Article Date: 12/1/2004

business advisor
Secrets to Staff Salaries
You've heard the numbers before, but what's really too much to spend on staff?
By Jerry Hayes, O.D.

From a consulting standpoint, I've long maintained that compensation for non-optometrist employees shouldn't exceed 20% of your annual collected gross income. I get a lot of feedback from optometrists who think those numbers are unrealistically low in this day of high-priced labor. But I'm still comfortable recommending that range for practices that gross less than $1 million each year for two reasons:

1. Those aren't really my numbers, they're simply reflective of what your peers spend on staff. How do I know this? Hayes Consulting conducted a detailed survey of more than 100 practices and found these ranges based on practice size.

Note: My company defines "compensation" as everything you spend on your staff (e.g., salaries, bonuses, payroll taxes, health insurance, uniforms and training). We specifically exclude staff time spent in your optical lab edging and surfacing lenses because we allocate that expense to cost of goods.

2. Optometrists often tell me that they can't keep their employees unless they spend 22%, 23% or even 25% of their gross on staff expenses. But it's virtually impossible to net the national average of 31% if your staff salaries exceed 20% of your gross income. That's because cost of goods (always the biggest single expense in a traditional optometric practice) runs between 30% to 33%.

So if you spend 25% of your gross on staff salaries and 33% on your cost of goods (58%), that leaves you with only 42% (100% - 58% = 42%) for your net profit and all other expenses. My rule of thumb is your staff expenses plus your cost of goods should not exceed 50% of your gross.

Two reasons for high salaries

I've found that salaries generally get out of line for two reasons:

1. Low staff productivity. You have more people on the payroll than you really need. If you produce less than $100,000 of annual gross income per full-time employee per year (excluding your lab employees), then you're probably overstaffed. Grossing $125,000 per employee each year is okay, but $150,000 is better.

2. "Salary creep." Optometrists don't get in trouble with fair raises, they get in trouble when the rate of those raises steadily outpaces both the growth of your practice and the employee's growth in skills. This is what happens when you hire somebody at $15,000 per year in 1985 and after 20 years of 5% raises they're now making $40,000. No matter how skilled that person is, you can't greatly exceed the pay scale for a receptionist or frame stylist in your community and still net 30%.

Perfecting the balancing act

We all need good employees if we expect to provide a reasonable number of patients with high-quality eye care. The trick is to manage your employee expenses so that your spend enough to hire reliable, qualified people, but not so much that you negatively impact your profitability.

A frequent writer and speaker on practice management issues, Dr. Hayes is the founder and director of Hayes Consulting.  You can reach him at (800) 588-9636 or JHAYES@HAYESCONSULTING.NET.


Optometric Management, Issue: December 2004