Leslie A. Mamalis
MBA, MSIT, CVA
Leslie A. Mamalis is the owner and senior consultant at Summit Veterinary Advisors. She provides practice valuations, profitability assessments, feasibility analyses, and financial consulting to veterinary specialists and general practices. She is co-chair of the VetPartners Valuation Council. Learn more at summitveterinaryadvisors.comRead Articles Written by Leslie A. Mamalis
When veterinary hospital leaders insist that they can’t find qualified people to hire, the truth sometimes is that no one will work for the wages that the employers are willing to pay. Any practice manager will tell you that building a great team requires the right mix of key elements. Money, in the form of financial compensation and fringe benefits, is one of them.
Practice managers perform mathematical gymnastics to calculate who should receive a pay increase and how much, how wages as a percentage of revenue will change, and what other financial metrics would be affected. A lot of thought goes into determining team wages and the hit to profitability when trying to retain staff members.
Henry Ford understood the importance of higher pay. Before 1914, the automaker was battling high employee turnover and spending more money to find and train new workers. So, he doubled the wages to $5 a day.
Does that sound familiar? Is your practice suffering from high turnover or an inability to hire people? Are you scheduling yet another training module for yet another new hire? At Ford Motor Co., the wage increase led to more job applicants, better employee retention and a doubling of profits in less than two years.
Increase both employee retention and profitability? How does that happen? Isn’t the path to higher profitability paved with higher prices, lower wages and understaffing? No, it isn’t. Don’t believe me? Consider reading “The Good Jobs Strategy” by Dr. Zeynep Ton of the MIT Sloan School of Management.
If you don’t have time for reading assignments, here are six tips on approaching the issue.
1. Do Your Homework
Analyze your numbers before you hit the raise button. Giving your team a pay increase involves more than calculating wages as a percent of revenue. It consists of assessing job responsibilities and requirements (see tip No. 3), reviewing industry pay rates and the competition, and examining your region’s demographics. Finally, talk to your accountant or consultant about your profitability and the key metrics for determining the next steps (tip No. 4) before you implement wage increases.
2. Avoid a Kneejerk Reaction
When someone contemplates raising wages, the most common idea is to raise prices to maintain profitability. However, while increasing prices is indeed on the table, it isn’t the only answer. That’s why you need to do your homework (tip No. 1).
3. Identify New Revenue Streams
We all know the preferred payroll-to-revenue ratio (non-DVM wages at 18% to 22% of gross fees). So, we immediately think that a fee increase is the only way to reestablish the balance when raises are given. Think again.
One option is to create new revenue streams, such as charging for services performed by your veterinary nurses. Vet Viewer data shows that certified veterinary nurses are underutilized and a source of untapped revenue potential. In fact, 71% of consults by veterinary nurses are not charged to the client. Seeing the value of such a skilled group of professionals can drive practice revenue and provide for wage increases.
An additional note about revenue: Please don’t tell your team to “sell more.” People don’t enter the veterinary profession to be salespeople. Instead, educate your team members to focus on the patient’s needs and communicate with the client, enhancing compliance.
4. Manage Other Expenses
A large part of profitability is controlling operating costs. If your methods of cost management are broken, producing more revenue will be of limited benefit. One of the best ways to manage operating costs is to monitor income-to-expense ratios. So, set up a matching account in your cost of goods sold (COGS) for every income account, such as reference lab, pet food, pharmacy, and flea, tick and heartworm preventives. By comparing the income to expenses every month, practice managers know when and where profits are falling.
Also, don’t ignore variable costs, such as labor, transaction fees and commissions. Forgetting those costs is easy because they become a part of running a business. However, creeping variable costs will eat into profits.
One last tip about managing expenses: Focus on the largest ones first. Get them under control before you worry about the small things. Having a laserlike focus on the cost of coffee pods or Post-it notes won’t make a difference in your profits.
5. Improve Productivity
Is your team efficient? How do you know? Efficiency indicators include staff hours per transaction, revenue per staff hour, invoices per full-time-equivalent DVM and overtime trends. Start by looking at ways to improve the metrics.
Not all efficiency indicators are corrected by reducing staff numbers or increasing fees. Some can be improved by simplifying or automating processes or improving workflow. For example, how much time is spent scheduling appointments by phone? Can the process be automated or go online? If so, the team can focus on other tasks, perhaps talking to clients in the hospital and improving compliance with health care recommendations. Could you use technology to streamline patient intake by allowing clients to enter information electronically instead of on paper in the exam room? That would improve team efficiency.
I suggest holding team huddles to ask what causes delays or frustration. Furthermore, explore ideas on industry discussion boards, and talk to your consultant.
6. Consider Other Compensation
You might want to award a bonus instead of a wage increase, given current inflation concerns. When you give a raise, your payroll rises permanently. Bonuses are one-time expenses and can lead to better results.
Think about it. A raise of $1 an hour for a full-time position (40 hours a week) costs the practice about $2,240 in wages and payroll taxes over a year. The employee takes home about$37 more a week after taxes — perhaps not much overall impact.
Compare the raise to a one-time $750 bonus. The cost to the hospital is about $807 after taxes, and the employee takes home about $700. (Consider “grossing up” the bonus check so that the employee gets the entire $750.) A $750 bonus can make a bigger difference to a team member than an extra $37 a week, and it won’t increase future payroll costs.
The best approach to compensation uses a mixture of raises and periodic bonuses, with the bonuses tied to the practice’s goals, which needn’t be exclusively financial. Examples of those goals include increasing the number of cat visits, gaining Fear Free or Cat Friendly certification, or having every employee attend CPR training.
Wages must be part of a strategic business plan, just like fees, services and equipment purchases. For example, you wouldn’t buy a new radiograph unit without careful analysis, so don’t give raises without carefully assessing your business’ metrics and market changes.
Wages comprise a large slice of the revenue pie. Instead of thinning the slice, focus on expanding the pie, or better yet, looking at the entire banquet. Sometimes, all it takes is out-of-the-box thinking, as Henry Ford did, to arrive at a solution that benefits employees and the company.
Check out these resources to get a better feel for veterinary pay rates: