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Hey everyone, welcome back to The Testing Psychologist podcast. Happy to be here.
Today is a business episode. We are talking about compensation, and specifically, we’re talking about salary. The issue of compensation models comes up all the time in my consulting and mastermind groups with [00:01:00] practice owners.
People are always asking, should I pay a percentage? Should I do a flat hourly rate? Should I consider a salary? Now, I’ve talked about my thoughts on percentage versus flat hourly rate, but we haven’t really tackled the salary option in detail. I find that as hiring becomes tougher and the market is more competitive, practice owners are compelled to consider a salary for a variety of reasons, but there’s a lot of math involved and we can dig ourselves into a hole if we’re not careful as we calculate the salaries.
So let’s dig in and talk about how to do a salary in your practice.
Salaries are attractive, [00:02:00] right? It’s simple. Clinicians like it. We’ve talked before in terms of what makes people happy as far as flat rate versus hourly pricing for evaluations. I think some of those same principles extend to compensation as well, and that people just like a salary. It’s easy, predictable, and stable, and it could be quite a trap for a business owner in our line of work.
Let’s talk about some of the ins and outs of a salary, and by the end of this episode, I think you’ll have a good idea of the pros and cons of paying a salary, how to calculate a salary, and some considerations to put into place if you do decide to go the salary route.
Let’s start with why we might consider this.
I think that there’s an argument to be made for better clinician retention, at [00:03:00] least among some clinicians. I don’t know the research on this. I should have looked that up. I’ll be honest. But clinician retention is one thing that people go for when they consider a salary.
It’s been said that the two most addictive things in our culture are heroin and a regular paycheck. I’m paraphrasing, but that’s pretty close, and there’s some truth to that. Having the stability of a salary I think is really attractive to many individuals. It’s not going to be attractive to those who want to really hustle and overwork to make more money via an hourly model, but for a lot of folks, a regular paycheck is pretty attractive. So clinician retention is one of those things that is typically included in the arguments for paying a salary.
Now, on the practice owner side, there are also some benefits. Payroll is a lot easier if you are paying a salary because you just put that number into your payroll system and it just happens [00:04:00] every payroll without any further work on your side. You’re not calculating the hours, you’re not looking into your EHR for a percentage of revenue collected. You’re not doing any calculations.
Now, that is attractive as a practice owner with over 40 folks on the payroll. I was handling our payroll up until recently. That gets very unwieldy and time-consuming to calculate payroll if you’re doing an hourly model. So, a salary is attractive in that regard. Payroll is easier and that saves a person hours assuming you’re not doing it yourself as the owner which I recently handed off.
Another reason that folks are attracted to a salary from the practice owner’s side is that it does even out cash flow a bit. If you know that your payroll is going to be X amount every two [00:05:00] weeks because you’re paying a salary, that’s very predictable and you can contrast that with the ups and downs of an hourly or percentage model where the revenue fluctuates and payroll fluctuates because you’re paying folks for what they work and if they’re not working a consistent number of hours each week, then that just makes things harder to predict, harder to budget, harder to plan for.
And you might say, okay, well that’s not a huge deal. I can roll with some uncertainty, but let’s take just a simple example where if you have a group practice and your hours worked fluctuate, your employee hours fluctuate by, let’s just say 5% every pay period. Well, if your monthly payroll is, let’s just [00:06:00] say $50,000, and it’s fluctuating by 5% each time, it could go 5% down, 5% up, that could be $2,500 in either direction. So you could end up with a $5,000 fluctuation from month to month. And that’s significant enough to want to avoid. So cash flow is smoother, and a little more predictable with a salary.
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All right, let’s get back to the podcast.
Now, I’m going to spend the bulk of the episode talking about the downsides of a salary. I don’t know that you would call them downsides necessarily, but there are many things to consider when you are considering a salary model.
The first thing to consider is just how you calculate this salary. I would say that folks typically calculate a salary based on a percentage of gross revenue earned. I’m going to walk through an example that’s going to stay consistent throughout the episode just to keep things hopefully easy to understand. But typically folks will jump in and say, okay, I want to pay a salary. I’m going to pay a salary that’s 50% of the gross revenue earned. 50% is a pretty common percentage to pay in an employee [00:08:00] model. And you can only pay a salary if you have employees. So we’re going to work through it from that angle.
