Pay partners fairly

Pay partners fairly

Mar 01, 2006

Are you in a partnership where all the partners are getting paid the same amount of money and receiving the same benefits? Are all the partners working an equal number of hours or contributing equally to the practice? If not, is it fair for compensation and benefits to be the same? I think not. In fact, this scenario leads to discord in partnerships and in severe cases, partnership breakups.

Fortunately, there's a better way to pay veterinarians in a partnership—a tiered-compensation program. This method makes compensation fair, regardless of whether the partners contribute equally.

Reference: Figure the four tiers
With this approach, you consider four issues: production, return on investment, division of net profit, and management. Here's a look at what you'll consider within each tier. (I've summarized the key points of each of the tiers for you in "Figure the Four Tiers".)

Tier 1: Production

I define production as the fees generated and collected for services and products that you're directly involved in providing. As an example, if you conducted an outpatient office visit, and during that visit you performed a comprehensive wellness exam, vaccination, and heartworm check and sold some flea control or heartworm preventive, you'd get credit for all those products and services because you were involved in their delivery. If the client returned a week later and purchased more flea control over the counter, you wouldn't get credit because you weren't involved in the delivery of that product.

The exceptions to this rule are dentistry, laboratory, and radiology. You may not do the dentistry, laboratory, or radiology procedures, but you'd oversee them and interpret the results, so you'd receive the production credit for these services. In most cases, you'd never receive production credit for food sales, boarding, or grooming unless you provided medical services.

The normal percentage you'd receive in Tier 1 is 18 percent to 23 percent of your production. The exact percentage depends on your other benefits. After adding up all your costs of employment—salary, benefits, matching payroll taxes, retirement plan contributions, and so on—your total cost of employment in Tier 1 shouldn't exceed 25 percent of your production. (To calculate your total cost of employment, visit and click on "Forms" to download a total compensation statement.)

Tier 2: Return on investment

The second tier of compensation, return on investment, is based on the value of the corporation's stock. The normal return on investment is 9 percent to 12 percent. So, for example, if the total value of the practice's stock were $1 million, and you owned 10 percent of that stock and received a 10 percent return on investment, you'd get $10,000 each year. In other words, you'd earn 10 percent of the value of the stock you own.

The return on investment you're paid needs to be decided each year and stated in your buy-sell agreement. Customarily, all partners are paid the same percentage return on investment. I recommend that you tap an accountant in the veterinary profession to value the stock annually, so you're using an accurate number.