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How do you decide on compensation for your employees? What can you do if you are currently paying your clinicians too much? Should you pay a percentage or a flat fee?
In this podcast episode, Alison Pidgeon speaks with Julie Herres about compensation structures in a group practice.
Meet Julie Herres
Julie Herres is the owner of GreenOak Accounting. The firm provides bookkeeping, accounting, payroll, Profit First services to private practice owners throughout the United States.
Julie and her team have worked with hundreds of private practice owners, so they are uniquely positioned to be a trusted advisor to clients.
To get more information on GreenOak Accounting’s services or to schedule a free consultation, visit www.greenoakaccounting.com or connect on LinkedIn and Twitter.
In This Podcast
- Deciding how to compensate
- Things to take into account when running the numbers
- What to do if you are overcompensating
- The difference in compensation for contractors vs W2 employees
- Percentage vs flat fee
Deciding how to compensate
Usually, there is very little planning that has gone into thinking about how much to compensate clinicians. When practice owners get really busy and they decide they will hire another clinician, this move alone doesn’t increase the overhead but most of the time this is what gets them into trouble because they have not looked at things long term. Practice owners may be overcompensating and not making any real money.
In order to not let this happen, you need to run your numbers by seeing what the average fee per session is and see how all the pieces of the practice fit into that.
Things to take into account when running the numbers
- Payroll tax
- You need to be making some money on each session that someone else is doing
- Possibility of adding an admin person later on
What to do if you are overcompensating
- With your very next hire, you need to change the pay structure
- Increase the rate of your sessions
- If there is no other option and you are going to give someone a pay cut, make sure that you have enough data to back it up
The difference in compensation for contractors vs W2 employees
Contractors will typically be a little more because they are responsible for paying their own tax. Employees will be paid less because as the employer you will be paying a portion of their taxes.
- Employee pay should generally be 45-55%
- Contractors pay should generally be 50-60%
Percentage vs flat fee
When you are paying someone a percentage the only way to give them an increase is to give them a bigger percentage. As time goes on you, as the practice owner, you’re bringing in less and less. Therefore a flat fee is better because you’re in control of the raises and when insurance reimbursements go up, you’re not automatically giving someone a raise.
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- Four-Part Series with Accountant Julie Herres, Part 2: Budgeting and Forecasting for Your Group Practice | GP 08
- Four-Part Series with Accountant Julie Herres, Part 1: Getting Your Head Out of the Sand about Your Practice Financials | GP 06
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Meet Alison Pidgeon
Alison is a serial entrepreneur with four businesses, one of which is a 15 clinician group practice. She’s also a mom to three boys, wife, coffee drinker and loves to travel. She started her practice in 2015 and, four years later, has two locations. With a specialization in women’s issues, the practices have made a positive impact on the community by offering different types of specialties not being offered anywhere else in the area.
Alison has been working with Practice of the Practice since 2016 and has helped over 70 therapist entrepreneurs start and grow their businesses, through mastermind groups and individual consulting.
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Hi and welcome to the Grow a Group Practice podcast. I’m your host Alison Pidgeon. We are doing a four-part series right now with Julie Harris who owns Green Oak Accounting about different aspects of financials and accounting for group practices. I think this topic is so important, which is why I asked Julie to join us for four different episodes so we could cover a variety of topics. So, episode one was about getting your head out of the sand about your practice financials if you’ve been an ostrich and been avoiding looking at your numbers. She gives you some tips about how to start sorting through things and making sense of it.
Episode number two, we talked all about budgeting and forecasting for your group practice. Today we’re going to talk about compensation in group practice. And then the next episode we’re talking about profit first. So today in terms of compensation in group practice I’m talking to Julie all about different ways that you could pay employees, contractors, therapists, admins in group practice. And there’s lots of different ways of doing that. Some of it depends on what your state laws say about how you can compensate people, but she kind of just goes over all of the different possibilities and sometimes it’s just helpful to kind of get the overview of what the different options are so that you know what to ask about if you go talk to a lawyer or maybe talk to your own accountant about what you want to do in terms of compensation. So, I hope you enjoy today’s interview with Julie Harris.
