Originally published in the March 2003 Dental Practice Report. Copyright 1999-2003 Medec Dental Communications.

Stressless salary reviews

Erase doubts about when, and how much, to raise employees’ salaries.
by Deborah Odell MBA

Dentists are finding it increasingly difficult to determine how much to spend on salary increases. Far too often, they base raises on gut decisions. Did the staff member do a good job this year? If she did, what is it worth? Fifty cents an hour more? $1?

This type of decision-making creates several challenges. Because these raises are not based on definable, measurable and understandable methodologies, staff members often do not know why they received them. Thus, it's likely that they won't continue to do the types of things that were rewarded. And ironically, the doctor ultimately ends up frustrated when the employee's performance, far from improving after the pay raise, actually declines.

So how does a dentist decide what to give for salary increases? The answer lies in the analysis of three components: current economic trends, practice profitability and employee performance.

Current economic trends

Several economic and employment pressures are impacting salaries and pay increases. A recent survey conducted by Deloitte & Touche, one of the nation's largest human resource and compensation consulting firms, indicated that in general "large companies are holding aggregate pay increases to 3.5 percent in 2003." Corporate America recognizes that the economy has not rebounded sufficiently to warrant significant salary increases. Many small businesses use corporate compensation trends to determine salaries and pay increases.

Another economic indicator used to resolve compensation questions is the Consumer Price Index (CPI). The CPI represents the percentage increase in the costs of goods and services. It is often used to determine cost-of-living salary adjustments. Like the survey outlined above, the CPI indicates moderate pay increases for 2003. From November 2001 to November 2002, the consumer price index increased 2.2%.

In conjunction with economic trends, several employment trends continue to impact salaries and potential pay increases. The number of available hygienists remains low, and there has not been significant movement to remedy this situation. Also, the number of available assistants is slim in several areas of the country. The continued lack of supply and increased demand for these workers, due to the static number of practitioners and the increasing population, play a significant role in sustaining the pressures on dentists to increase salaries for many staff members.

Practice profitability

As many practitioners experienced minimal production increases in 2002, the thought of increasing overall employee expense through salary increases is daunting. In an effort to acquire and retain employees, more and more dentists are providing additional fringe benefits such as medical insurance, pension and profit sharing programs and bonus plans. This is driving up the overall cost of employment. In order to control costs and maintain an appropriate employee expense percentage (24 % - 34 % of total office production), practitioners must consider the impact of a significant percent increase in salaries on overall practice overhead percentages. In turn, dentists must also analyze the practice's ability to increase production sufficiently to offset the increased costs.

An accurate production forecast is the best tool to use to determine the necessary production goals to pay for salary increases. All production goals should be based on the expenses of the practice and the current percent of production collected. If production goals are determined in this manner, the emotional component of salary reviews is eliminated and the decision to increase employee expenses becomes simple.

Since staff members are informed that any potential salary increase has been included in the annual forecast and production goals, they understand that if the practice does not meet its production goals, they do not earn a salary increase. Not only does this make the decision whether to give raises cut and dry, it also increases the ownership by staff members in the practice's production goals.

Employee performance

Finally, pay increases must be evaluated in direct proportion to employee performance. Annual performance reviews need to be an integral part of determining pay increases. These meetings are critical because the outcome of the review should be a list of improvement action items that can be statistically evaluated. As a result, individual job performance can be definitively measured and translated into an appropriate percentage increase for each employee.

Here's how it works:

To begin, the percentage of gross salaries to be allocated for pay increases is determined and included in the production forecast. Next, performance reviews are scheduled and conducted for each employee.

An effective performance review incorporates several steps designed to create an environment where the staff member feels motivated to improve his or her work (for a sample of the Performance Benchmarking Packet, please visit www.odellconsulting.com). During the review, the doctor and staff member discuss and negotiate improvements to be achieved. Each goal is written as an action item that is clearly defined, has a completion date and can be quantified. At the end of the performance review a date is set for an evaluation meeting.

Note: As a general rule, salary reviews and performance reviews should be held separately. Because performance reviews focus on behavioral successes and improvements, including the stress of whether a raise will be given or not dilutes the effectiveness of the meeting. Therefore, salary reviews should be held after the completion of the Performance Benchmarking Action Plan and the evaluation meeting.

To illustrate how this provides a way to determine a salary increase, let's look at a possible scenario:

Based on current economic indicators, a doctor decides to allocate 3% of gross salaries as pay increases in 2003. Total gross salaries for the practice equal $180,000, and the total dollars allocated for pay increases will be $5,400.

During a performance review with an assistant, the doctor and employee agree upon an action item designed to reduce the percentage of inventory expenses from 8% of total office production to 6%. The expense reduction is to be accomplished within three months and sustained for the remainder of the year. The measurement of implementation will be monthly and will come from the practice's cash flow analysis. Finally, an evaluation meeting will be held six months from the date of the performance review to determine the staff member's level of implementation.

At the evaluation meeting, the doctor and assistant review the measurements of implementation and agree on the level of completion the staff member has made with her action item. Implementation is ranked on the following scale:

During the past six months, the assistant has successfully reduced the inventory expense percentage from 8% to 6%. They agree that the action item has been completely implemented.

In this case, the employee achieved 100% implementation and therefore should be rewarded with a 3% salary increase. Here's an example of the calculations:

This methodology ensures that the staff members understand how they can earn a salary increase and how much they will receive if all action items are fully implemented.

Determining how much to allocate for salary increases can be a difficult task. What's important to remember is that pay increase models should be designed to motivate employees to improve their performance and the overall performance of the practice. By analyzing the key determinants for pay increases, doctors can successfully decide on appropriate dollar amounts to be allocated for their staff members. If dentists remember that all pay increases must create a win-win environment between employer and employee, and if doctors consider what other businesses are allocating for increases, what the practice can afford to allocate and the level of performance necessary to warrant an allocation, determining salary increases can be easy and rewarding.