How to Structure Compensation for your Aesthetic Practice
Compensation is often one of the most challenging aspects of running a successful MedSpa or plastic surgery business, as it can substantially impact your practice culture. We often scour online tools, reach out to colleagues, find benchmark data from various online sources, and/or take the word or request of an incoming team member when attempting to come up with a solid compensation plan.
There is often a lot of guesswork involved and a lot of misinformation out there regarding this hot-button topic that can quickly lead to a practice overpaying and losing out on potential profits.
With our APX clients, our team of practice consultants offer very specific consulting sessions customized to your individual practice, but we wanted to share some best practices with you to use as a guideline for structuring fair compensation.
COMMON FINANCIAL TERMS
There are a lot of financial terms used out there, but these are some of the key terms and definitions for you to understand that we use within the aesthetics space.
Base Pay: Base hourly rate, or base salary. Does NOT include bonus pay.
Wages: Base pay + any commission/productivity bonus.
Cost of Goods Sold (COGS): Cost of goods and consumables, paid to the vendor, for procedures and/or products – Does NOT include expenses.
Cost of Labor (COL): Includes total compensation or what is included in payroll total (base pay + bonus + employer paid taxes + benefits).
“Cost of Sales”: The total amount of expenses directly related to generating revenue, including COGS, COL, Credit Card Processing Fees, Financing Fees, etc.
Direct Gross Profit (DGP): Revenue – COGS (this is a term our team at APX uses to differentiate from Gross Profit)
Gross Profit (GP) Revenue – (COGS + COL)
Productive Revenue Per Hour (RPH): Revenue / Hours Sold
Provider Productivity: Hours Sold / Sellable Hours
Productivity Bonus: Often referred to as a commission; however, in some states there are strict rules about fee-splitting, so we refer to it as a productivity bonus.
Multipliers: Factors that impact the results of a calculation or metric. In the case of compensation, it may be, for example, related to a person’s experience, certifications, etc. that could increase or decrease the projections, averages, and benchmark data.
Margin: The result of a calculation expressed in a percentage, such as “Gross Profit Margin” or “COL Margin”
When reviewing or structuring compensation and bonus structure, there are several multipliers or factors you want to consider in addition to a job title, including:
- What licenses or education do they have?
- How many years of experience?
- What is their character like? (They may look perfect on paper, but do they seem like they will be a good employee? Will they fit into your practice culture? Will they set a good example to others? What is their work ethic like?)
- What is their reputation in the field?
- What does their current or projected average revenue look like? Are they a high performer or a low performer or middle of the road?
- What is their current or proposed compensation structure and the amount of total payout?
- What service mix by category can they provide to your practice? Do they offer a healthy mix, or do they only provide services that involve a high cost of goods?
- How does this fit within your practice’s budget? We often see decisions that are made based on what compensation a new hire is asking for or what someone is paying down the street. However, you must make sure the financial health of your business is being considered when determining compensation.
When you think about developing your compensation plan and bonus structure, it is important to note that medical aesthetics is different from traditional medicine or small, privately owned businesses. So here are some best practices to consider and qualifying factors to incorporate.
You need to consider the gross revenue that’s being generated as well as understand the revenue per hour of both the provider and the practice. In addition, you need to understand your gross profit margin (revenue – COGS + COL) and your direct gross profit margin* (*APX Term to define Revenue – COGS). Again, cost of labor is very important relative to the revenue being brought in, and you must know the percentage of cost of goods.
Another factor to review is their conversion rate percentage from consultations to booking procedures or services. Finally, what does their capacity look like? Is their schedule full or is their unrealized revenue? This is very important as you do not want to be bonusing on unrealized revenue or paying out on liability income. You want to ensure you are paying out on what you are profiting from. So, you want to bonus on realized income such as completed consultations, procedures or received products in a package, or in the case of a plastic surgery practice, completed surgeries. Of course, there are exceptions, for example, perhaps a productivity goal based on membership enrollment, etc.
You want to make sure you are offering a competitive base salary. We have encountered some practices who are not paying a base salary and the downside to that is you want to compensate for the work you expect whether there are patients booked or not. You want to keep your employees motivated, and we do recommend that a base salary is part of a healthy compensation plan.
When it comes to pay raises, you want your team to be clear that you are not giving “blanket” salary increases. Of course, you will want to consider cost of living increases, and merit-based raises with milestones/goals clearly outlined in advance.
One of the most common questions we get at APX is, “How do I bonus my providers?” As mentioned earlier each state is different regarding paying commission. So, we encourage you to pay a productivity bonus rather than commission. You want your team members to continue to grow and grow the practice to earn those bonuses. Bonuses typically range between 5-20% and can be based on direct gross revenue or direct gross profit. You’ll want to add in some performance goals that are clearly defined and reasonable as you want them to be motivated.
