need to be more predictable and dependable to most staff members. For example, if the practice does ‘x’ production, the staff will get a ‘y’ amount of money as a bonus. So now there is predictability. But upon closer inspection, we see that predictability still eludes the staff. Why? Because if production consistently increases, so will the expenses associated with obtaining it. Therefore, the owner must increase the production required for the bonus. And the unintended result is that the staff loses predictability again. From their point of view, just when they started making consistent bonuses, the owner suddenly changed the rules and moved the goal line further away, thus making it more unlikely that the employees would earn a bonus. Additionally, they become concerned that even if they achieve the new production goal, the owner will again change the rules.

Lack of Control = No Bonus

In addition to the problem of predictability, there is the issue of control. Often the team can work hard to achieve a production goal, only to see the practice fall short of the named target. In that event, the employees become frustrated because they don’t know how to ensure the practice reaches its target. In other words, they don’t know what to control that would help to achieve the stated goal. They work hard, perhaps through lunch or take fewer breaks, and pay close attention to their workmanship. Those are all their efforts to effect something they can control. But staff morale will most assuredly plummet when that still doesn’t result in the practice reaching the targeted production level. They will feel like they are just a cog in an enormous machine wherein their efforts can’t affect the overall income of the practice. And when they reach that conclusion, they will cease making the extra effort, and then for sure, the practice will not achieve the intended goal.

Know All of the Areas That Affect Income

This dilemma of staff feeling that they aren’t able to effectively contribute and resultantly help to control the income level of the practice is one of the most common problems in virtually every practice I’ve analyzed. In most cases, I traced back the source of this predicament to the owner not knowing how to identify all the parts of a practice that affect income. Did you know there can be up to 12 or even 15 such areas in a solo doctor practice? In a multiple-doctor practice, there are more than that! Once we have identified those areas, the owner must place a staff member in charge of each one, develop a statistic to monitor it, and then teach the staff member how to control the area to keep the statistic at the appropriate range. An owner who can accomplish that is the owner who can control their economic destiny.

Bonus Plan Inequity

Let’s return to the subject of bonus plans. In addition to the problem of the staff’s inability to effectively control the attainment of targeted income goals, there is also the sense of inequity or unfairness that most bonus systems create. Most bonus systems take a certain amount of money and divide it among the staff, generally in proportion to the number of hours they work. But in most practices, you’ll find a few superstars who do most of the extra work required to reach the target. They are the ones who talk to patients about referring friends and family when the other staff members are reticent. And they are the ones who are more productive than their co-workers. But when those superstars see everyone rewarded equally, resentment emerges.

Consequently, they stop putting forth the extra effort. After all, why should they work so much more diligently if they will be paid the same bonus as those who don’t make the extra effort? And, of course, the irony is that when the superstars start cutting back on their efforts, the office won’t achieve its goals, and then NO ONE gets a bonus!

Profit-Based Bonus Plans

Poorly crafted bonus plans also create problems, mainly financial, for owners. Bonuses should be calculated and paid on profit, i.e., the money a practice makes after accounting for all expenses (often called the make-or-break point or overhead). If a bonus system starts to pay out before the office achieves profits, then the owner has effectively taken a pay cut.

Based on analysis of many thousands of practices, we can conclude with certainty that most owners need to learn how to figure out their make/break point correctly. For example, owners need to consider non-monthly expenses when calculating overhead. Such costs include repairs to equipment, equipment replacement, money set aside for reserves or staff training, etc. Since those aren’t bills the owner deals with on a recurring monthly basis, an owner can easily exclude them from the make/break point calculation. But they are expenses and will eventually have to be paid. Therefore, in most practices, the make/break point is higher than what the owner believes. So, owners need to create bonus levels for income goals considering the actual profit.

Summary of Bonus Plan Failures

These are the main reasons bonus systems can fail to function well:

1. Lack of predictability for the staff.
2. The staff’s perceived inability to proactively control the production or income that would achieve the bonus.
3. Bonus distribution is not based on the level of contribution.
4. Bonus levels set incorrectly.

While other factors might cause bonus programs to be problematic for the practice, those listed above are the biggest culprits. And the result of that is the opposite of a win/win scenario. The team is unhappy and perceives the owner to be a cheapskate. On the other hand, the owner is resentful, shocked, or even furious that their efforts to help the staff make more money are not just unappreciated. What a mess!

The Solution to Medical Practice Bonus Plans

So how does one get around this minefield? The owner must include the following in the design of any bonus plan to ensure its success:

1. Base bonuses on profit, not revenue. To do this, the owner must understand how to identify all the expenses in the practice.
2. The owner must know what percentage of the profit to distribute to the staff.
3. The staff must feel that the bonus plan is predictable. Owners must tie bonuses to specific stats for each employee, which can be measured. Each employee should understand that achieving the targeted goals of their stats helps ensure that the practice will meet its profit target.
4. The staff must clearly understand that changes to the bonus level will occasionally occur as the make/break point rises. In this way, the team will not become upset when the owner raises the income level target to account for the increase in the make/break point.
5. The staff must feel that they can control the practice’s income to ensure they have a chance at getting to the targeted ranges. As mentioned previously, the owner must place a staff member in charge of each area, develop a statistic to monitor it, and then teach the staff member how to control the area to keep the stat in the appropriate, targeted range.
6. The bonus system has to be fair. In other words, it has to reward the staff members who contribute to growth, not just because they are part of the team.

What a Practice Owner MUST Have in Place for a Successful Bonus Plan

If all the above seems a bit complicated, that’s because it is, and then again, it isn’t. You see, items 1 to 6 above are things a practice owner should have in place anyway. In other words, regardless of whether or not you have a bonus system established, as an owner, you need to:

• Understand your actual make/break point.
• Understand how to equitably pay staff (whether wages only or bonuses too).
• Create predictability in the practice.
• Ensure the team understands why the practice owner occasionally will need to raise the income level targets.
• Work with the staff to ensure they feel their efforts make a meaningful difference to the practice and the team.
• Ensure that everyone in the practice carries their weight and is not propped up by other staff members.

Every owner should have these points in place in their practice. If you are uncertain about any of the points above, it is crucial that you get educated in them. Once you do, setting up an effective, motivating, and fair bonus plan for all becomes easy. If you would like help with this, Silkin Management Group would be more than happy to assist you.