Optometric Management Tip # 86   -   Wednesday, September 10, 2003
Payroll Costs, Part 2

Last week, I wrote about ideas for scheduling staff and keeping them productive on days when patients are not seen. Smart management can keep productivity high and make payroll costs a good investment.

Today we'll concentrate on how to gauge if your payroll costs are appropriate - and how to decide on the proper number of employees.

Conventional wisdom in optometry sets payroll cost, as a percentage of gross revenues, at 17%. But where does this number really come from? How do we know that "conventional wisdom" is right? Well, AOA surveys have been used to garner the average expense in various categories from practicing ODs nationwide, and respected management consulting firms have researched their client bases and have made recommendations for expense categories. I believe, however, that the standard 17% benchmark for payroll is too low. I think a practice that wants to grow and prosper must make a sizable investment in highly qualified staff and must delegate an increasing number of procedures, which requires a larger staff. When functioning properly, the expenses for an excellent staff is not a financial drain on the practice, but actually becomes a tremendous savings. Productivity is elevated much more than the payroll cost, and doctors' time is preserved in order to function at the highest level.

Here are some other reasons why the 17% standard is out of date.

• It's been around for a very long time - and both optometry and the economy has changed a great deal. Even George Elmstrom advocated 18% of gross as the desirable payroll figure (or ODs who delegated non-professional duties) in his textbook Advanced Management for Optometrists -- and that was published in 1974!!
• The advent of managed care requires optometrists to have more staff - for the billing process and so more clinical procedures can be delegated.
• Employee benefits and competitive salaries are increasingly important to attract and retain excellent employees - and these costs are accelerating. Health insurance premiums are a prime example. No business owner likes these escalating costs, but it is part of our society and the job market. These costs are ultimately passed on to the consumer.
• My philosophy of practice centers around excellent customer (patient) service. You can't achieve that with an average staff.

I actually try to exceed the 17% payroll expense standard! I think 20% is actually the goal to shoot for, and I know many excellent practices that exceed that.

If you track your payroll cost percentage, here are the specific factors that most experts agree should be included.

• Make sure your gross revenue is right in the first place. Use the "true gross" - or the revenue that is actually deposited, not merely billed but later written off.
• Include ALL costs of employment - including employment benefits if they are paid by the practice. Health insurance, uniforms, social security matching, worker's comp insurance, vacation pay, bonuses, unemployment and payroll taxes, etc.
• Do not include optical lab staff. Employment expenses for staff who make glasses actually belong in the "cost of goods sold" category. If employees spend part of their time making glasses, estimate the percentage of time and pull out a pro-rated percentage of their costs.

When examining the high costs of doing business, I remember the quote I read in a business book once...

"You can't cut your way to prosperity"
Best wishes for continued success,

Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management