Welcome back to the podcast. Today, we are talking again to Julie Harris who is an accountant with Green Oak Accounting. She is the owner of the firm. They provide full-service accounting to private practice owners throughout the United States. Julie and her team have worked with over 100 private practice owners. That’s their specialty and they can do a variety of things to help you with your group practice, whether it’s just a one-time project, whether you’re wanting ongoing monthly support or maybe you’re really interested in how to implement profit first into your business. She and her team can help you with all those things and we are doing a four-part podcast series because Julie has so much great knowledge to share with all of us who own a group practice. So welcome back to the podcast, Julie.
[JULIE HARRIS]: Thanks for having me again, Alison.
[ALISON]: Yeah, I’m really excited about our topic today. We’re talking all about compensation and specifically how to pay the folks that work for you. I feel like this is such a big topic, which is why we devoted a whole podcast episode to it. Lots of questions come up around this, so, I’m really interested to hear what you have to say. So, when you look at the group practice owners that you work with, what do you find that they’re doing around compensation? Or how are they deciding how to compensate their staff?
[JULIE]: So, what I find most often is that compensation, which is the biggest expense in any group practice, there’s very little planning usually that went into it, on the, the planning side. So, a lot of times a group practice or a practice owner will get really busy and then decide, “I’m going to hire someone else.” And that move alone doesn’t really increase the overhead because they’re in the same office, they’re in the, they don’t really need to add an admin, they may be paying for an EHR, and no additional space. So, the increase in overhead is almost nothing. So, they think, “Oh, let me just give them X percentage,” just based on that, but they’re not thinking about really the long-term or scaling or what would it look like if I added 10 clinicians at that rate? And so that’s how they can get into trouble. And a lot of times the decision is made by just asking around. Like, how much are you paying your clinicians? Or I was paying, you know, 80% when I worked over here, so that’s what I should do in my practice. What do you find?
[ALISON]: Yeah, I find exactly the same thing. Like they haven’t run the numbers or looked at the data or like you said, sort of extrapolated out well. When I do have increased expenses because now, we’re, you know, five clinicians and we have two or three offices, like, you know, how is that going to change the overhead? And they get themselves into trouble because they are too generous.
[ALISON]: And people think that, you know, “Well, people aren’t going to come want to come work for me if I’m not more generous than the next place.” And so, they really can get themselves into financial trouble pretty quickly. And unfortunately, I get those calls quite a bit.
[JULIE]: Same here.
[ALISON]: From consulting clients. Yeah, who were like, “Oh I really like you know, like paying these people’s killing me. I’m making no money and not paying myself.” So, I did want to ask you since it is such a common problem that people seem to get themselves into, like if somebody is listening to this and is like, “Oh boy, this is me.” What do you recommend that they do?
[JULIE]: Well I think you need to start by running the numbers. So, you need to know what your average fee per session is and then see how all the pieces of the practice fit into that. And we’ve talked about ratios in the previous two episodes, but look at how much of that fee do you need to allocate to overhead? And look at that. Even if you’re just a solo practice thinking of moving into group practice, like do that exercise for yourself because that gives you a really good idea of how much is left after you’ve paid for your rent, after you’ve paid for your admin, like how much has left for you to take home. And then you can extrapolate that into how much you can pay someone else because you also need to take into account payroll tax and you need to be making some money on each session that that someone else has as well. But take into account, you know, “What if I need to add an admin later on?” Like you should be looking at all of those from the very beginning to make sure there’s enough room to do all of those things.
[ALISON]: Right. So, if somebody has already started and they realize that they are paying their staff too much, what are some options to sort of turn the ship around at that time?
[JULIE]: There’s a few things that can be done. So, the first thing would be with your very next hire, you need to change the pay structure. So, you’re not hiring anyone else at this unsustainable rate. And so that might change how you recruit and that’s okay because something has to change. So that’s one of the first things. The other thing you could do is increase the rate if you’re in a private pay situation without increasing the percentage. So, where you would do basically a switch from a percentage to a flat fee. So, if you were, just to have round numbers, if you were in an average of a hundred dollars per session and then you are currently paying your clinician 60% of that, right? So instead of being 60%, why don’t we change that to $60 per session and then you could increase your rate to 120, for example. And so, in this example, like the amount that you get to keep just increased really significantly. You didn’t actually reduce anyone’s pay, but you increased what’s available for overhead and other practice expenses without changing their pay.
