Dr. Jeremy Sharp (00:00)
Hey folks, welcome back to the podcast. I have a business episode for you today. We are talking about compensation models again. This is topic I think that bears repeating because the question just keeps coming up in my consultation meetings and Facebook groups and things like that. This is such a common question that it makes sense to talk about it more and more. So today we’re talking about compensation models. We’re going to talk about how to compensate your staff well with
out sinking the ship of your practice. So we’ll go through the different compensation models. We’ll talk about some data and we’ll talk about how to design a structure that is fair and motivating and hopefully sustainable. whether you have one admin or one psychologist or one person or a team of 10 or 20 or 30, I think getting it right can kind of make a break your
long-term stability. I am speaking from personal experience with a lot of this. So stay tuned. Let’s talk about compensation models.
Dr. Jeremy Sharp (01:08)
Okay people, we are back and we’re talking about money and compensation and how to do it well without breaking the bank or sinking your practice. Okay. So why, why does this matter? Might be obvious, but it matters because it is usually the single biggest source of stress that folks will report as practice owners. So a 2024 practice of psychology report from the APA found that
67 % of small practice owners identified quote unquote managing payroll and benefits as their biggest source of financial stress. That was even higher than attracting clients or getting referrals. I think this matches, you know, with the folks I know who own group practices. This is such a huge question and it’s not anybody’s fault because I think we’ve been pretty confused about how to do compensation in
private practices like ours started with the fee for service or percentage split model. And that’s been very common over the years. I’m not sure exactly where that came from, actually, if that was carried over from other industries or what. But I think we really shot ourselves in the foot by putting all the eggs in that percentage split basket, because it’s not generally the best compensation model for most of us.
But we didn’t get taught this like anything else that pertains to running a private practice. This is not something we were taught in graduate school. And the nuts and bolts are pretty nuanced. And what ends up happening is a lot of us just ask our friends or colleagues or Facebook groups, whatever it may be, how to compensate our employees. And the truth is that it’s a relatively personal decision based on your practice dynamics and details.
But it also makes sense because compensation in the budget is typically the single largest expense category for a practice. It’s often going to be anywhere from 60 to 75 % of your total revenue for a service based business. So if you’re generous without modeling it out, you can end up rewarding clinicians at the expense of the business. But if you are too stingy, on the other hand,
Turnover is probably going to cost you in the long run. And so it’s really like unpacking the different models and helping you kind of strike the right balance, which is tough, again, if you are just going by trial and error or something you find in a Facebook group. All right. So let’s talk about common compensation models. A lot of these will probably sound familiar, but again, bears repeating and we’ll dive kind of deep into each one.
There are kind of three, I would say dominant pay models across testing and mental health practices and each of them have their pros and cons, of course. So first one is one that I mentioned just a minute ago, the fee for service or percentage split model. So how does this work? Works in the way that clinicians get a percentage of what they bill or collect. Okay. Seems simple enough.
Typical range that you have probably heard is between 50 and 65 % for 1099 contractors. It certainly does creep up to 70 or 75. I think I’ve even heard an 80 % split going to the clinician. That’s pretty rare and unique and almost certainly a terrible decision for whatever business is offering that high of a split. But the typical is about 50 to 65 % for contractors and
somewhere between 40 and 55 % for W-2 employees, which allows the business to cover taxes and benefits and other expenses related to having employees. So according to 2024 data from PayScale, and indeed the average licensed psychologist in private practice makes about 105 to 120,000 a year, give or take.
So we can sit with that for a second. That’s the average. OK. So this is clearly running across geographies and metro areas and rural areas.
So that’s what we’re kind of shooting for. Now, pros of the percentage split fee-for-service model. It’s simple to calculate, assuming that you have an EHR or some other means of getting a report of the monthly income or weekly income or however you divide it up. So simple to calculate. also rewards productivity because compensation is directly tied to the number of billed hours or the amount that’s collected.
The downsides to that are volatile income. So if referrals fluctuate or if hours fluctuate, then compensation is also going to fluctuate. It’s hard to offer paid time off because you’re just based on the amount that is being collected or billed. And it can also certainly incentivize quantity over quality.
So this model works best, I think, when clinicians are pretty independent, maybe part time, and prefer autonomy over stability. And that, again, tends to work well for part time folks. Now, I know, right, with any of these models, there are going to be exceptions. And I know there are folks out there that are like, we have 100 person practice, and we use the percentage split model, and it’s great. And that’s awesome, right? I’m just talking in generalities and based on the data.