Performance goals should be based on actual revenue, not on liability revenue. You want to ensure they are trackable. Within APX, we have an amazing goal tracking tool where you can track goals for each provider and how they produce each day so you know in real-time how they are performing and gain the opportunity to coach your team so they can self-correct on their own. However you track goals, you want to make sure that you set time aside monthly or on a regular basis to see how they are performing.
In addition to your providers who are directly generating revenue, you want to make sure you are setting up good compensation structures for the other individuals on your team (front desk personnel, management team, your patient care coordinator in a surgical practice, etc.,) and set goals for them as well.
Here are some examples for ways to structure bonuses. Please keep in mind there are always qualifying factors involved but as a general guideline:
- Providers often receive 5-20% (10-20% if paid on Direct Gross Profit or 5-10% if paid on Gross Revenue) on the revenue they generate
- Patient care coordinator may get a percentage of the surgeon’s fee – the typical range is 1-3%.
- Front desk or concierge scheduling team members are often bonused $10-$25 per completed consultation. They are getting clients/patients in the door.
- Management team members should typically have goals that center around the practice goals and what you want to achieve. This can range from better online reviews, to improved practice culture, overall profit, or retail revenue.
As far as team goals go, it is a great strategy to enhance your practice culture and bring everyone together as a cohesive team. These team goals can range from quarterly profit, positive reviews or survey results, retail sales, conversions (inquiry to consult and consult to procedure or service), patient retention, membership or loyalty program enrollment, or team sales goals.
There are some key benchmarks that you should be familiar with when structuring compensation plans and it really all starts with having a clear understanding of your practice’s financial health. Don’t be blinded by gross revenue coming in. There is so much more to your financial health than just your gross revenue. You need to make sure you can afford the compensation structure you set in place, and that you are forecasting, budgeting and considering how your compensation structure will impact that budget.
Here are some general benchmark guidelines (keep in mind this can vary by geographic location):
- Cost of provider labor should be 20% or less of generated revenue.
- Administrative labor should account for 10% or less of total revenue.
- Total payroll should be 30% or less of gross revenue.
- High performance revenue benchmarks for surgeons $3000+ per hour.
- High performance revenue for surgeons/MDs (nonsurgical) $800-$1200 per hour
- High performance nurse practitioners, physician assistants, and RNs $600-$1,000 per hour
- High performance aestheticians $250-$350 per hour
These are extremely important metrics to know and just to reiterate – what gets measured gets managed. Data does not lie. There is no emotion when it comes to data. APX clients can utilize our benchmarking data and our financial tools, worksheets, and templates to measure your data accurately.
When looking at benchmark data you may find online (from places like salary.com, PayScale, Allergan, the FDA, or from ASAPS, or from the Ronan Solutions Dataset we use within APX), it is important to understand the appropriate pay ranges both nationally and regionally if available. Keep in mind there can be a huge difference within a region based on the state laws related to procedures performed by role. For example, in Idaho an aesthetician can inject, but in Florida you must be a nurse practitioner or in Pennsylvania you must be a NP or PA to inject. So, the midwest region might look very different than the south.
Benchmarks are going to be communicated in percentiles and, again, multipliers must be factored in as typically benchmarks for compensation are for Total Compensation and include base salary, bonuses, productivity/commission amount totals. They are usually presented in annual or hourly amounts and are based on full-time schedules (2080 hours per year or 40 hours per week). So, if you have part-time employees, you must do the math to ensure you are getting the right information based on how many hours that person is expected to work.
HOW OUR APX TEAM CAN HELP
With some data entry from your practice, APX’s business intelligence dashboard is going to share 30 different KPIs on how your practice is performing. That information starts to feed into financial calculators that will help you set your goals, manage your compensation and your performance. Our revenue per hour calculator ensures you are monitoring monthly and quarterly performance, your cost of goods, and your service mix per provider and for the practice. Our compensation tool helps you not just plan but track your actual metrics each month to determine what the payout looks like. Our goal tracker keeps your team all on the same page and is transparent on their progress. When we work with our APX clients, we offer very specific consulting sessions to really look at your individual practice’s compensation plan.
We hope these general guidelines and information are helpful to you regarding compensation structure. If you are not currently an APX client, our team is happy to answer any questions you might have if you send an email to firstname.lastname@example.org.
We are also happy to set up a call with you if you are interested in learning more about the tools within APX that can help simplify and set up a fair compensation structure based on your individual needs, you can set up a call with one of our team here.