[ALISON]: That’s a great idea.
[JULIE]: So, I’m a big, what’s that?
[ALISON]: So, what I was just going to say, so, what if like there is really no other option other than to go back to your staff and say, “I’m really sorry I have to give you a pay cut.” Like how do you recommend they have that conversation, because obviously that’s not a fun conversation to be had.
[JULIE]: That’s not fun. And we have supported many clients through that conversation. I like to have some data to back it up. So, it is already going to be a very emotional conversation but if you’re able to have some data that shows here’s how much is coming in. Here’s all the money that’s going out. There is not enough. There are more expenses than income. So, something has to change in order for this to be sustainable and the reactions, listen, no one’s ever going to be excited about making less money. But if you’ve got the, you have the right team members who are supportive of you and supportive of the practice, a lot of times they will need to take a step back and deal with the information, but they will, a lot of them will understand what’s going on. They don’t have to take on the stress that you have as a practice owner. They don’t have the duties that you have. They’re not waking up in the middle of the night wondering about how to make payroll. And so, they often will realize that you shouldn’t be compensated for all of those things.
[ALISON]: Yeah. That reminds me of something similar. I switched over my staff from contractors to W2 employees this year and obviously we also had to change the pay structure pretty dramatically. So we were doing 60, 40 split, so they were making 60%, and then when I did my financial forecasting to try to figure out what to pay them, it turned into paying them about 50%, which we just decided to go to like a flat hourly rate just to make it really simple. But I had to kind of lay it out for them like, “Hey, this is why now on paper it sort of looks like you’re getting paid less, but it’s actually because now I’m taking on more of the expenses.” So really it sort of it ended up being six- and one-half dozen of the other. But I think because I had the data to sort of show them like all those moving parts, I think they actually like took it pretty well.
[JULIE]: They understood.
[JULIE]: Yeah, and a lot of times, you know, that’s something, the W2 portion is something that doesn’t always get looked at as a whole. Where there is your payroll tax that has to get paid by the employer, there’s federal unemployment, there’s state unemployment, there’s a lot of other pieces to that that do cost the practice money. And that often is just, you need to have that conversation with the employees so that they understand that that part is being paid for them and that’s part of their compensation package as a whole even though it doesn’t necessarily look like it on their pay stub.
[ALISON]: Right. And I think your typical staff person who’s working in a group practice probably isn’t that interested in the business side of stuff, which is why they’re working for you and they have no concept about any of that. And not that you have to give them all of the, you know, exact specific details, but if you just at least give them sort of the overview, I feel like it helps that conversation go better.
[ALISON]: Yeah. So, speaking of kind of like contractors versus W2 employees, like what do you see in differences for compensation depending on what you choose to have in your group practice?
[JULIE]: Well, so contractors are typically going to be paid a little bit more because they’re responsible for paying their portion of self-employment tax. They’re considered self-employed for tax purposes. So, you’re going to issue them a 1099 at the end of the year and they have to pay federal, state, and pay payroll tax as well. So social security and Medicare and then typically employees are going to be paid less because you as the employer are going to pay a portion of that.
[ALISON]: So, what would be like, I know every practice is different and it probably depends on what part of the country you’re in in terms of cost of living and that kind of thing. But are there any like general kind of rules of thumb about what you should be paying a contractor versus what you should be paying a W2 employee?
[JULIE]: Well, so I generally like to see clinician pay be around 45 to 55% of the total expenses. So, what that usually means is that if a contractor, there’s going to be a range, usually somewhere between 50 and 60%, where not everyone is necessarily going to be at the same exact rates. And on an employee side that’s closer to 45 to 50% to leave some room for that payroll tax.
[ALISON]: Okay, great. Yeah, that’s a question I get quite a bit, so that’s good to know. So, in terms of having a contractor then, like what do you see in terms of a structure? Like I get this question all the time too. Like does the money come into the practice and then you pay the contractor or are there different ways of doing that?