Well, you know what, what most practices will use. So the second model is kind of a base salary plus production bonus. So how does that work? Um, clinicians will get a guaranteed base salary, quote unquote, with performance incentives tied to billable hours or revenue. Okay. So an example here would be like a clinician gets an $80,000 a year base salary plus a 10 % bonus for
exceeding a certain utilization number or billing a certain number of hours. some data from 2024 says that this kind of hybrid compensation structure did help to reduce turnover by about 22 % compared to pure fee for service payment systems. So if you’re trying to reduce turnover, this may be something to consider. Pros for this compensation model include predictable payroll.
⁓ loyalty and presumably less financial stress for the staff. Now on the downside, it does require kind of careful forecasting and makes the model a little bit more complicated because you have to account for this ⁓ bonus structure that might vary a little bit. It can also create potentially resentment if productivity targets feel arbitrary or just out of reach. Okay. So
I think the key here is transparency. Staff should always understand how their pay is calculated and what behaviors drive these ⁓ incentive-based bonuses. A third model that is another variation on salary is a salary model with a profit share model. Salary model with a profit share model. That’s a lot of models. Anyway, salary with profit sharing.
So how this works is, again, everyone gets a salary. It’s typically a higher salary than the ⁓ base plus commission model. But everybody gets a higher salary. Let’s call it $100,000, maybe $105,000 for the same employee. But at the year’s end or the quarter’s end, you can pay a portion of the profits as a distribution based on, say, tenure or contribution or other performance metrics that you may use in your practice.
Might be report turnaround time. It might be client satisfaction if you’re measuring that kind of thing. So as an example, you could distribute 10 % of the net profit among your clinicians, know, proportionate to their billable revenue share, for example. OK. So if you have a quarter in your practice where you net, let’s just call it 50,000 in profits, which would be great, then you take 10 % of that.
5,000 and distribute that among your clinicians. Okay. So this is the least common model. And, you know, from my experience and talking with folks, um, even paying a salary period is pretty, still pretty rare. We did move to a salary model, gosh, four or five years ago, and, uh, it’s worked out really well. Um, but it is very, um, uncommon, I would say. Now there is some 2023 data.
that says that transparent and profit sharing models did boost retention and morale even more than pay raises alone, which is kind of cool. So again, pros here, it encourages shared responsibility for doing good work and meeting hours requirements and that kind of thing. It’s sort of a minor way to get your employees invested.
in the success of your practice. On the downside though, it does require, again, financial literacy and a somewhat more complicated model. It certainly requires open communication because not every owner is comfortable sharing numbers. if employees know that they are getting X percent of the net profit, then they can back into it and determine how much profit the practice.
is making and that is vulnerable for some folks, which is understandable. A fourth model, I’m actually going to add another one here that’s think a relatively common here in our field and that is the hourly model. So this is where you just do a flat hourly rate per build hour. So this is something that I might recommend to folks in lieu of a percentage split, but
for those folks who don’t want to go all the way to a salary. And the reason here is because one, doing a percentage split model, really just, do not like it, to be honest. I think it creates a psychological energy that, you know, we as practice owners are quote unquote, taking money from the individual practitioner in the sense that we are, you know, splitting the income.
That’s maybe the biggest thing. also, if you do a percentage split, you can get into a lot of trouble if your reimbursement rates go down, for example. And then that percentage also has to go down. Then you have to have that conversation with your employees. So we talk about this hourly compensation model. This is a flat rate per billed hour.
so let’s just say, ⁓ you pay your employees, $50 per build hour and it’s predictable. the pros it’s predictable, makes payroll easier, makes the modeling easier. I think it’s also more predictable for employees. it is easy to calculate and that’s always a plus on the downside. you can again,
you know, kind of the other side of the coin I just mentioned, you can also get in trouble if your hourly rate is too high and your reimbursement rates end up fluctuating, then you will have to adjust your hourly rate as well. The other thing is that it maybe lends itself to a little bit more of a temporary or part-time arrangement, you know, someone being paid by the hour versus a salary model that feels
more like a full time position. But I think it does work well for part time folks as well. All right. So lots of different models, but I want to transition and talk about the forecasting component because this is the part that I think most of us skip. I skipped it for probably the first, I don’t know, eight, maybe 10 years of my practice and it ⁓ did not go well. So we tend to hire first and hope for the best and figure out the numbers later.
