Key Takeaways
- Associate compensation should reflect the financial realities of the practice, not simply what competing practices are offering.
- Production-based and collections-based compensation models each have advantages and potential drawbacks.
- Guaranteed minimums, lab fees, benefits, and other costs can significantly affect the profitability of an associate arrangement.
- Reviewing associate compensation regularly can help practice owners identify problems before they affect profitability or retention.
Hiring an associate dentist can be an important step in growing your practice, expanding patient access, or reducing your own clinical workload. But determining how to compensate that associate isn’t always straightforward.
Many dental practices use a percentage of production or collections, sometimes with a guaranteed daily minimum. While these arrangements are common, that doesn’t necessarily mean they’re the right fit for every practice.
The real question is whether your compensation structure is fair to the associate, financially sustainable for the practice, and aligned with what you’re trying to accomplish.
Production vs. Collections: What’s the Difference?
Two common approaches to associate compensation are percentage of production and percentage of collections.
Under a production-based model, the associate earns a percentage of the value of the dental services they provide. The calculation may be based on gross production or adjusted production, which accounts for contractual write-offs and other adjustments.
This approach can be appealing to associates because their compensation is more directly tied to the work they perform. However, if compensation is based on gross production, the practice may be paying the associate on revenue it will never collect.
Under a collections-based model, the associate earns a percentage of the payments actually received for their services. This more closely aligns compensation with practice revenue, but it also means the associate’s income can be affected by insurance processing delays, patient payment issues, or collection practices outside their control.
Neither model is inherently better. What matters is understanding how each affects the practice’s finances and ensuring that both parties understand how compensation is calculated.
Look Beyond the Compensation Percentage
It’s tempting to evaluate an associate arrangement by looking at the percentage of production or collections being paid. But that number doesn’t tell the whole story.
Consider a practice that pays an associate 30% of collections. If the associate generates $600,000 in annual collections, compensation would total $180,000.
That may sound reasonable, but the practice must also account for the costs associated with supporting that production. Depending on the arrangement, those costs may include:
- Dental assistants and additional administrative support
- Supplies and laboratory expenses
- Payroll taxes, benefits, and retirement contributions
- Malpractice insurance, continuing education, or professional dues
- Additional equipment, technology, or facility expenses
Some of these costs would exist regardless of whether the associate joined the practice, while others are directly attributable to the associate’s work.
The important calculation is how much the associate contributes to the practice after accounting for the additional costs required to support their production. An arrangement that generates strong collections may still produce disappointing financial results if those costs aren’t considered.
Be Careful With Guaranteed Minimums
Guaranteed daily rates or minimum compensation arrangements can help attract associates, particularly those who are newer to practice or joining an office where patient volume is still developing. But guarantees also create financial obligations for the practice, even when production or collections fall short of expectations.
For example, if an associate receives a guaranteed $800 per day for 16 days a month, the practice has committed to $12,800 in monthly compensation before considering other associated costs.
That may be entirely appropriate if the practice has sufficient patient demand and a realistic plan for building the associate’s schedule. Problems can arise when guarantees are established without evaluating expected production, available patients, scheduling capacity, and the time it may take for the associate to become fully productive.
Practice owners should also understand whether the guarantee is a true minimum or an advance against future percentage-based compensation. Those arrangements can produce very different financial outcomes.
When Should You Reevaluate the Arrangement?
An associate compensation structure that worked well when someone first joined the practice may not remain appropriate indefinitely. Changes in patient volume, reimbursement rates, procedure mix, staffing costs, or the associate’s productivity can affect the economics of the arrangement.
It’s worth reviewing compensation when:
- The associate’s production or collections have changed significantly.
- Operating expenses have increased faster than associate-generated revenue.
- A guaranteed minimum continues to apply long after the initial transition period.
- The practice is considering adding another associate or expanding clinical capacity.
- The owner is concerned about profitability despite strong associate production.
This doesn’t necessarily mean changing compensation percentages. Sometimes the underlying issue is scheduling, treatment mix, collections, or the cost of supporting the associate. A financial review can help identify the actual problem before changes are made.
Build an Arrangement That Works for Both Sides
A successful associate relationship should benefit both the dentist and the practice. Associates need a compensation structure they understand and consider fair, while practice owners need confidence that the arrangement supports the business financially.
That requires more than comparing compensation percentages with other practices. It means evaluating actual collections, understanding the costs associated with the associate’s work, and periodically reviewing whether the arrangement is delivering the expected results.
Compensation terms should also be clearly documented and reviewed with appropriate legal counsel, particularly when making changes to an existing agreement.
Are you confident your associate compensation structure is working for your practice? Edwards & Associates works exclusively with dental professionals to help them evaluate practice profitability, assess financial performance, and make informed decisions about staffing and compensation. Contact us to discuss the financial side of your associate arrangements.
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