Practice owners often ask us how they should be compensated. Unfortunately, this is not a simple question and there is no single answer. Rather, the structure and amount of every owner's compensation is dependent on several factors including: the profitability of the practice, the amount of debt the practice has to repay, the need for new or replacement equipment, and of course, the amount and type of work the owner does for the practice.
First and foremost, practice owners should be compensated for the work they do in the practice. Think of this as what you would pay another employee who is not an owner to do the same work. For veterinarian owners, this includes the veterinary work they do as well as any time they spend managing the practice. Compensation for veterinary work should be based on a percentage of production and should represent what it would cost the practice to employ one or more associate doctors to produce the same level of revenues as the owner. You may wish to follow industry norms (which range from 18-22% for general practice and higher for specialty and emergency practice), or you may choose to compensate your doctors in a different manner. Regardless, veterinarian owners should be paid for their veterinary production.
Veterinarian and non-veterinarian owners should be compensated for the time they spend managing the practice. Again, consider what it would cost to hire someone else to do this work. Similar to veterinarian owners, manager owners should be compensated for the work they do at the practice. Accordingly, manager owners will not be paid on production since they do not generate revenues for the practice. Rather, their compensation will be based on a salary commensurate with the responsibilities they have, or on a percentage of gross income.
Management compensation is usually calculated as a percent of gross fees, with the accepted range generally from 1% to 5% of gross practice income. Higher percentages correlate somewhat with practice size, while lower rates are appropriate for smaller practices. It is important to remember that this management compensation is for everyone involved in management duties. In other words, if other doctors or staff members participate in managing staff or operations, this effectively reduces the amount that can be paid to the owners for their time spent managing the practice.
The real reward of ownership comes not from being compensated for the time you spend at the practice, but rather from the value you create in the practice. This value is determined based on the practice's profitability and is paid to owners either through distributions or through a cash lump sum when the practice is sold. Practice value is essentially the "goodwill" that you create in the practice. If the practice is profitable, owners may take money out of the practice, generally in line with their ownership percentages. The underlying assumption is that the profit is available to pay out, and is not needed for equipment purchases, taxes or an unanticipated expense. This is an important consideration as it is possible for a business to be profitable but not have cash in the bank. Potential distribution levels vary greatly (and may be $0) based on business success and other cash requirements.
Finally, as the practice owner you can set your compensation at whatever level you choose and whatever the practice can afford. Depending on the legal form of the business as well as your tax elections, you may be required to keep your salary compensation to a fair and reasonable level. Setting your compensation within the guidelines outlined above will ensure that you will not be overstepping your bounds with Uncle Sam!
What if your practice cannot afford to compensate its owners at the levels discussed above? Rather than cutting your salary, look for ways to grow revenues, decrease costs of inventory and other costs of goods sold, and increase staff efficiency. Benchmark yourself against other similar-sized practices to see where improvements in profitability could be made. Review your internal controls and accounting policies and procedures to identify where charges are being lost, what overhead costs are too high and if there is wastage or even theft of inventory. Ultimately, if your practice cannot afford to pay its owners a fair and reasonable salary, then it is probably not as good a financial investment as you think.