[JULIE]: So, I have seen two different types of contractors’ setups. The most common is where all the money comes into the practice and then there’s a, usually a payroll report run in Therapy Notes or whatever the EHR is, and then they’re paid a, either a percentage or a flat fee based on the income that has come in. So that’s the most common but it is the most, like an employee. So, there are certain states where it’s increasingly difficult to have contractors legally. California is one of those, Washington state is one of those where really, there’s a lot more enforcement between what truly is a contractor and what is an employee. And so, I’m seeing a lot of practices switch from contractors to employees because of that because you’re never going to get in trouble for having employees, but you can get in trouble for having 1099 sometimes. So, in a lot of circumstances it does make sense to make that transition. And then you also have a lot more say as the business owner for an employee. You can dictate their schedule, how many hours they have to be available if you just have a lot more control.
[ALISON]: Yeah, I was just going to say, so in terms of you know, there’s always this big debate among therapists when they’re starting a group practice. Should I hire contractors? Should I hire employees? Like obviously the legal piece is a big part of that, but like from a financial perspective, do you think there’s like pros and cons to having one over the other? What would some of those things be?
[JULIE]: I think practice owners typically start with contractors because it feels like less of a risk. That is my personal opinion. So, where you, they’re busy, they hire the first person, they think, ‘Well, let’s just bring them on as a contractor,” because as an employee it feels like more pressure. You’re responsible for filling their schedule. Whereas if they’re a contractor, they’re kind of responsible for bringing in some of their own clients or like maybe seeing other clients on the side or whatever that may be. So, but I think there’s a big trend towards employees in private practice and I noticed that those practices generally tend to be more successful. And I don’t know if it’s correlation or causation, but I think there’s something to be said for committing to people and their commitment to you as well.
[ALISON]: Yeah. I’m glad you brought that up because that’s actually one of the big reasons why I decided to switch my staff over to W2 employees because it seemed like the contractors would come on and they would kind of get a taste of what it’s like to be self-employed and then it wasn’t very long before they were leaving to go start their own practice or because I wasn’t offering any kind of benefits. Like they didn’t want to come work for me full time. They wanted to keep their agency job and just work in the evenings or whatever. But then, you know, they’re just not as committed as the fulltime people because they have another full-time job. You know?
[ALISON]: So, yeah. So, for me that made a lot of sense in terms of that because it just feels like, yeah, there’s just sort of more stability with the staff, having W2 employees. And I’ve noticed I’ve been getting a lot better candidates applying to come work for me because I am offering those benefits now. So, yeah, that’s definitely, I’m glad to hear you say that. It seems like on the financial side, it also has a lot of positives.
[JULIE]: It really does. And there’s something to be said for being able to say, you know, “I need someone who is available 35 hours a week to see 20 to 25 clients.” And being able to dictate those hours, like there’s an advantage to the business owner, certainly.
[ALISON]: Yeah, because then you can know exactly for the year what they’re, how much they’re going to work, right?
[ALISON]: Like before when they were contractors, if they wanted to go on vacation for a week or two weeks every other month, I couldn’t stop them from doing that.
[JULIE]: You’re absolutely right.
[ALISON]: But then there’s a huge hole for me financially if they’re going on vacation that much.
[JULIE]: Yes. And yeah, that comes up too. And I know we were talking about contractors. I wanted to mention much less common type of contractor, what I call the reverse contractor. It’s not a legal term, but where the contractor is in the business, they’re seeing clients, a lot of times they’re doing their own billing, and then at the end of the month they’re providing a report to the practice and paying a percentage to do the practice owner. So, they’re actually 1099 in the practice because all the cash is coming into them and they’re just giving a percentage to the business owner to cover the overhead, advertising, all of the different expenses in the business.
[ALISON]: Yeah, I’ve heard of that structure before and I had, clients asked me about that and I tend to not recommend that because it seems like therapists, when they come work for you, because they don’t want to deal with all of that headache of, you know, the all the paperwork with billing and like documenting what got paid, what didn’t get paid and then like having to calculate, “Okay, what do I owe you now the practice owner?” they just sort of want that taken care of for them. So, I tend to not recommend that, but I know that is somewhat common. I’ve heard of that happening in various places.
[JULIE]: I agree with you. Usually people come work for you because they don’t want to work for themselves. So, if you make it like they have to do all this stuff on their own, they might as well just have their own shingle.
