I'm considering implementing an incentive bonus program.
Where do I start? Are bonus programs effective? What are the pitfalls?
Incentive bonus programs serve a valuable purpose for rewarding a team based on exceptional performance rather than just required duties. This sharing in the extra profit from successful operations is a generous gesture from the doctor towards the team, and adds energy to the business. Earning extra income for performance beyond normal expectations is an incentive for employees to contribute extra effort. However, there are pitfalls; but if constructed with careful calculations and good intentions, an incentive bonus may work very well.
When constructing an incentive bonus program, establish a Baseline level for calculating a bonus that must be met before a bonus can be paid. This number must be based on collections, or payments, after any refunds. Do not use production. Funding a bonus program must be done through actual money collected.
Since the bonus will be paid from income beyond normal expectations, the team needs to pull together as a unit to produce more. It has worked well to set a Baseline at the number that relates to how much the team is paid for expected productivity. Therefore, calculate the total gross wages paid, including pay for time off, such as vacation, and include payroll taxes. Exclude any wages and payroll taxes paid to the doctor. Make these calculations over a reasonable period of time, preferably six months.
Practices that control overhead typically hold salaries and/or wages, including payroll taxes to less than 25% of income, or collections. In this case, multiply total monthly salaries by four to arrive at a reasonable Baseline of collections for the bonus. Example: Total wages, salaries, and payroll taxes may come out to be $12,500 per month. A reasonable Baseline is then $50,000, because salaries would be held to 25% of income. Anything over the $50,000 may be considered available for bonus.
Pay an incentive bonus on 25% of any amount over the Baseline. A key point here is that controlling employee costs though the incentive program happens by only paying out 25% of any collected revenue over the Baseline. And, going forward, include any bonus paid when re-calculating the Baseline for future bonuses.
Since some months are longer than others due to the number of working days and vacations or time off for continuing education, a provision must be in place to even the playing field. Otherwise, the practice will pay out huge bonuses during big collection months, and suffer through reduced profit in lower collection months. To balance this, consider a rolling three-month average. Calculate total collections less any patient refunds for the previous three months and divide by three. This is your current total collections. Compare this number to the Baseline, and pay out accordingly if the total exceeds the Baseline. For the next month, conduct the same calculation for the most recent three months.
The abovementioned steps have worked well across most all practices when putting together an incentive program. Each practice is different in how much revenue is collected and operating costs. Following are some pitfalls and how to avoid them.
- Employee turnover: Salary calculations may not represent the current salary level for calculating the Baseline; make adjustments to the bonus when employees are added or released since salaries will change as a result.
- Fringe Benefits: Some employers offer extensive benefits beyond regular pay. If the practice pays for health insurance, vacation, holiday, sick days, disability, retirement contribution, etc., it may not be financially feasible to offer an incentive bonus in addition to the extra benefits.
- Keep bonus pay at 25% of Baseline to control costs: To illustrate, when bonuses are kept at or below the 25% range, mathematically the total of salaries including bonus going forward will remain below 25% of total collections.
- Cap on the pay out: A good rule of thumb is to limit the pay out of the bonus to a dollar amount; say $500 per employee, if on a monthly bonus. Reason being, the employees are given added income for their performance, and the practice can re-invest extra earnings into operations to retire debt, purchase more equipment, continue a successful marketing campaign, etc.
- Provisions for slower collection months: There must be an "equalizer" for those months that the office may not collect enough revenue to meet general operating costs. A rolling three-month average is a sensible solution.
- Quarterly Baseline Revisions: Keep an eye on payroll, bonuses paid, payroll taxes, wages and salaries quarterly. Make minor adjustments if these numbers begin to fall out of the healthy ratio of 25%. Again, exceeding the Baseline in collections, paying only 25% of collections over the Baseline, and capping the pay out will prevent the numbers from jumping out of the healthy range.
- Qualifications: Consider placing qualifications on the incentive program. Here are a few:
- 90 days must pass before new team members are eligible for the bonus system to calibrate their contribution and their part of payroll
- Employees must be active employed members of the practice at the time of the pay out
- Termination, either voluntary or involuntary, negates participation in the program immediately
- Any manipulation of the appointment book or payments to influence the bonus will cause the bonus program to terminate immediately
- Any material change in personnel (adding or reducing staff) may cause the program parameters to change
- Pay out of the incentive bonus will be done at the next pay period following the end of the month
In conclusion, an incentive bonus program is only as good as the team and systems in place. Great communication skills, outstanding patient services, and a team working cohesively will lead to more income, profit, and will ultimately make the bonus program work.