So let’s say you settle on 50% as a salary for your gross revenue earned. In that case, a salary of $100,000 would require a gross revenue earned of $200,000, right? That’s 50%,$100,000 to 200,000. That’s half. 50%. Everybody’s with me.
But it’s not just about the gross revenue target, and here’s why. With this $100,000 salary, you actually have other add-ons and considerations that tend to add to that number.
The first thing I want to talk about is payroll Taxes. So if you’re in an employee model, which you have to be to do a salary, you’re going to pay payroll taxes on top of the salary. [00:09:00] Let’s call it 10% just to keep the numbers even. That’s a little high in most states, but not by much. Usually, it’s around 7.5%- 8%, so we’re in the ballpark.
Let’s say we’re adding 10% to our practice costs or payroll costs for this employee with a $100,000 salary. So 10% of $100,000 is $10,000, so that puts us now at $110,000 all in from the practice side.
Now, let’s talk about the benefits. If you provide retirement matching, that’s likely going to be another 3% of the salary. So 3% of $100,000 is $3000. Add that to the $110,000 that we are already paying for salary plus payroll taxes. Now, we’re at $113,000.
All right. Now, let’s [00:10:00] talk about benefits which a lot of practices try to provide. If you’re in a place to consider a salary model, I assume you’re also in a place to consider benefits.
So if you are covering, let’s just say 50% of an employee’s health insurance premium, that’s going to vary, obviously, but we’ll just call it on the low end, about $200 a month. If you cover 100% of an employee’s health insurance premium, that’s going to be closer to about $400 a month.
I’m going to pick a number in the middle and call it about $250 a month. This is on the low end, which would come out to about $3000 a year. We add that to our $113,000 that we’re already paying for salary, payroll taxes, and retirement, and now we’re at $116,000 all in for a full-time employee salaried at a$100,000. [00:11:00] So even that right there, you can see between taxes and benefits, you’re adding about 16% to your salary number.
Now, let’s talk about the big one, which is NO-SHOWs. A typical practice is going to have between 5% to 15% of the appointments no-show over the course of a year. I’ll call it 10% just to keep it in the middle and do a little ballparking. So let’s call it 10%. And you have to keep in mind though, 10%, that is 10% of that $200,000 gross revenue target, not of the salary because when an employee is billing, they’re presumably billing at the full hourly rate, which you use to calculate your gross revenue target.
10% of $200,000 is $20,000. So if you have a 10% no-show rate, [00:12:00] that’s going to reduce your employee’s gross revenue by about $20,000 if we’re working in this example. So now that clinician is only bringing in $180,000 gross revenue if you don’t have a good system in place to account for no-shows, right? So, if the no-shows happen and they don’t get filled, they don’t get charged, then you’re going to be down to about $180,000 gross.
That changes our numbers quite a bit. All of a sudden, that 50% salary number, $100,000 on a gross revenue target of $200,000 has turned into $116,000 to the employee versus $180,000 gross. I can’t do that math in my head, so I did it on a calculator, and that brings our salary percentage up to 65%. [00:13:00] That’s a big jump, right?
So that in and of itself, if you’re talking about, let’s look big picture, big picture practices like ours in our industry are going to have a profit margin anywhere from 10% to probably 30% on the very high side. So if you’ve increased your payroll costs by 15%, moving from that 50% to 65% number, that’s going to eat into a big chunk of your profit margin.
This is what I mean when I say make sure to do the math when you’re calculating a salary, There are all these little things that chip away and add on to the cost to the practice that a lot of practice owners don’t consider. We just start with that hey, I’m going to pay 50%. Here’s gross revenue, let’s run with it.
So make sure to account for all of these [00:14:00] factors, and this may not even be all of the factors you need to account for. These are just the big ones that I run into with certainly our practice and other practices that I work with.
Now, if you want to move forward with a salary, say you’ve done these calculations and you say, okay, I think I’ve got these numbers dialed in or I want to still consider a salary, totally fine. Here are some considerations to think about.
