Too Much of a Good Thing

Are you overpaying your staff? Here's how to tell and what to do about it.



 Real-life cases of optometrists' practice dilemmas and how these seasoned consultants resolved them.

Donna Suter Marilee Blackwell, M.B.A., C.P.A., A.I.B.A.

Too Much of a Good Thing
Are you overpaying your staff? Here's how to tell and what to do about it.

Because there's always fierce competition for qualified personnel, retaining staff and hiring replacements is a challenge for optometric practices, regardless of the economy or unemployment rate.

When an employee leaves and you feel like you're in a bind, it's easy to justify paying a promising candidate more than your practice can afford. Overpaying not only has serious short-term ramifications, but long-term consequences as well, as we'll see in this article.

One O.D.'s problem

Dr. Lynn Antonio (not her real name) had a growing practice in a large city and exemplified how an O.D. can let employee wages get out of control. Fortunately, we were able to diagnose the problem and set some guidelines to get her practice operating within healthy limits.

In December 1996, Dr. Antonio purchased a practice from a retiring optometrist. The practice was grossing $350,000 and had two employees -- Sarah and Beth. At the time of the purchase, Sarah was earning $45,000 and Beth $25,000. By the end of 1997, practice gross had grown to $390,000, so Dr. Antonio hired Mary at $27,000, for a total of $97,000, which represented 25% of her practice gross.

Dr. Antonio contacted us in February 2001, concerned that her net had always been low even though her revenues increased significantly every year. We gathered detailed information about her practice that allowed us to analyze her over head. The table on the next page shows her December 31, 2000 profit and loss (P&L) statement using the Hayes Seven Key Expense Format.

All expense areas of the practice appeared in line except for staff salaries and benefits, at 25% of gross revenues. Dr. Antonio's payroll taxes had risen every year because of performance and cost-of-living raises. The table on page 76 shows each staff member, her annual wages (not including payroll taxes) and her percent of gross and net.

Was Dr. Antonio overpaying her staff? While it's hard for an outsider to judge the value of any one employee, we could objectively answer this question to some degree by conducting a local wage and salary survey.

Like any optometrist, Dr. Antonio competed for the same pool of workers that other healthcare providers and professional offices hire from. Therefore, we had to consider salary ranges from these establishments for establishing her pay scales.

Detective work

We called the Chamber of Commerce, the economic development council, the local medical society and several opto metric clients located in Dr. Antonio's metropolitan area. From each, we collected details about staff salaries and the pay range for each position.

Based on national norms for optometrists and our salary data for her area, it became clear that Sarah's compensation was significantly above average.

Overcompensating one employee had both short-term and long-term consequences for the practice. Short term, it reduced Dr. Antonio's net. Long term, it raised employee expectations and embroiled the practice in a cycle that made it difficult to grow without further reducing the net. Hiring additional staff to handle increased patient volume automatically raises staff costs.

Based on Dr. Antonio's historical growth patterns, we projected that her gross collections would be around $570,000 in another year (growth of 15%). If she hired another full-time person, which is what the on-site portion of our consultation showed she needed, her staff costs would increase from 25% to 27%.

To help her decide what to do next, we discussed Dr. Antonio's options with her. We saw them to be as follows:

  • Do nothing about her staff salaries and accept a lower net.
  • Freeze salaries until staff costs were around 20%.
  • Reduce Sarah's salary.
  • Reduce staff through layoffs or normal attrition.

Making the decision

Because staff expenses is an issue with both a financial and an emotional component, high costs can be a difficult problem to solve. Few people will take a cut in pay and stay on board, so the only realistic ways to reduce staff expenses are to cut back on hours or to lay people off. Dr. Antonio liked Sarah and didn't want her to leave. However, her long-term plan was to gross $700,000 and to bring on a partner. High staff costs would make it harder to grow without taking a reduction in her own earnings.

Although it was hard to do, Dr. Antonio decided to place a cap on Sarah's wages and simply explain to her during her next performance review that she was making significantly more than she could make at any other practice in the area.

