Veterinary practice owners care deeply about their employees. Their compassion runs deep because they want each person to live a successful and productive life. With this in mind, most owners default to increasing employee pay, but compensation becomes a touchy subject because there is a belief that people just want more money. The proposed question eventually becomes, “Where is the end?”
Compensation should be focused on each person’s results and responsibilities, but at the minimum, the cost of rent, food, and everyday necessities continues to rise. The last thing we want is for team members to starve and be unable to pay their bills. Commonly, employees make remarks such as, “I can’t save any money,” or “We are living paycheck to paycheck.” On the other end of the pendulum, we all have desires to see places, have experiences, and consume. To plan effectively, we must understand how and what the increased expense means to the veterinary practice, the employee, and the owner.
Thoughts to Consider
• Compensation based on staff results, responsibilities, education, and skills
• Benefits, such as retirement plans (401(k) or SIMPLE IRA), health insurance, and group benefits (short- and long-term disability, and other insurance products) must be provided to everyone. They can be voluntary to the employee or paid for by the practice.
• Bonuses need to have a specific metric tied to results (which is ultimately, profits). Holiday bonuses, monthly “just because” bonuses, and those based on the overall monthly performance compared to last do not directly tie someone’s actions to the result.
I refer to an entirely different category of employees as “key employees.” These people directly impact the owner’s time, the practice’s profits, or the overall culture of the hospital. Imagine they were to leave for another job, prematurely pass, or become sick or injured. This can dramatically impact the overall practice’s functionality, environment, and profitability.
Surprisingly, these people are treated very similarly to the entire team. Eventually, the conversation between the owner and the employee will focus on bonuses, ownership, and additional compensation. Extra time off, more continuing education reimbursement, and performance bonuses are helpful, but these are all short-term benefits.
When a bonus is paid, the bonus is made, and we move on. When continuing education is reimbursed, the money is paid back, and we move on. What happens next when the employee is targeted by another practice or something unforeseen happens? The performance bonus and other perks might briefly flash across their eyes, but then they make the decision to leave.
Ownership is considered and used as a carrot. Sometimes, the employee does get ownership. This can be good for the employees since they get to participate directly in the practice’s overall success. The downside is that the existing owner is now in partnership with the employee. The alternative could be phantom stock. This is where the employee can receive a percentage of profits but not have ownership in the business.
The Four Keys to a Successful Retention Program
1) Substantial Benefit
A good rule of thumb is to calculate the bonus based on a percentage of future cumulative compensation. For example, someone who makes $100,000 annually would make $1,000,000 over 10 years. The sweet spot is between 20 and 30 percent of total compensation. We want to create a program designed for a $200,000 to $300,000 bonus. This is a sliding scale; however, the lower the bonus, the less the desire to stay.
2) Completely Deferred
A legal agreement will be established to outline how the benefit will be paid out. Based on the example above, we would create a plan that, after 10 years of employment, the employee is eligible to receive the entire amount in the 11th year. If decided in advance when the agreement was established, they can take the bonus over a few years to help reduce income taxes.
If the employee were to prematurely leave within the 10-year period, the entire benefit would be forfeited. Since this person is likely someone you will need to replace, if they were to prematurely pass or become sick or injured, a provision can be built into the agreement to compensate the family.
3) Cost Recovery
Funding may be required depending on the retention program. We encourage owners to set aside funds now actively otherwise there is a chance in the 11th year nothing will be available.
There are many ways to informally fund the benefit, such as cash accounts, investment accounts, and permanent life insurance. Remember, some products can solve multiple concerns, such as premature passing and disability. This is an important factor to consider when choosing where to contribute money. If the employee were to leave, all funds allocated towards the plan would be owned by the veterinary practice and could be used for replacing that person or general business operations. If using life insurance, a benefit can be paid to the practice upon passing or contributions can continue by the insurance company due to sickness or injury.
4) Solves an Emotional Problem for the Employee
We all have concerns. Make sure to spend time with your team to truly get to know them, especially the key employees. Some worries keep them up at night, as goals they might want to accomplish. Maybe this person would like to have veterinary practice in the future, and funding is going to be a hurdle. They might have children they worry about sending through school. Student loan repayment might be a worry for them. Another is retirement savings to one day not have to work for a paycheck. These are common examples we see, but the emotional problem could be something else.
All four of the elements above need to be addressed. The process to set up an effective retention program is not streamlined and requires a few steps. To make things simple, start by identifying the key employees who are regarded highly by the practice and doing the math above on what a substantial benefit would be. Consult a professional who can assist with these types of programs. The goal is to create something that will lock that person into practice for an extended time period and potentially extend after the agreement is completed.
There is an option to use ownership, phantom stock, performance bonuses, and other types of compensation programs. Whatever you decide on using, make sure the practice can support the compensation, and the overall goal is to increase profitability of the practice. If you have designed a program that does not satisfy these two things, then now is the time to reconsider what is done and restructure the plan.