A salary model should be a lot more rigid than an hourly model. What I mean by that is the clinician’s “work plan should be very dialed in and well defined from the beginning. When you hire them you would put that in your offer letter or contract, if you go that route. It’s not technically a contract because they’re not a contractor, but you get the idea.
So [00:15:00] the work plan should be very dialed in. And when I say very dialed in, what I mean is you can dial it in down to the week. The clinician should be seeing X number of billed clinical hours per week. You can include a no-show rate, or you can not include a no-show rate, but you need to be very specific as far as the clinician’s work plan each week. Clinical time, admin time, any other time that you might be paying for so that they know exactly what to expect from the very beginning.
I think it also makes sense to specify the gross revenue target and how often you will check to make sure that they’re on track and what will happen if they’re off track.
I would recommend checking their gross revenue target at least quarterly. So if you have a, again, gross revenue target of $200,000, getting reimbursed $100 an hour, just trust me on this, that’s [00:16:00] going to be about 40 billed hours per week for a 50-week year. So every quarter, you can do the math you would break that down and they would need to be seeing about 670 billed clinical hours every quarter. So checking quarterly, make sure that you don’t fall too far behind and you don’t have someone who’s way behind and still getting paid their salary.
So if you’re going to consider it, make sure to dial in the work plan as specifically as you can, and define it as best you can. That’s what I mean when I say it should be more rigid. Typically on an hourly model that gives clinicians a little bit more flexibility, but on a salary, you have to be super clear with what the expectations are to hit that gross revenue target.
As I said before, no-shows are the biggest threat to a salary model. Clinicians have to [00:17:00] know that there are no free cancellations and that clinicians will not have open time necessarily if someone no-shows or cancels. All of those will be filled based on the work plan to hit the gross revenue target. So if someone is scheduled to do two intakes a week and the first one on Monday no-shows, they should know that they need to find another spot within that week to do another intake. So it means that they have to be able to find the time for that intake.
The other side of that is that the practice needs to have a really good system for filling no-shows. So if you don’t have a great system for filling no-shows, either from a waitlist, perspective or from an admin perspective, where you have someone who can call people on your waitlist immediately when a no-show happens and try to fill that within the same week, then you could be in trouble.[00:18:00] So if you don’t have a good system for filling no-shows, you need to account for that in the salary calculations. You can do that in two ways. You can adjust the gross revenue target up to account for no-shows.
In our case, that would be adjusting up to about $220,000 let’s say. So that just means that you’re going to book enough appointments to account for that 10% no-show rate, and the actual gross revenue will settle in back around $200,000.
The other option is that you can adjust the salary down. So 50% of $180,000. If you remember, 180,000 is the gross revenue we ended up with after a 10% no-show rate. 50% of $180,000 is $90,000, all-inclusive. So [00:19:00] that $90,000 should include benefits, retirement, and so forth.
Now, I know this is a lot of numbers and I’m trying to break it down as simply as possible. At the same time, I know it’s a lot of numbers, so if you are getting lost in the numbers, totally okay. The principles I hope are shining through though, so if you don’t have a good system for filling no-shows, just remember, you can adjust your gross revenue target up to account for them or adjust the salary down to account for no-shows.
All right. Another question that comes up a lot when we’re talking about salary is how to handle vacation. So a couple of models here. You’ve got the traditional model where you specify the amount of vacation desired. I would recommend either two weeks or four weeks of vacation and adjusting the gross revenue target [00:20:00] accordingly.
So in our example, the $200,000 gross revenue target for the year divided by 50 weeks a year is about $4,000 per week. If you’re getting reimbursed $100 an hour, that’s 40 billed clinical hours per week with two weeks of vacation. If you’re looking at a 48-week year, which means that the person, the employee would get four weeks of vacation, that comes out to about 42 billed hours a week at $100 an hour.
Now, $100 an hour is pretty low in most parts of the country. I’ve certainly heard lower, but it’s on the low side, certainly. So, you can adjust that up and do the math to figure that out. So you would just take your gross revenue number and divide it by your hourly rate, and then divide by weeks out of the year or vice versa.
