First off, a profit sharing plan should only be given when it is affordable to the practice. Therefore, the first step in establishing a profit sharing system plan is to determine the point at which “extra” monies exist with which a share of the profits (bonus) can be paid. To do this, you must confront your overhead (what it costs to keep your business there), what you intend to net out of the business, and additional sums to cover a reserves fund, money for owner of the practice and staff training, and money for equipment replacement or expansion. Part of this process is to confront where your staff payroll is as a percent of your collections; for a dentist you want this ideally to be below 25%, for an optometrist close to or just below 20% and for a veterinarian close to or below 18%.
When this viability figure has been determined, you can reasonably afford to pay 20% of any collections over this amount into a staff profit sharing pool. If, for example you determine that $60,000 is a viable level of collections (overhead met, owner of the practice's net where it should be, money for reserves, training and equipment handled), and the office collects $70,000, then 20% of $10,000 can go into the profit sharing pool, i.e., $2,000 in this example.
I recommend that this profit sharing system amount be based not on the collections figure for one month, but from a three-month running average. For example, the collections for the past three months has been $60,000, $65,000 and $70,000. The average of the three is $65,000, which would be $5,000 over the $60,000 viability point, which puts $1,000 in the profit sharing pool (20% of $5,000 is $1,000). This “running average” is designed to factor low months into the equation; otherwise, staff are not penalized for low months, only the owner of the practice is.
Now that we have a profit sharing pool of $2,000 (in our earlier example), we need to distribute it. There are a variety of ways to do this:
1) The simplest way to do this is just divide it evenly amongst the staff. Part-time people either don’t participate or are given a share of the profit proportionately to their time (1/2 time people get half as much profit share (profit sharing) as full-time people, which is probably the simplest way to work this out and would also probably cause less internal noise amongst staff.
2) Another way to divide it is proportionately to staff members’ pay – on the principle that staff value to the office is reflected is what they command as pay and that they deserve a share of the profits (or bonus compensation) on the same basis. (For a dental practice I would not bonus Hygienists proportionately to their pay, as this would throw the bonus way off for the rest of the staff. If Hygienists are part of this system and does not receive a bonus separately on their own production, I would bonus them at the same rate as a highly paid Expanded Functions Assistant.)
3) You may want to work up a division of the profit sharing pie based on other factors than pay, e.g., length of time in service, responsibility level in the office, etc. Here would simply have to work with relative percentages of the profit sharing pie meted out to staff until you felt the relative amounts were just.
An additional factor can be used to further reward an individual staff member’s personal productivity: their own production statistic! To factor this in, you can take a staff member’s portion of the pie and divide it in half. Let’s say in a 6-person office, an Office Manager is eligible for 25% of the profit sharing pool. Each half is 12 ½ % of the profit sharing pool. If there is a profit sharing that month, the OM automatically gets 12 ½ % by virtue of being on the team. The other 12-½ % she gets provided her personal statistics are improved from the week or month prior.
These ideas are offered as a starting point for developing a bonus system and profit sharing plan for a practice.
The basics are:
1) it is affordable to the office, and
2) it does in fact effectively reward productive staff and enhance their morale, motivation and loyalty to the practice.
I hope the above was helpful and I'm sure variations on this and other ideas have been proven workable.