We coached Dr. Antonio on the best ways to present the information as positively as possible and to put her long-term plans ahead of personal feelings for Sarah. Not surprisingly, Sarah resigned 4-weeks after receiving the news.

The next step was finding Sarah's replacement. Like many young optometrists, Dr. Antonio had inherited most of her staff from the retiring doctor and naïvely hired her third staff member, Mary, because "the girls liked her and I thought she seemed okay." The staff had said they needed another person because they were overloaded, but Mary didn't boost productivity.

Hiring a winner

The real goal of a job search is to find someone who can do the work and fit in easily with your office culture. This might not mean hiring the candidate with the most qualifications, who may demand a salary that's higher than you've budgeted, but hiring the candidate who not only has the core skills necessary to perform the task but will be able to form relationships with other staff members.

This winning combination typically leads to increased performance and better team productivity.

To help her hire the right person, we gave Dr. Antonio the following advice, which could benefit you, too:

Define the job accurately. To hire wisely, you must know and understand the skills and talents that are required. How would you answer if the applicant asked, "What are your performance expectations for this position?"

A thorough job description should at least list the "must do" components of the job, such as answering the phone, making daily deposits, taking out the trash, etc. By giving candidates a copy of the job description before the interview, you allow them to qualify or disqualify themselves.

If you don't know the true demands of the job, the answers you need to make a sound hiring decision will never come, no matter what or how many questions you ask the candidate during the interview.

Ask good questions and listen to the answers. You must hear what the candidate has to say, not your own self-talk or thinking about what to ask next. This means reviewing the application and resume before the interview.

Each position will have its own unique set of questions arising from the requirements of the job. Ask questions that help you probe past the initial (often rehearsed) response. As the candidate responds, note not only her words but also her body language and mannerisms. Make notes to highlight gaps in employment you want to inquire about.

Consider the personality angle. Because exit interviews reveal that 51% of all employees fail because of personality issues and "fit," you should ask questions that relate to the candidate's personality as well as to your own.

Think about what the candidate can expect from you as well as about your expectations of her. Are you buttoned-down and dignified or do you run on the almost feverish energy of constant innovation? Do you follow a growth plan step by step, decision by decision? Or are you comfortable making on-the-fly decisions?

With practice, knowing what the candidate can expect from you and asking her the proper questions will mean that you'll be able to effectively evaluate two equally qualified candidates and know that Candidate A will thrive in your practice while Candidate B will fail.


Analysis of Staff Salaries

Position Annual
Percent of
Percent of
Sarah Front Desk & Insurance 55,000  11% 44%
Beth Optical 30,000 6%  24%
Mary Pre-Test 30,000 6% 24%

Sally saves the day

Dr. Antonio found a replacement for Sarah and agreed to pay her $35,000. Sally came from the billing department of a four-person internal medicine practice and looked forward to once again having patient contact. This brought Dr. Antonio's staff costs down to 21%.

Sally was much more computer savvy than Sarah and worked to convert from paper to electronic filing. For some plans, this increased the reimbursed amount. For all, it reduced the average third-party reimbursement time from 90 days to less than 60 days.

As we tutored Sally about ophthalmic coding and reviewed proper accounting systems and protocols, we discovered that Sarah hadn't been collecting non-reimbursable costs, such as refraction fees, from patients. A chart audit revealed other coding and billing errors that had been costing the practice approximately 1% of collections, or $4,850 per year.

Sally's proper coding and billing as insurance clerk/front desk person increased revenues by about 1%, which dropped straight to the bottom line.

On the road to success

Dr. Antonio was now on her way to grossing $570,000 and could look forward to her best paycheck ever -- 30% or $162,000. Maybe this advice can help you, too.

Marilee Blackwell, M.B.A., C.P.A., A.I.B.A., senior consultant for Hayes Consulting (904-273-1115), and Donna Suter, president, Suter Consulting Group (423-236-5465), team up to offer financial guidance and on-site consulting services designed to increase your gross revenue while significantly improving your net income percentage.