Most practice owners are very loyal to the people on their team. It is common for many practice owners to provide compensation increases and bonuses each year as a habit without considering the impact on the profitability of the practice. It is common to find employees who have worked at a practice for 15, 20, or even 30 years. The relationship between employees and the practice owner(s) can be extremely close and very special.
However, when a seasoned practice owner begins to explore their future options with the practice, an objective financial review of the practice typically shows that employee expenses are higher than they should be for a practice of its kind. This is the result of paying employees for their tenure or time at the practice instead of for the role that they provide at the practice.
Financial analysis and valuation of a veterinary practice is typically performed with an eye towards normalizing some specific cost areas, or at least planning to normalize them after the practice is acquired. Overpaying employees for their tenure makes a practice worth less than it would otherwise be if employee compensation was in a more 'normal' range. Since most practices are valued and sold based upon a multiple of earnings or profits, anything that decreases profits can have a dramatically negative impact on what the practice is worth to a buyer. Thus, a long time owner may be faced with some tough decisions regarding what to do about their overpayment of long-standing employees. Their decision is whether to reduce compensation for employees to more 'normal' levels based upon the position or role they provide, or taking a significantly smaller amount for the sale of their practice. If a long-standing employee can take on a larger role that demands higher compensation, it is a relatively easy decision to promote them to a more valuable position. If not, the owner will face difficult decisions.
How do you avoid this conundrum? Establish strict descriptions for each position in the practice, including expectations, a pay range, and knowledge to your employees that if they want to advance their compensation beyond the high end of your position pay range, they will need to advance their skills to take on higher paying, more valuable positions in the practice. This scenario keeps employees working to increase the value that they bring to the practice, so hopefully, your team will get better and better, while profitability improves as well.
To assess your employee or payroll costs, use the Data Dashboard at IsMyPracticeHealthy.com to learn if you are within an optimal range or not.
