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[00:00:00] Hello everyone. Welcome to The Testing Psychologist podcast, the podcast where we talk all about the business and practice of psychological and neuropsychological assessment. I’m your host, Dr. Jeremy Sharp, licensed psychologist, group practice owner, and private practice coach.

Many of y’all know that I have been using TherapyNotes as our practice EHR for over 10 years now. I’ve looked at others and I keep coming back to TherapyNotes because they do it all. If you’re interested in an EHR for your practice, you can get two free months of TherapyNotes by going to thetestingpsychologist.com/therapynotes and entering the code ‘testing”.

This episode is brought to you by PAR.

PAR offers the SPECTRA Indices of Psychopathology, a hierarchical dimensional look at adult psychopathology. The SPECTRA is available for paper and pencil assessment, or administration and scoring via PARiConnect. Learn more at parinc.com/spectra.

[00:01:06] All right, y’all, welcome back. Glad to be here with you. We have a business episode today. I’m talking about how to reverse engineer employee or contractor compensation.

Compensation is a hot topic among practice owners and employees alike, yet also one of the most misunderstood. I think we’ve all wrestled with the question of an appropriate “split”, I’ll tell you later why I hate that word, often basing our decision off of what our peers do, what we’ve seen in Facebook groups, or what we “feel” is the right thing to do.

This episode approaches compensation using simple math, and we’re going to work backward from industry standards for budgeting in private practice.

As always, I will invite any of you who might want some support on the business side of your practice to give me a call. You can go to thetestingpsychologist.com/consulting, [00:02:00] check out the options, and schedule a phone call if you would like to chat about whether consulting is a good fit for you.

Okay. Let’s talk about reverse engineering employee or contractor compensation.

Without further ado, let’s get into it, folks. So this is yet another topic that comes up a lot in my consulting groups and individual consulting sessions and something that I have worked through myself as a practice owner.

Two disclaimers before getting into this topic.

The first disclaimer is I’m going to use the term team member to describe employees and contractors in [00:03:00] general. If I need to specify which one I’m talking about, I will do so when appropriate because there are some differences in terms of calculating compensation. But generally, I will use the term team member to describe anyone working in your practice.

Another disclaimer. As I mentioned in the intro, I hate the term split, but we hear this a lot. What’s the split? What’s an appropriate split? What’s a fair split? I hate the term split because of the psychological implications and the practical reality. The psychological implication here is that practice owners are “splitting” the income with team members.

My question there is, does any other company split their revenue with their team members? Does Apple split the revenue from selling iPhones with its Apple store owners or workers? No. Do medical practices or hospitals split the revenue with the physicians? No. [00:04:00] Profit sharing is a different beast altogether, but if anything, that is much closer to splitting than what most of us are doing in our practices.

To me, using the term split lends itself to the idea that we, as practice owners, are somehow taking money that should belong to the team member that that team member would have earned on their own and that we are taking it from them. I think it’s much more valuable for both sides to consider this the same as any other “real job” where team members are compensated, hopefully fairly and appropriately for the market for the job that they do. They are compensated, right? So unless you have a very unique practice model where you are sharing revenue or profit sharing, this term of split I think does everyone a disservice.

Okay. My rant is over.

Remember all those ways of determining compensation that are specified in the intro: what we feel, what we read in [00:05:00] Facebook groups, what a peer did, all those things I mentioned in the intro were true for me at one point. I’ve gone through a variety of mental and emotional gymnastics routines to come up with compensation from my staff and it took me a lot longer than it should have to finally get down to simple math.

What do I mean by simple math?

This is what I mean. There are relatively clear industry standards for budgeting that help us know how much of overall gross revenue should be dedicated to team member compensation. And we can easily use some math to determine the right number for our practices.

