Bonus Plans

The Do’s and Don’ts of Bonus Plans – from Silkin Management Group

The subject of bonus plans has bewildered practice owners for quite a long time. The theory—create 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. If you construct a bonus plan correctly it can be a very useful tool for you, the executive. But when done incorrectly (and for every right way there are countless wrong ways) 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 essentially all about money. While the old 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 salaries and wages are set up. It’s fundamentally based on exchange. A staff member is hired to do a certain job. Money is given in exchange for that work. Anyone who has ever held a job understands that basic concept. He knows that if he were to consistently do poor work, he will be dismissed. Consequently, most personnel strive to do a good job. In return they expect remuneration and they expect it to be consistent. If an owner constantly changes the pay scale, the staff would understandably be upset. 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 a person will be paid then becomes predictable and dependable. There is nothing arbitrary or capricious about it.


Predictability is the Key

So, this brings us to one of the basic problems with many bonus systems: bonus plans are neither predictable nor dependable to most staff members. Here’s an example: In many practices, bonuses are doled out on a whim; 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. And when it doesn’t materialize, resentment ensues.

What has been violated is “predictability.” To earn their basic check, staff members know they need to show up and do good work. This will predictably lead to a paycheck. However, with the bonus, there is no such predictability. The practice had a similarly good month but the staff was not rewarded as before. Now they resent the owner and view him as a cheapskate; the owner, in turn, is left wishing he had never doled out a bonus in the first place. So, what started out as a generous act on the owner’s part has now become the source of dissatisfaction on everyone’s part.

Nevertheless, the owner, who still perceives some benefit to the implementation of a bonus plan, makes adjustments and sets up an actual bonus structure: If the practice does ‘x’ amount of production, the staff will get ‘y’ amount of money in the form of a bonus. So now there is predictability.

But upon closer inspection, we see that predictability still eludes the staff. For if production consistently increases, so will the expenses associated with obtaining it. Consequently, the owner must increase the amount of production required (‘x + 5’, for example) to earn the same ‘y’ 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, making it more unlikely that a bonus will be earned. And their concern is that even if they were to somehow achieve the new production goal, the owner would again change the rules. And he’d be viewed as a cheapskate once more.


Lack of Control = No Bonus

In addition to the problem of predictability, there is the issue of control. Oftentimes the team can work hard to achieve a production goal, only to see the practice fall short of the named target. In that event, they will become frustrated, as the carrot (incentive) has been dangled in front of them, but they don’t know what they can do to make sure 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 work through lunch or take less breaks, and pay close attention to their workmanship. Those are all efforts on their part to control something that can be controlled: their time and quality of work. But when that still doesn’t result in the practice reaching the targeted level of production, staff morale will most assuredly plummet. They will feel as though they are just a cog in an enormous machine wherein their individual 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 intended goal will never be attained.

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. By the way, did you know that in a solo-doctor practice there can be up to 12 or even 15 such areas? In a multiple-doctor practice there are more than that! Once those areas have been identified, the owner must place a staff member in charge of each area and develop a statistic to monitor it and then teach the staff member how to control the area so as to keep the stat at the appropriate range. The owner who can accomplish that is the owner who can control his or her own 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. The majority of bonus systems are set up to 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 the majority 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 on an hourly basis. But when those superstars see everyone being rewarded equally, despite the obvious differences in the quality and quantity of the work being done, 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 goal won’t be achieved and NO ONE gets a bonus!


Profit-Based Bonus Plans

Poorly crafted bonus plans also create problems, mainly financial, for owners. Bonuses are supposed to be calculated and paid on profit, i.e., the money a practice makes after accounting for all expenses (often referred to as the make-or-break point or overhead). If a bonus system starts to pay out before profits are achieved, 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 don’t know how to correctly figure out their make/break point. One of the reasons for this is that those owners don’t take into account the non-monthly expenses when calculating overhead. Examples of such expenses are repairs to equipment, equipment replacement, money set aside for reserves or for staff training, etc. Since those aren’t bills the owner deals with on a recurring monthly basis, it’s easy for them to be excluded 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 actually higher than what the owner believes it to be. Consequently, the bonuses levels can be tied to income goals that don’t correctly take into account the actual profit being made.


Summary of the Situation

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 that is not based on 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 some of 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 his or her efforts to help the staff make more money are not just unappreciated, they are attacked. What a mess!


The Solution

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

  1. Bonuses need to be based on profit, not revenue. To do this, it is crucial that the owner understands how to identify the true expenses in the practice – all of them.
  2. The owner must know what percentage of the profit is correct to distribute to the staff.
  3. The staff must feel that the bonus plan is predictable. This means that bonuses need to be tied to specific stats that can be measured and made known to them, and that the achievement of the targeted goals of those stats ensures that profit has actually been made.
  4. The staff must clearly understand the fact that changes to the bonus level will occur on occasion as the make/break point rises. In this way, when the income level target is raised to account for the increase in the make/break point, they will not become upset.
  5. The staff must feel that they can control the income of the practice so as to ensure they have a chance at getting to the targeted ranges. To do this, as mentioned previously, the owner must place a staff member in charge of each area and develop a statistic to monitor it and then teach the staff member how to control the area so as 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 truly contribute to growth, not just because they are merely part of the team.

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 all things that 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 true make/break point.
  • Understand how to equitably pay staff (whether wages only or bonuses too).
  • Create predictability in the practice.
  • Ensure that staff understands why income level targets for bonuses are raised from time to time.
  • Work with the staff to ensure that they feel their efforts make a meaningful difference to the practice and the team.
  • Ensure that everyone in the practice is carrying his/her own weight and is not being propped up by other staff members.

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

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