But we can build a simple model that will help you with this. So imagine that you have a psychologist who can do 20 evals a month. So that’s kind of a lot depending on how many hours you spend. But let’s just call it 20 evals per month. Each one will net you about $2,000. So that’s 40,000 gross revenue potential from those evals. So when you take 30 %
for that, it leaves about, gosh, what is that? 30 % of 40,000. So that leaves about 28,000 available for clinician compensation and profit. All right. So if you pay that clinician about 120,000 annually, this is 10,000 a month, your profit margin is pretty solid, assuming that they maintain that workload. If referrals dip and they only hit, you know,
60 % of their capacity, then you are probably losing money. So that’s why sustainable pay, think is more, it’s about more than generosity. It is about math and forecasting because a lot of us forget that a sustainable business is the best business for everyone. If your compensation model is not sustainable, then you’re eventually either going to go out of business or get into a lot of financial trouble or
end up having to do more work yourself to cover the expenses and the salaries. And none of those situations are great for a practice owner or the employees. So sustainable compensation benefits employees and practice owners alike. So again, when you’re building your model, I’ve talked about a model on here before, make sure to account for payroll taxes for W-2 employees. This is going to be at least eight to 10 % of on top of wages.
You need to account for paid time off, benefits like health and retirement and CE stipends and things like that, and anything that you might provide in terms of admin support or supervision time. So if you don’t include all those things, which is tempting, you’re underestimating the true cost of employment, likely by anywhere from 15 to 20%, which will go away real quick when you actually have to pay that money.
Another component I want to talk about that does not get talked about a lot, but there’s some interesting data here is aligning your compensation with your practice values. Okay. So numbers are important, of course, but the culture matters just as much and sometimes more. So something that I found is that, you know, compensation communicates what you value. So if you only pay for billable hours, you are essentially signaling that, you know, productivity is what matters most.
And if that is true for your practice, then that’s fantastic. You you’re aligned there. But if you like tie bonuses to report quality or turnaround time or client satisfaction, you know, you’re telling your staff that there are other components like professionalism and outcomes count too. And I think all of us would probably agree with that in theory, but the sticking point is when you
make your compensation model actually match those thoughts. And again, some data from 2023 just found that employees who perceive their pay as values aligned are twice as likely to stay beyond three years in the business, which is great because turnover is really tough and it’s really hard to hire in this field right now. So just think about the message that your pay structure sends. Speaking of messaging.
I want to talk about communication and transparency a little bit. Even the best designed pay system fails if people don’t understand it. holding an annual compensation clarity meeting where you review the formula, the expected margins, the potential raises, that kind of thing, super helpful. Our salary rubric is totally transparent.
you know, anybody can search it at any point. I am in the process of revamping it. So it’s technically under construction right now, but, in the past, anyone could look up the salary rubric and know exactly what they and anyone else was getting paid. So to that point, you don’t have to share everyone’s salary necessarily. It just means sharing the logic behind it so that at least, you know, that particular employee.
or a specific employee can know exactly where their compensation is coming from and where it is going. think transparency breeds trust and trust breeds retention. And the research would support this. again, 2023 data found that pay transparency correlated with something like a 16 % improvement in employee engagement scores across small practices. So it’s not necessarily about the number exactly, but it’s more about the narrative, so to speak.
So what are some pitfalls that you might run into here? I want to talk about some red flags that I see all the time in my consulting sessions. One, overcompensating clinicians early. So people will sometimes pay new hires too high of a percentage or too high of an amount to attract the talent. And then when they try to normalize the rates later, it either breeds resentment or financial difficulty.
It’s better to start lower with a clear raise structure than starting high. And I know it’s a tough job market. I know that. But as long as you are competitive, that’s all that we can ask for. The second thing is ignoring utilization rates. What does this even mean? So utilization rates is just a fancy way of saying build hours and capacity.
So if you’re not tracking people’s billed hours, you can’t tell whether your payroll is sustainable or not. There are some things that would suggest that a healthy utilization rate is about 80 % of available time. I would argue with that, doing testing, that would suggest that somehow 20 % of appointments are.
going, you know, it’s okay for them to go missing or not be filled. I totally disagree with that. Uh, I think people’s schedules should be, um, 95 to 98, if not a hundred percent full. And that’s a whole other episode talking about how to, how to manage caseloads and how, you know, make sure your admin team or whomever is scheduling appointments is on point and making that happen. But yeah, utilization should be really high.