Now, as you might expect, where it gets complicated is when feelings get involved. We hear about other compensation models from team members or our peers. We want people to like us. We want to be “good bosses”. We want to be seen as generous, [00:06:00] et cetera. Or the flip side, we want to, well, how do I phrase this? This is rare, I will say that, but I have occasionally run into practice owners who are more concerned with making money for the practice. We think we deserve more money as practice owners and then we underpay our team members. Though I will say this is relatively rare in my experience. It’s typically practice owners who are overpaying their team members.

Now, as always, you’re going to have practices that fall at the ends of the bell curve on either side for whatever reason. I’ll talk about those in a bit as well, but I’m going to focus on the under-the-bell-curve practices and what tends to work for most of us.

Okay. So what is [00:07:00] the math? 

When I say reverse engineer, I want to come at it from the standpoint of, I want to pay my team members X salary, or they want to make X salary, whatever that might be. How do I make sure that they’re working enough hours and we’re getting paid enough to justify that compensation?

I’ll contrast that with how most of us determine compensation. Again, those previous approaches where we typically come at it from the angle of deciding on pay and then hoping that revenue and hours will justify that pay rather than determining the pay from the revenue and the hours worked.

Let’s bring this to life with an example. I know that numbers are always tough in an auditory format, so I will try to keep them simple and even.

Let’s say you have an employee who wants to make $100,000 a year. [00:08:00] In many parts of the country, this would be a relatively reasonable salary for a team member as a staff psychologist, right? Again, always outliers. Don’t crucify me for that. $100,000 a year, reasonable in a lot of places. We need to figure out how many hours at what rate will justify that salary and make sure you have enough leftover for the business to function.

The only number you need in order to figure this out is your average hourly reimbursement. That could be from insurance or private pay, a mix of the two, or whatever, but that’s going to be the magic number that we start with.

For this example, let’s say that our average hourly reimbursement is $200 an hour. Again, I know some of you are thinking, Oh my gosh, that’s way too low. Or, Oh my gosh, that’s way too high. We will talk about outliers in a little while.

[00:09:00] Let’s take a break to hear from a featured partner.

Y’all know that I love TherapyNotes, but I am not the only one. They have a 4. 9 out of 5-star rating on trustpilot.com and Google, which makes them the number one rated Electronic Health Record system available for mental health folks today. They make billing, scheduling, note-taking, and telehealth all incredibly easy. They also offer custom forms that you can send through the portal. For all the prescribers out there, TherapyNotes is proudly offering e-Prescribe as well. And maybe the most important thing for me is that they have live telephone support seven days a week, so you can talk to a real person in a timely manner.

If you’re trying to switch from another EHR, the transition is incredibly easy. They’ll import your demographic data free of charge, so you can get going right away. So, if you’re curious or you want to switch or you need a new EHR, try TherapyNotes for two months, absolutely [00:10:00] free. You can go to thetestingpsychologist.com/therapynotes and enter the code “testing”. Again, totally free, with no strings attached. Check it out and see why everyone is switching to TherapyNotes.

The SPECTRA Indices of Psychopathology provides a hierarchical dimensional look at adult psychopathology. Decades of research into psychiatric disorders have shown that most diagnoses can be integrated into a few broad dimensions.

The SPECTRA measures 12 clinically important constructs of Depression, Anxiety, Social Anxiety, PTSD, Alcohol Problems, Severe Aggression, Antisocial Behavior, Drug Problems, Psychosis, Paranoid Ideation, Manic Activation, and Grandiose Ideation. That’s a lot. It organizes them into three higher-order psychopathology SPECTRA of internalizing, externalizing, and reality impairing. The SPECTRA is [00:11:00] available for paper and pencil assessment or administration and scoring via PARiConnect. You can learn more at parinc.com/spectra.

All right. Let’s get back to the podcast.

Where to start?

If we know that our average hourly reimbursement is $200 an hour, accountants and other industry guidelines suggest that payroll benefits, continuing education, retirement, et cetera, basically payroll plus benefits, should be no higher than 60% of collected revenue. So we need to figure out what I call total compensation cost for a team member. If we take our team member who wants to make $100,000 a year, let’s take that $100,000 and add in the annual cost of payroll taxes, withholding retirement health insurance, and any other benefits.

