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Partnership Compensation
By Thomas L. Snyder, D.M.D., M.B.A.
Over my career I have often been asked to assist failing
partnerships. The root cause of many failures has been
related to income sharing. Historically, partnerships were
always relationships based upon partner income being shared
equally. This approach, in many instances, did not succeed
in the long-term. Not all partners contribute equally
to their practice whether it's due to the number of patients
or how efficient they are. Basing part of partner income on
production is a fair approach to solving that problem. Being
an owner should reap some rewards as well, so basing partner
income on a blend of personal clinical production and ownership
share is the best way to address this issue. We'll present
two methods of sharing partner income in this article.
Method I - Payment on a Proportion of Personal Clinical
Production and Profit Sharing
In this method we calculate available partner compensation,
which is defined as all income available after deducting the
practice's operating expenses. We term this as Available
Partner Compensation. It is then divided in the following
way:
Component I - Calculate the Personal Clinical Production
Ratio of Each Partner
Based on the partners' philosophy towards emphasizing
clinical production on their relationship, the proportion
of Available Partner Compensation that will be allocated toward
production, is anywhere from 20 to 80% of available partner
compensation. The remaining balance of available partner compensation
will be shared based upon the percentage of partnership
interest. Many of our clients, however, select 50 to 60%
of available partner compensation to be allocated to the production
equation.
The next step is to calculate the ratio of personal clinical
production. So, for example, if one partner produces 55%
of clinical production, the remainder will obviously be paid
at the rate of 45% of clinical production. These percentages
are multiplied by the proportion of available partner compensation
that is allocated to clinical production. In certain instances
when there is a significant difference in the size of the
partner's patient base, the respective hygiene production
may be added to this calculation. The remaining balance of
available partner compensation then is allocated to each respective
partner's interest in the practice.
Method II - Pay Partner's a Percentage of Production
Another method of compensation uses the approach that
most associates are paid, namely applying a percentage of
net production or collections with an adjustment for lab expenses.
Select a compensation rate between 33 to 37%, overhead permitting.
Lab expense is deducted at the same percentage rate as the
selected compensation rate. In cases where a severe discrepancy
exists in lab expenses, it may be wise to deduct 100% of the
lab. This would be done by paying the percentage of compensation
first, then deducting 100% of the lab costs. In either case
after you apply the percentage calculated to personal clinical
production the remaining balance of available partner compensation
is split, based upon partnership interest.
Below are illustrations of two examples to show you how the
math works for both methods.
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Method I
Payment on Split of Production
and Profit Shared on Ownership %
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Revenue
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$1,500,000
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| Operating Expenses |
$900,000
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| Available Partner Compensation |
$600,000
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| 50% Production Allocation |
$300,000
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50% Profit Allocation
Equal Partners - (Sharing Profit Equally)
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$300,000
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Calculate Proportion
Dr. A. - $556,500 / $1,050,000 = 53%
Dr. B. - $493,500 / $1,050,000 = 47%
Calculate Production Compensation
Dr. A. - $300,000 X .53 = $159,000
Dr. B. - $300,000 X .47 = $140,000
Calculate Compensation
Dr. A. Compensation
$159,000 + 150,000 = $310,000
Dr. B. Compensation
$140,000 + 150,000 = $290,000
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Method II
Payment on % of Production
and Profits on Shared Ownership
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Revenue
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$1,500,000
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| Operating Expenses |
$900,000
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| Available Partner Compensation |
$600,000
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| Equal Partners |
50%
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| Dr. A |
$556,500
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| Dr. B |
$493,500
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| Dr. A Lab |
$80,000
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| Dr. B Lab |
$55,000
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| Compensation @ 37% |
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Calculate Production Compensation
with Lab Deduction
Dr. A. - ($556,500 - $80,000) X 37% = $176,305
Dr. B. - ($493,500 - $55,000) X 37% = $162,245
Total Production Compensation : $338,550
Calculate Available Profit Share
$600,000 Available Partner Compensation
$338,550 Partner Production Compensation
$261,450 Partner Profit Share Pool
Calculate Production Compensation
Dr. A. Compensation
$176,305 + 130,725 = $307,030
Dr. B. Compensation
$162,245 + 130,725 = $292,970
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Summary
At the end of the day, the most important issue to carefully
analyze when forming your partnership is to develop an equitable
way of splitting income. At the outset, typically, in
newly formed partnerships the "senior partner" will
be the big producer thus receiving a greater portion of available
partner compensation. However, as the senior partner begins
to reduce his/her time in the practice, the junior partner
will more than likely receive a larger proportion of income.
In balance, over the life of your partnership, this appears
to be the fairest way of sharing income.
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