Article Date: 4/1/2001

Staff Compensation
Is the old standby -- 18% of gross -- enough?

Recently, Dr. Richard Edlow from Towson, Md., e-mailed with a question about a longstanding benchmark mentioned in Jerry Hayes' March "Business Advisor" column. Specifically, he wanted to know if the statement, "Staff compensation expenses shouldn't exceed 18% of your gross income" still held true for hiring and retaining quality staff with today's low unemployment.

Still the going rate?

Interested myself, I thought I'd not only pose this question to Dr. Hayes but also to a few other well-known practice management experts. Here's what they had to say:

Dr. Neil Gailmard. I think the traditional benchmark of keeping total staff compensation to 18% of the practice gross is outdated today. In fact, I advise doctors to try to exceed 18%. This is the only way to provide outstanding customer service and to efficiently delegate office and clinical procedures. An excellent staff is one of the best investments you can make. You can't cut your way to prosperity!

Dr. Richard Kattouf. It really depends on geography. Doctors practicing in areas with lower starting salaries can keep this percentage to 16%. Others, in areas such as Connecticut or Las Vegas, really can't expect it to be lower than 20% or 22%.

Also, remember that we're not just talking about wages. Health insurance costs are an issue, too. At a minimum, you'll spend $1,200 a year per employee. You have to consider insurance coverage and any perks (bonuses) in the total percentage.

Dr. Gary Gerber. Look at a practice doing $4 million, and look at its labor costs. You're not going to find an 18% labor cost; you'll probably see it at 25%. Your labor costs may go up significantly, but so will your bottom line. Be careful. If you accept the status quo percentages, you could have a status quo practice.

Katherine Bumgarner, M.B.A. I'm finding that this percentage is based on the actual method of practice. If a doctor delegates, his percentage is higher because he needs staff trained at a higher level. So compensation may range from 18% to 20% instead of the typical 16% to 18%. This percentage includes staff wages and bonuses, but not insurance costs. Most practices grossing $350,000 to $500,000 can maintain a staff compensation range of 15% to 18%.

Dr. Hayes responds

I get this question often; many doctors struggle to control payroll. I think 18% is a good number for total staff expenses in a traditional practice. However, the magic number for any private practice owner shouldn't be how much you pay staff, but how much you net in absolute dollars.

I'm continually shocked at how many O.D.s view the end game as building a high-volume practice, but don't work hard to control expenses and keep their net above 30%.

It's much more important to keep your staff expenses and cost of goods below 50% of gross. Otherwise, it's hard to net above 30%.

Optometric Management, Issue: April 2001