[ALISON]: Right, right. So, another question too, that is pretty common that I get asked about is, “Should I pay a percentage? Should I pay a flat fee?” Like what are some of the considerations that go along with deciding between those two?
[JULIE]: So, I would say, in my experience, percentage is by far the most popular, still. However, I’m seeing a big trend towards a flat fee and I’m a big supporter of flat fee. And I can tell you why. So, when you have a percentage the only way to increase, to give someone an increase is to increase that percentage. So, it doesn’t matter what the fee for each session is. The only way to pay them more is to give them a bigger percentage. So, with the years you’re bringing in less and less and less for those people who have been with you a long time and it’s really difficult to get ahead and when your margins keep slipping in that direction. So, I really like a flat fee for that reason because you’re in control of the raises. But also, if your insurance reimbursements go up, you’re not automatically giving someone a raise that they’re not really considering to be a raise.
[ALISON]: Ah, yeah. Good point. Yes, I like that. That makes me glad now I switched to a flat fee. Yes.
[JULIE]: Yes, a flat fee, and honestly, a lot of times, when there’s some kind of financial distress and something needs to change, there’s a change from a percentage contractor to a flat fee W2 because then you ca make a big change in a short amount of time and really change the profitability of the practice.
[ALISON]: Okay. Nice. So, what about deciding between maybe paying a full-time staff hourly or paying them a salary? Do you have any thoughts about that?
[JULIE]: Well, salary seems to be very rare. I encounter salary often for a leadership team and that’s usually going to be in a practice in the over a million range, maybe even 1.5 million where they have a leadership team, maybe a clinical director in each location, something along those lines. So, it’s common for leadership to be salaried. As far as therapists, that’s kind of rare although I find it interesting because physical therapy is all salary basically, and they just expect the physical therapist to see a certain number of clients per day. So, I always wonder why it’s not as popular in mental health, but it isn’t. I think because it feels like a big commitment on the part of the business owner because you have to fill their schedule. That part is on you.
[ALISON]: Right. Or I think the therapist then might start to feel resentful if you’re like, “You know, well you have to see your 25 clients and if you don’t like, you’re going to be in trouble.” You know, like, versus like, “If you work, if you want to make X amount then you have to see this many clients per week and then if, you know, that’s sort of up to you how many hours you want to work.”
[JULIE]: Absolutely. And I think there was, where someone can go the other direction too whereas if you, like let’s say you’re there, your salary therapists have a lot of cancellations in one week and they’re seeing 18 clients that week. You might feel resentful at that salary because they’re not working as much as they should have.
[ALISON]: Right. So, any other tips around compensation? I know that we could probably talk about this for hours and hours because there’s so much to it, but just some things maybe people typically don’t think about or just maybe some ways that they can make sure that they’re not getting themselves into trouble by overpaying their staff.
[JULIE]: Well, I, one question I get asked a lot is about doing a sliding scale for therapists where you’re, if they’re seeing a certain number of clients per week they get a certain percentage, and then if they go above that, then they get a different percentage. And I see the attraction of that type of system because it can help encourage someone into a specific behavior. Like if you’re trying to encourage them to see more clients, that could be a way to do it if they’re financially motivated. But I find that often it’s not that successful, but it also puts a lot of burden on the practice owner as far as calculating the payroll, as far as checking it, but it’s also a really easy way for margins to slip as well.
[ALISON]: So, you don’t recommend doing a tier system?
[JULIE]: I don’t because it does add a lot of complication to that. I think instead you could do a bonus, like a dollar amount bonus versus, on a quarterly basis, for example, versus changing the percentages all the time.
[ALISON]: Okay. So, let me get some free advice here. I’ll tell you what I’m doing and you can tell me what you think. So how I have it set up with my full-time staff is they have to do a minimum of 25 billable sessions a week to maintain their kind of full-time status. And then once they go to session 26 and above, they start making 10 more dollars an hour, but just for those sessions they go above the 25. So, it’s pretty easy for me to calculate because they just report like, you know, “Okay, I did 25 hours at this rate, did five more hours at this rate, and that’s all there is to it.” So, what do you think about that?