$200,000 divided by 50 weeks is $4,000 per week. Then you could divide that $4,000 by [00:21:00] the number of hours, or sorry, the amount that you get paid per hour. You can see. As it goes, it requires fewer hours worked per week.
That’s how you do it. You base your gross revenue target on the number of weeks the person is working. That’s also a mistake that I see is sometimes people will divide the gross revenue target by 52 weeks per year not accounting for vacation. And that results in a lower number of hours required per week. And that’s what we want to stay away from because most people don’t work 52 weeks a year.
Now, the other option that some people do is “unlimited vacation time”. How this works is the practices will specify the gross revenue target and allow clinicians to have an unlimited vacation as long as they hit the targets each quarter. So theoretically, this provides a little bit more flexibility for [00:22:00] employees who want to hustle a little bit more.
In this example, it’s exceptionally important for you to keep a watch on the gross revenue target each quarter. An employee could theoretically be on track for three quarters and then take a lot of vacation in the fourth quarter and not hit their target. So you have to trust your employees and have a plan for how they’re going to hit their target if they want to take more vacation than it’s typical.
But all in all, I think this unlimited vacation time is almost more of a psychological benefit. And what I mean by that is the number of hours that are typically required to hit the gross revenue target often comes out to pretty close to full-time. With the math involved, it’s hard to have a gross revenue target that doesn’t come close to full-time.
What this means is that employees who want more than the typical vacation time [00:23:00] typically have to work more hours each week to reach their gross revenue target sooner so that they can have more vacation. I’ll say that one more time. I consider an unlimited vacation to be a bit of a psychological benefit more than a literal benefit because, in most practices, the number of hours required to hit your gross revenue target comes out to pretty close to full-time.
So then if folks actually want more than typical vacation time, they have to work more hours each week when they’re not working to meet the gross revenue target. So, two ways to do a vacation.
Closing thoughts. I think the salary is certainly doable. We have a few folks in our practice who are salaried, but you have to do the math. I think it’s important to take a really close look at your no-show rate and your ability to fill cancellations [00:24:00] in no-shows, and just be realistic about that as you calculate your salary.
And the last thing to keep in mind is just to make your expectations clear from the very beginning for your employees, including what happens if something goes wrong in this whole process. If they have more no-shows than they should, or if they get sick, or if they’re not able to just hit their gross revenue target for whatever reason, or if they start to burn out or it’s too much. So making the expectations clear are super important as well.
I will say that practices that offer a salary typically will include some kind of clause in the offered letter contract about reducing the salary by a certain percentage if the gross revenue target is not reached or it doesn’t look like it’s going to be reached. So that’s one example of how you might adjust if need be.[00:25:00] So, salary is out there. It’s another payment model. It’s certainly doable, but requires some math, just like everything in our practices as we run these businesses.
Hope you enjoyed it. Talk to you next time.
All right, y’all. Thank you so much for tuning into this episode. Always grateful to have you here. I hope that you take away some information that you can implement in your practice and in your life. Any resources that we mentioned during the episode will be listed in the show notes, so make sure to check those out. If you like what you hear on the podcast, I would be so grateful if you left a review on iTunes or Spotify, or wherever you listen to your podcast.
And if you’re a practice owner or an aspiring practice owner, I’d invite you to check out The Testing Psychologist mastermind groups. I have mastermind groups at every stage of practice development: beginner, intermediate, and advanced. We have homework, we have accountability, we have [00:26:00] support, we have resources. These groups are amazing. We do a lot of work and a lot of connecting. If that sounds interesting to you, you can check out the details at thetestingpsychologist.com/consulting. You can sign up for a pre-group phone call and we will chat and figure out if a group could be a good fit for you. Thanks so much.
The information contained in this podcast and on The Testing Psychologist website is intended for informational and educational purposes only. Nothing in this podcast or on the website is intended to be a substitute for professional, psychological, psychiatric, or medical advice, diagnosis, or treatment. Please note [00:27:00] that no doctor-patient relationship is formed here, and similarly, no supervisory or consultative relationship is formed between the host or guests of this podcast and listeners of this podcast. If you need the qualified advice of any mental health practitioner or medical provider, please seek one in your area. Similarly, if you need supervision on clinical matters, please find a supervisor with expertise that fits your needs.