Productivity-Based Compensation (“Bonus”) Principles
Willeford, MBA, CPA/CFP
Remember, any bonus system is somewhat arbitrary. So you want to be sure
to test your formula under various scenarios and see if it produces the kind of
bonus figures you are comfortable with.
Remember that a bonus system should be simple, understandable and
possibly be monitored throughout the month.
A bonus should be attainable, or folks will lose interest in the program.
The system should be based on a moving average to smooth out peaks and
A bonus can arguably be based on Production and/or Collections, Net
Income or on keeping total wages at a predetermined overhead percentage.
Production/Collections have the advantage of satisfying item 1(b) above.
The worksheet is based on this approach.
Basing a bonus on Net Income is conceptually preferable in a business
where the manager can control both revenues and expenses, a “profit center”.
However, in a dental practice, the staff has no real control over expenses, and
the doctor can even manipulate expenses to avoid having a bonus.
Shooting for a target percent, such as 22% overhead for wages, is
probably OK. A problem can arise if your wages already exceed this percentage,
and yet you want to implement a bonus system anyway in an effort to get the
You need to decide what percentage figure to use to calculate the Bonus Pool
amount. 20% is a typical figure.
How do you determine the Strike Point? If this is your first time for having a
bonus, I would look at last year’s average Collections/Production and add at
least an amount to represent your average fee increase. You might then add
another 5-10% for true growth. Presumably, by the end of a year, the staff
should be getting regular bonuses (if growth continues). At the beginning of the
second year, you should increase the strike point by an amount equal to the
average fee increase and perhaps by an additional amount of growth you are
trying to achieve. Meanwhile, you give the staff raises to replace some or all
of the prior year’s bonuses they have been getting.
You can either base the system on Production or Collections, or an average of
Most doctors’ knee-jerk reaction is to base it on Collections. (“If I
don’t collect it, I can’t afford to pay a bonus!”) While that is somewhat
true, remember that you can always base the bonus on x% of Production, where x%
equals your historical collection percent. If that is 96%, then you could base
the system on 96% of Production.
Unfortunately, the staff can’t really influence Collections a lot
(other than the front desk person). Since they CAN influence Production, it may
be fairer to base the system on Production (or 96% of Production.)
An advantage of the Collection approach is that you might be able to
ignore brief periods when the office is closed. For instance, if the office is
closed for two work days due to continuing education trip by the doctor, the
Collections keep flowing. Under the Production approach, you have to decide if
you should base the bonus on an average DAILY Production figure. This would
eliminate folks from complaining about the doctor being absent from the office
You may want to limit the maximum amount of money that goes into the bonus pool
for a particular month. For example, let’s say you have a huge month due to
one big case, and Collections/Production is $30,000 over the Strike Point. At
20%, that would mean that 20% x $30,000 = $6,000 goes into the bonus pool. Your
protocol may state that there is a ceiling of $4,000 for any one month. However,
I would keep the full $30,000 figure for the next three months as you calculate
the moving average. So a huge month still indirectly helps the bonus.
How will you handle an additional new staff person? As soon as you add to the
size of the staff, everyone else’s bonus goes down! You may want to phase a
new person in to the bonus over, say, 12 months. For instance, a new person
would only get 1/12 of a share of a normal bonus the first month, 2/12 the
second month, etc.
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