[JULIE]: I think that’s a good way to do a tiered system. What I see most often is something like you get 50% up to 20 sessions, for example, and then anything after that you get 60% but on everything. So, even if they see 21 then they’re getting 60% and that doesn’t make sense financially for the business.
[ALISON]: Okay. So, the fact that I’m just limiting that bonus to the session they go over and above is where you think that’s the difference?
[JULIE]: That’s the difference. Yes.
[JULIE]: And I agree with that because it’s essentially the same, right? You could be looking at the average of a month or a quarter and saying, you know, “If you’ve seen on average 25 or more, you’re going to get an extra dollar amount on these sessions. So, it’s a very similar situation.
[ALISON]: Okay. Great. Well that’s good to know that I’m doing an okay job there.
[JULIE]: One more thing that I thought we should chat about is when clinicians are also doing other work in the practice. Does that happen in your business?
[ALISON]: Yes. I’m glad you brought that up because yeah. So, I have split out a lot of the roles that I used to do and have them now done by different people. So, there’s like somebody who does some marketing, there’s somebody who trains all the new clinicians, et cetera, et cetera. So yeah, talk to us about that.
[JULIE]: Okay. So, I think that’s great when you get things off your plate. So, let’s just start there. I’m not saying don’t do that but when we look at ratios, if we’re allocating all of those hours in your clinician pay, it makes that number look very high when in fact there really is like an admin or a leadership type work happening. So, I really like to track those hours separately in the financial reporting so that you can actually see what’s going on. Because we, one thing that we encountered really recently with a client is that all of a sudden, her payroll went up almost 15%. And on the surface, we couldn’t really tell why but once we actually started looking at what was going on, it turns out she had allocated a little bit here.
Like one person was doing some marketing, the other person was doing some social media and the other person was covering the phone some of the time but it wasn’t well defined and so there was a lot of overlap in what everyone was doing and they had also, so not only were they charging her for those nonclinical hours, but they had also reduced their number of clinical hours. So, there was less money coming in and more overhead hours but there were just kind of hidden within the clinical pain.
[ALISON]: Yeah. So, how I have it set up is they have a billable hourly rate and then they have an administrative rate and the administrative rate is like about half of what the billable hour rate is. So, it’s considerably less time because obviously that’s not necessarily like money that they’re generating directly for the business. So, and I also have it set up so that it’s like capped like, “You are training new clinicians. You can only spend 10 hours a month doing this and if for some reason you’re going to go over, you have to come ask me for permission.”
[JULIE]: Very nice. That’s, I think that’s great. And I think it makes sense a lot of times to make sure that those roles are very well defined and that everyone knows what everyone else is doing so that they’re not kind of, “Oh, well let me also help over here.” And then it takes a little while for you to realize that there’s been some scope creep.
[ALISON]: Right. Or even like they just take it upon themselves to do XYZ, but they don’t realize that’s maybe not a priority or doesn’t need to be done right now or whatever the case may be.
[JULIE]: Exactly. They’re good intentions, but they can get really expensive.
[ALISON]: Yeah, that’s a great reminder. Yeah. Thank you. Well, Julie, this has been super helpful. Thanks for giving me advice about my own practice. I appreciate that. How can our listeners get in touch with you?
[JULIE]: So, you can visit our website at greenoakaccounting.com. On the website, you can sign up for a free consultation if you’d like to learn about our services. You can also sign up for five days of profit boosting tips for your private practice where you also get access to a lot of our Excel and Google sheets templates.
Thank you so much Julie. It has been a pleasure and definitely stay tuned for the next episode where we’re going to be talking all about Profit First, which is the book that was written by Mike Michalowicz. That definitely has been of great interest to therapists, business owners. So, looking forward to talking about that with you next week. Sounds good.
So, lots of valuable information that Julie shared with us there. I think that every time you know, I get to interview an expert, there’s always little nuggets that I learn as well that I was not aware of. And so, I’m really enjoying doing this four-part series with Julie and please join us for episode number four, which is where we are going to talk about profit first.
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This podcast is designed to provide accurate and authoritative information in regards to the subject matter covered. This is given with the understanding that neither the host, Practice of the Practice, or the guests are providing legal, mental health or other professional information. If you need a professional, you should find one.