Article Date: 6/1/2008

Guidelines for Giving Pay Raises
staff salaries

Guidelines for Giving Pay Raises

Do you struggle with making payroll decisions? Here is some practical advice.


Knowing when and how much to periodically increase staff salaries requires a delicate balance. Fail to give a raise or make it too little, and your staff will feel underpaid, underappreciated and may very well leave you for an O.D. who offers a higher salary than what you've been paying them. (See "Is a Counteroffer The Answer?" below.) Over do it, and you'll spend too much of your revenue on staff salaries. (See "The Overcompensated Employee," below.)

The following guidelines may be helpful.

Merit-based compensation

Your way of compensating employees sends a strong message about the culture of your practice, says Amy Morgan, Chief Executive Officer (CEO) of the Pride Institute, a Novato, Calif. practice-management consulting firm for dentists.

"If you never give raises, even if your productivity keeps rising, you'll convey the message that it's futile for the staff to work harder because their efforts go unrewarded, and they have no control over their compensation," she says. "On the other hand, if you give raises just because a year has passed and an annual increase is expected, you'll convey the message that employees are rewarded without having to work toward new levels of productivity and excellence. Both of these approaches are demotivating and encourage lack of accountability and substandard performance."

In stark contrast is a compensation model that expects, recognizes and rewards achievement, making a statement that you want employees who are hard-working, strive for excellence and take your practice to new levels, Ms. Morgan says.

Action step: The net effect of merit pay raises should be that individual employees will each receive different percentage pay raises, says Mark E. Kropiewnicki, JD, LLM, a principal consultant with and vice president/treasurer of The Health Care Group (a Plymouth Meeting, Pa. practice-management firm) and a principal attorney with and president of Health Care Law Associates, P.C. also in Plymouth Meeting, Pa.

"Thus, if the average pay increase is 3%, the ‘good’ employee will merit a pay raise greater than 3% (perhaps significantly greater), an ‘average’ employee will receive 3%, and the ‘poor’ [performing] employee will receive less than 3% (and sometimes no) increase," he says.

Hard learned lesson: Raises based on merit not only encourage your employees to work hard, but also show marginal employees what they're missing by not performing well.

Skills-based compensation

Employers who base raises on employee skill increase the employee's pay when that person adds to or improves skill sets that increase the practice's value.

This method of compensation gives your employees a tangible incentive to acquire new skills. As staff training increases, so will the quality and efficiency of work output.

Three direct benefits of skillsbased compensation, says Sandy Seamans, a Sugar Land, Texas veterinarian, are: "Empowered employees possess higher skills for patient care; cross-training means less downtime because a staff member can step in for a coworker and perform at the same level; and employees with goals are more motivated and happier, which translates into a more rewarding work environment."

Is a Counteroffer The Answer?
A key employee gives notice that she's decided to accept a position that offers a higher salary than what you've been paying her. Do you make a counteroffer to persuade her to stay?
In speaking with doctors and office managers in a wide range of professions, the consensus seems to be: "No." The reason: The problems counteroffers cause often outweigh the benefits.
For example, if you match or exceed the other job offer or make additional concessions, such as allowing the employee to have flexible work hours, and the employee stays, this may lead to resentment among your other employees who feel they too deserve a raise and the ability to set their work hours.
This in turn, may prompt a chain reaction, in which other employees use this same tactic to gain more money and/or concessions. Translation: You may be relinquishing your control of the practice policies to your employees.
Another problem a counteroffer can cause: resentment. If the employee has repeatedly asked for a raise and you've denied it up until this point, she may resent the fact that she had to spend her time looking for a new job in order to get it. At the same time, you may resent having to make this concession under duress. Resentment on either side, let alone on both sides, is sure to erode employer-employee relations and the spirit of teamwork so necessary to maintaining and fostering a successful practice.
Something else to keep in mind: Salary counteroffers have proven in many cases to be ineffective at keeping the employee after she announces she's leaving for employment elsewhere. This is because other factors, such as a morale problem or a personal issue with another employee, may soon prompt her to leave regardless of the pay increase.
The one exception in which a counteroffer is worth the risk of the aforementioned outcomes: when the departing employee is critical to the day-to-day operation of the practice. This is because in the long run, it may cost you more to replace than retain her.

Action step: "This type of compensation works only if both you and the employee agree in advance on what you want to accomplish and by when," says practice-management consultant Jerry Hayes, O.D., of Jacksonville Beach, Fla. "Then put it in writing. When staff members successfully master new skills to your satisfaction, congratulate them on their achievements, and then follow through on the promised raise…"

Hard learned lesson: For a skill-based pay system to work, make training opportunities available — either in-office training or at one of the many continuing-education conferences throughout the country.

Four-pronged approach.

"Base the first 25% of a merit increase on personal attitude," advises Linda Miles, chief executive officer (CEO) of Linda Miles and Associates, a Virginia, Beach, Va. practice-management firm for dentists.

"[Ask yourself:] Is the employee cheerful, caring and a pleasure to work with? Is the person negative? Does he or she speak negatively about the practice to others? Is the staff member a team player?"

Use your overall evaluation form to determine the second 25% of the employee's merit increase, she says.

"An overall evaluation should include a self-evaluation, your evaluation of the employee and an evaluation by the employee's peers."

Base the next quarter of the merit increase on the employee's scope of responsibility and volunteerism, Ms. Miles says.

"When there are projects to make the practice better, [ask yourself] does this employee volunteer to implement each step, which may take some personal time? What new task has the person mastered that makes him or her worth more this year?"

Ms. Miles says to base the final 25% of the raise on what she says she considers the most important criterion — the health of the practice since the last performance increase.

The Overcompensated Employee
This "good" employee has been working for you so long that a simple compounding of reasonable yearly raises has increased her salary to the point at which it's unreasonably high.
To determine whether you're overpaying the employee, ask yourself whether she could obtain a similar job at an equal salary. If the answer is "no," you're most likely overpaying her.
You can resolve this problem, in part, by giving this employee smaller increases than in the past and/or by using tax-free benefits in lieu of increases, such as a uniform allowance. This arrangement also benefits the practice, says John K. McGill, MBA, JD, CPA, of the McGill & Hill Group, Charlotte, NC financial specialists for the dental profession. Why? The tax-free fringe benefits you provide have no federal or state income or matching payroll taxes on them. Nor are retirement-plan contributions required on the value of such benefits.
Once you reach the point of over compensation, you have a business decision to make: Risk losing the person if you fail to grant an increase or continue overpaying the employee.

If you carefully consider these guidelines for giving pay raises while weighing the issues involved with counteroffers and overcompensation, you have an excellent chance of mastering the delicate balance that is the employee pay raise. This balance is necessary to retain valuable employees and ensure the financial health of your practice.

Reality check: A pay increase below the level of inflation isn't a real raise because it doesn't keep pace with the eroding value of the dollar. The current rate of inflation is 4.3%, according to the Bureau of Labor Statistics. OM

Dr. Levoy's newest book is 222 Secrets of Hiring, Managing and Retaining Great Employees in Health-care Practices published by Jones & Bartlett. E-mail him at

Optometric Management, Issue: June 2008