Dentist Compensation Models

Understanding Dentist Compensation Models

As a dental financial advisor, we have the privilege of helping dental professionals navigate the often complex world of compensation in the dental industry. Whether you are a new dentist stepping into your first role, an established practice owner looking to revise your pay structure, or somewhere in between, understanding the various compensation models is crucial for your success and satisfaction. In this post, we will explore common compensation models for dentists and dental hygienists, highlighting the advantages and considerations of each.

Arch Financial Planning is a dental-focused financial advisor that helps dental practice owners nationwide. Be sure to read our guide and hire the right team of advisors who can assist with building and selling the practice you’ve built to empower your retirement plan. 

Your employment agreement may differ depending on whether you work for a private practice or a dental service organization (DSO). Having contract terms reviewed by a dental-specific attorney and your dental-specific financial advisor is a good idea. At Arch Financial Planning, we help dentists across the country set a dental compensation model tailored to their practice’s needs. 

Independent Contractor vs W-2 Employee

Employing associate dentists as independent contractors in a dental practice can often lead to misclassification issues, which is not advisable as a general practice. This classification is crucial because it dictates many legal and tax responsibilities. Typically, associate dentists work under the control and guidance of the practice owner, using the practice’s equipment and supplies and adhering to specified office hours and protocols. These conditions align more with an employee status rather than an independent contractor who typically maintains control over how and when their work is completed and often uses their own tools and methods. Misclassifying employees as independent contractors can lead to legal challenges, including penalties, back taxes, and damages for failing to provide employee benefits such as health insurance and workers’ compensation. Therefore, correctly classifying associate dentists as employees helps ensure compliance with labor laws and protects both the practice and the dentists from potential legal and financial pitfalls.

In many cases, the associate dentist should be classified as a W-2 employee rather than an independent contractor. 

Net Collections vs Billable Production 

When evaluating compensation models for dentists, two common approaches are payment based on gross production versus net collections. Paying on gross production means the dentist earns a percentage of the total amount billed for their services before any adjustments for discounts, non-collectible accounts, or insurance write-offs. This model benefits the associate dentist by guaranteeing earnings based on their activity alone, providing immediate and predictable compensation regardless of the practice’s efficiency in collecting payments. In contrast, payment based on net collections ties the dentist’s earnings to the actual amount collected by the practice after all adjustments. This model favors the dental practice owner, as it ensures that the dentist’s earnings reflect the practice’s ability to convert treatment into revenue. It promotes a shared interest in not only performing treatments but also ensuring that those treatments are paid for by patients and insurance companies, aligning the financial interests of the dentists with the cash flow health of the practice.

Common components of employment offers for a new associate dentist:

1. Guaranteed Salary

For many new associate dentists, a guaranteed salary is a preferred compensation model, especially when entering a new practice. This model offers a fixed annual or monthly wage regardless of the number of patients seen or the amount of total production. It provides financial stability and predictability, which is essential when building a patient base or adapting to a new dental office environment. While it ensures a steady income, it may limit the potential for higher earnings that could be achieved through performance-based models.

2. Straight Commission

Under the straight commission model, compensation is based entirely on a percentage of the revenues generated by the dentist. This model is highly motivating, as it directly ties earnings to performance, typically focusing on net productions or net collections. It encourages dentists to increase the number of new patients they treat and improve their clinical efficiencies. However, it also means income variability and can add pressure, especially if the patient flow is inconsistent.

3. Base Salary Plus Bonus System

This model combines a guaranteed base salary with the opportunity to earn additional income through bonuses. These bonuses are often tied to specific targets, such as the acquisition of new patients, lowering lab fees, or achieving a certain level of net profit. This hybrid model balances security with performance incentives, making it very popular among dental professionals. It not only motivates team members but also aligns their goals with the broader objectives of the practice.

4. Benefits 

Benefits such as health insurance, professional development allowances, and other perks are also part of the compensation package. These benefits can be particularly important for dental hygienists and other staff members, contributing to job satisfaction and retention. In competitive markets, offering comprehensive benefits can differentiate a practice and attract top talent.

5. Profit Sharing

Some private practices implement a profit-sharing plan where dentists receive a percentage of the practice’s net profits. This model fosters a strong alignment between the practice owners and their staff members, as everyone benefits from the practice’s success. Profit sharing can significantly incentivize dentists to contribute to the practice’s overall efficiency and patient satisfaction.

6. Laboratory and Ancillary Fees

Another aspect to consider in compensation models is how lab fees and other ancillary costs are handled. Some practices might deduct these costs from calculating net production before applying commission rates, while others might offer a higher commission rate to account for these expenses. This is particularly important for procedures that involve high laboratory costs.

7. Special Considerations for Dental Hygienists

Dental hygienists often have different compensation models compared to dentists. Many receive a base pay plus a bonus system based on performance metrics like patient feedback, adherence to schedule, or specific dental hygiene production goals. Some might be compensated on a per diem basis or through straight commission, depending on the structure of the dental practice.

Crafting The Perfect Associate Compensation Plan 

The first step to crafting the perfect employment contract is to ensure the associate dentist and the practice owner have a common goal of serving patients well and profitably. The first thing to establish is a production goal. If you want your associate to produce $800,000 per year, then the practice owner should make sure there’s enough patient flow for the number of days the associate is working. 

Next, the doctor and the dental associates should structure the compensation plan to incentivize production and control of their own destiny. The fairest is paying an associate based on a percentage of their production, typically 30-35%, less the same percentage of lab fees. If the associate is paid on collections rather than production, they’re on the hook for whether the office collects the net amount. Collecting revenue shouldn’t be an associate dentist’s responsibility and shouldn’t be penalized if the office manager fails to collect what’s produced by an associate. 

Conclusion

When choosing the right compensation model, consider factors such as the local market conditions, your dental practice’s specific goals, and your team members’ personal aspirations. Understanding these models can help new dentists negotiate terms that align with personal and professional growth goals. For practice owners, selecting the right model is vital in attracting and retaining talented professionals while ensuring the practice’s financial health and service quality.

In summary, each compensation model has its unique set of advantages and challenges. By carefully evaluating these models against the needs of your practice and its staff, you can foster a supportive and productive work environment that benefits both dental professionals and their patients.

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