The importance of dental compensation studies

December 7, 2015
Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA
Bruce Bryen, CPA, CVA

Bruce Bryen is a certified public accountant with over 40 years of experience and is a part of RKG Tax & Business Services LLP, an affiliate or Robin Kramer & Green, with offices in Marlton, New Jersey and Fort Washington, Pa. He specializes in deferred compensation, such as retirement planning design; income and estate tax planning; determination of the proper organizational business structure; asset protection and structuring loan packages for presentation to financial institutions. He is experienced in providing litigation support services to dentists with Valuation and Expert Witness testimony in matrimonial and partnership dispute cases. He is also a financial writer for several dental journals. You may contact him at 215-641-8300 ext 123 or at bbryen@rkgcpa.com, or through www.Bryen-BryenLLP.com.

There is a list of examples that will be addressed to explain the importance of compensation studies for the dental practice. Just like the importance of a written agreement when two or more partners exist in a dental practice to detail the role of each partner, among other things, compensation can become a disagreeable topic when the focus is after a dental practice is in full operating mode.

There is a list of examples that will be addressed to explain the importance of compensation studies for the dental practice. Just like the importance of a written agreement when two or more partners exist in a dental practice to detail the role of each partner, among other things, compensation can become a disagreeable topic when the focus is after a dental practice is in full operating mode.

Getting partners to agree after the fact can become such a stressful topic that it becomes litigious. This is not a good situation and will cost the partners and the dental practice itself a considerable expense for attorneys and experts as well as lost production and confusion within the office staff. Getting the compensation study in advance of the opening of the dental practice, is just as important as the above mentioned operating agreement explaining the responsibilities of each of the dentists who are owners in the practice. That study should lead to the creation of the employment agreement that would assist in resolving any issues arising in the future from compensation and agreed upon perks for the owners of the dental practice.

More from Bruce Bryen: How to navigate dental practice transitions

The employment agreement and its supporting background data

The preparation of an employment agreement by a non-dental attorney may be worse than having no agreement at all. The responsibilities, compensation and fringe benefit package for a dental employment agreement is rarely similar to that of any other type of business. An example of why is because the dental practice is a service business that is entirely hands on, compared to other types of businesses where there may be interchangeable parts, inventory and personnel. Patients are typically interested in seeing the same professional each time a visit occurs to the dental practice and may become comfortable with that dentist and the same hygienist.

Having patient appointments with different dentists and hygienists, as the large consolidating dental practices often insist upon, requires them to do away with the direct contact with the professionals and lessens the goodwill factor of that type of dental practice. Those types of practices have different types of employment agreements with lesser compensation to the dentist and more of a “cookie cutter,” less-favorable employee fringe benefit package for the senior people as well. The dentist with his or her own dental practice and one or two partners or more, should earn substantially additional amounts on an annual basis once the practice has established itself compared to the dentist working for the consolidator who has sold his or her practice to the large company with many practices.  

 

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Bonus arrangements, fringe benefits and other deferred compensation

After the completion of the compensation study and the input from the dental CPA regarding the compensation of the owners and their responsibilities for that remuneration, the “normalized net profit,” of the dental practice should be addressed prior to the completion of the employment agreement. This is a precursor to valuing the dental practice and will assist the dentists who are owners in understanding how much their income actually is.

The statement “understanding what their income actually is,” may sound like it makes no sense. When involved with a practice transition, partnership dispute, divorce proceeding or damage claim, dentists learn that their income is much higher than they believed. Experts in compensation and valuation will present proof to the dentist and unfortunately to a court as well. If the practice pays for many of the items that the owner expects it to pay for, these items should be included as additional compensation even if these amounts may not be taxable. These items, whatever they may be, should be added to the employment agreement so there is no misunderstanding of what the dental practice has as its responsibility for payment on behalf of the owners.

Of course the most important fringe benefit of all is probably the employer-sponsored qualified retirement plan. This difference in retirement plan contributions and benefits between the consolidating dental practices and those wholly owned by dentists is dramatic.

More from Bruce Bryan: How to keep dental practice disputes under control

What occurs with the “normalized profit,” of the dental practice?

The real profit of the dental practice has many options in which it may be addressed. For the short term and included in the employment agreement, it can be distributed as additional compensation to the owners of the dental practice. For a good long-term strategy for developing plans for the future, a dental CPA is a good person to speak with about the strategy for the use of the “normalized profit.”