Third problem is just having no boundaries around admin time. often we underestimate how much non-billable time that we spend. So if you promise a full salary but don’t control for like inefficiency in report writing, for example, ⁓ then your costs can just balloon as people bill more and more time for report writing. So I think it’s worth it to put some caps on that in most practices.
And then a last mistake I mentioned is just avoiding any talk of compensation. sometimes practice owners can approach this like a fix it and forget it kind of situation. And that’s not good. Right? So we have to talk about compensation and we also have to talk about raises to some degree, as much as we dislike it. you know, inflation, I mean, is, is a thing and cost of living is going up.
three to 4 % a year. And so you should be budgeting for cost of living increases. And this may require some creative financial management, especially if you’re an insurance based practice where I guarantee you’re not getting a three to 4 % increase from all of your insurance panels every single year. So it takes some mental gymnastics and financial wizardry to really work through.
how to find that extra three to four percent and raise your fees and collect more money.
Dr. Jeremy Sharp (21:20)
Okay. So let’s say you want to implement a sustainable compensation structure after hearing all this, or maybe you’re just revamping your compensation. That’s okay too. Here is a step-by-step little plan that might work for you. Okay. So number one, run your numbers first. Okay. Determine how much you can actually afford per clinician at full and partial capacity. cannot emphasize that enough.
as you’re working with whatever financial model or forecasting, make sure to run it when your clinicians are not full. Otherwise you are being way too optimistic. Okay. Second component is pick a compensation model that fits your practice. So, you know, if you’re solo or kind of a small group, maybe you do that percentage or a flat fee per hour model. If you’re midsize with some stable referrals,
might be a good time to move to a salary plus a bonus structure. And then if you’re a relatively mature practice and this you could be a small practice, but still be mature. I think the key variable here is predictability of referrals. That’s really what drives salary. So, or success with a salary model. So predictability with referrals and capability of filling schedules consistently and quickly in times of cancellation, for example.
So anyway, if you’re a mature practice with predictable, stable referrals and the ability to fill cancellations when they happen, then you could certainly consider a salary plus as a profit structure. And if you’re really engaged in keeping people around for the long term, I think that’s a great move as well. Third step in this process, build clarity and policy documents. So use written pay plans or written salary rubric that people can
search and check out to know what to expect. A four step is communicate early. Financial conversations have inevitably been fraught no matter what I have done over the years. So come into this with a no surprises mindset. And for me, the tough thing was keeping in mind that even if I had been thinking about any changes to compensation structure, uh, for say like three months, six months, 12 months,
And then communicating it to my staff. had to remember that they were not privy to my, internal thoughts over that time. And so what may seem like a very well thought out, planned, deliberate move on my part, was brand new to them. So try not to have any surprises, explain everything that you can, far as the what and the why and how behind these decisions, money is just, complicated and.
emotionally laden for folks. So anything you can do to be clear and transparent is helpful. And then the fifth step in all this is to do a frequent reassessment. So twice a year wouldn’t hurt. Okay. You got to be nimble, suppose, with adapting to market conditions and standard of living and inflation and things like that. So again, don’t set it and forget it. think earlier I said, fix it and forget it, but yeah, don’t set it and forget it.
with salary. And if it feels like a lot, mean, it is, right? The financial component is huge. It’s the biggest line item in your business, most likely, is salary and payroll. So getting it right early on, I think, pays dividends for a long time. All right. So starting to wrap up here. Paying people well does not always mean paying the highest possible amount. I want to make sure that that
comes across very clearly. It means creating a predictable, fair, meaningful compensation model that rewards contribution and supports the mission of your practice, whatever that may be. Okay? So an employee or a psychologist who feels financially secure and valued and connected to your vision will outperform one who’s chasing an extra few percent somewhere else. I mean, any day of the week.
So, and remember, this is a whole other episode we, you know, we could talk about, but the, as the owner, your own salary matters too. Okay. you should be getting paid a salary to run the practice, not just for the clinical work that you do. Okay. You should be getting paid for the administrative time and the leadership time that you spend running the practice. You’re not being greedy by paying yourself first or making that a priority. ⁓ you are again, modeling.
sustainability. So there you have it. Some nuts and bolts around paying people well without sinking the ship that is your practice. Think of compensation, I think, as both math and psychology. You the math keeps your business healthy and the psychology part keeps your people engaged. So until next time, stay focused and curious and do a lot of math and keep building a practice that fits your life.
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