Wthout knowing the details for your particular state or your particular practice, I’ll [00:12:00] ballpark this. My guess is that you’ll come up with something in the neighborhood of $115,000 for the total compensation cost. That’s a number that we want to hold in our minds. Again, for a salary of $100,000. The actual total compensation cost after benefits and so forth could very likely creep up to about $115,000.

Okay. Knowing that we can afford to pay 60% of collected revenue for the total compensation cost, we figure out 60% of which number equals $115, 000. In this case, it’s roughly $192,000, right? Set another way, 60% of $192,000 equals $115,000. All right? We’re getting very close.

Now we know [00:13:00] $192,000 is our revenue target for the year to justify the cost of an employee or team member making $100,000. Let’s take that $192,000 and divide it by our average reimbursement per hour, which we knew earlier is $200. Hang with me, folks. So that equals 959 hours.

Just to recap, that means this team member will need to bill 959 hours. This is assuming you collect 100% of what you bill. We’re not going to get in the weeds on that. But they need to bill 959 hours over the course of the year to make enough money for the practice to afford that $100,000 salary.

The final calculation we’re going to do is how many hours per week that comes to.

In this case, 959 hours [00:14:00] divided by 48 weeks, which is I think reasonable for most folks. Most folks will take at least 3 to 4 weeks off throughout the year. 52 weeks a year minus 4 weeks is 48 weeks. So 959 hours divided by 48 weeks is 20 hours a week. And there we are. We now have a very clear target. This team member needs to bill 20 hours a week at $200 an hour to justify a salary of $100,000 plus benefits. Hopefully, you’re able to follow me through that whole thing.

I have included a simple spreadsheet in the show notes that you can download and manipulate yourself to change any of the inputs. And that’s important to say, you can change any of the inputs in this equation. So if you have low overhead and you can afford to pay 65% of revenue, [00:15:00] or maybe even 70%, which I would only advise if you know you can do it, then go for it. You can change that. If your hourly reimbursement rate is higher or lower than $200, obviously you would change that. And if your folks work more or less than 48 weeks a year, you can change that. It’s totally up to you. Simple spreadsheet. Download that from the show notes. You don’t have to put in your email or anything. Just check it out and mess around with some numbers.

Earlier, I mentioned that these unicorn practices exist at the ends of the curve. So these are practices with either high revenue to overhead ratios. In those cases, it’s usually smaller private pay practices in Metro areas. Again, revenue is high relative to overhead. So you can charge more per hour and [00:16:00] pay less for your expenses. In those cases, you can probably afford to pay more than 60% for total compensation. You could experiment with 65% or 70%, maybe even higher, but again, highly, I’m very cautious about that.

The other side is low reimbursement and high overhead. This tends to be like larger insurance-based practices also in metro areas where the cost of living is relatively high. In this case, you may need to dial back and target only to allocate 50% or 55% for that total compensation costs. Again, payroll and benefits would need to be 55% or less in those cases.

Again, tough topics. Numbers are hard to talk about sometimes in an audio format and grasp. But the takeaway for this as far as I’m concerned is [00:17:00] getting in that mindset of reverse engineering the compensation based on, if you know what the salary should be or what you want it to be, then you can go through these calculations to figure out how many hours a week at what rate it can be used to justify that salary rather than just setting a salary and haphazardly determining a work plan without clear metrics.

I hope this has been helpful. Like I said, it took me way longer than it should have to take this approach and it’s never too late. You can always implement this model with any new team members that join.

Thank you. As always for listening and doing some math with me on the podcast.

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 your life. Any resources that we mentioned during the episode will be listed in the [00:18:00] 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 podcasts.

If you’re a practice owner or 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 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.

[00:19:00] 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 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 [00:20:00] needs.

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