A Method for Setting Pay and Budgeting for Raises

iStock_000011030526XSmall[1]I have helped my doctor clients review the compensation levels of their team members.  I have also assisted in establishing a “right wage” when hiring a new member to their healthcare team.  The process for doing this is built upon both internal and external data. It’s not only important to compare wage data to other similar paid positions externally; I believe that it is also important to have a wage scale within the office that is relative to the position being filled and the responsibility that goes along with the needed position in the office.

Establishing a pay scale for your office begins with the job description.  Each paid position in your office should have a position description that describes the duties and the requirements of job.   This description will also provide you with a tool needed to assess the position from time to time as well as evaluate the person doing the work. Along with each job description I recommend you assign a salary range – a minimum pay amount and a maximum pay amount that will attract the desired team members and provide a fair compensation.  Having this detail and structure will provide the communications needed to keep understandings and expectations very clear.

Once you have a base range for each position, then you are ready to take the next step towards your pay raises, which involves an overall pay “raise budget” for the year. This is typically set as a percentage and applied to your entire team pay amounts.  If you have team members that are paid a salary, convert them to an hourly rate for this computation. For example, and to keep things simple, let’s assume you employ three people – one person at $10 per hour, a second at $15 per hour, and the third at $20 per hour.  Let’s also assume that all your employees fall into the range of pay set in their job descriptions.  To establish the raise budget for the year, add the hourly pay amounts together, which, in this example, would equal $45 per hour.  Now, multiply this by a raise percentage.  This raise percentage will vary from office to office based upon factors such as the annual cost of living increase during the past year, how well your practice prospered in the prior year, and based upon the cost of other benefits you are providing your employees.  During high inflationary periods I have seen this percentage in the 8 – 12% range, but we haven’t seen that in years.  Today, and over the past many years I would say that the range would be more in the range of 1.5 – 5%.  Let’s use 5% for our example.  Applying this percentage to the combined hourly rate, the result is $2.25 ($45 X 5%).  Armed with your annual “raise budget” of $2.25, you are ready to move to the third and final step.

Some doctors prefer giving team members a cost-of-living adjustments or simply applying the same percentage increase, in our example 5%, across the board to all team members to avoid confrontations over employee performance.  This negates your responsibility as the manager and leader in the office.  Pay-oriented evaluation sessions are essential to good supervision.  Instead consider the following method as a recommendation for applying pay raises.  Based upon your evaluation of the person and the job performed, provide each employee with a portion of the “raise budget”.  Back to our example, let’s say that employee one did an outstanding job this past year and exceeded your expectations.  Employee two, well, let’s just say you have had a few conversations about missing the mark, but not to the point of terminating the relationship.  Employee three has been with you for a long time.  This team member continues to meet your expectation and provide a good experience for your patients.  Her current pay rate is within the current pay range for her job description, but it is getting close to the top.  The following table is an example of how you might divide the $2,25 among your personnel based upon your evaluation.


Note that not all team members received the same percentage increase, but you have kept the overall raise amounts within the 5% budgeted amount.  If by chance, in allocating the raises, you come up short of your initial determined budgeted amount, you can either increase an employee’s raise amount or simply lower the overall percentage based upon your final evaluation. Whatever your final decision is, remember this – people will have difficulty accepting low pay increases.  If your overall increase will be lower than what you have done historically, you can pave the way for lower salary increases specifically by informing your employees via general office team meetings before salaries are reviewed.  Indicate that the cost-of-living is rising so slowly that pay raises will be lower than in the past.  But do this over time – several weeks or months – depending on when you schedule evaluations and reviews.  By allowing the idea of a lower pay raise to sink in over a period of time, the lower increase will more likely be understood when granted. Whether it’s good news are not so good, having the discussions with your team members will enhance better personnel relations and help raise the expectations of your team.  A team member’s compensation should be a positive incentive for good work performance.  An additional merit increase, such as reflected with Employee 1, would be paid only on a basis of merit, i.e., because the employee deserves it and not because external forces dictate it.

Using this method of establishing pay raises will keep your overall costs in check.  It does involve more evaluation than simply giving everyone an established percentage raise, but remember, each employee is an excellent resource for your practice and worth the extra effort.  If you have a large amount of personnel and the option of meeting with each of them in one time-frame will not work with your schedule, consider staggering when you actually conduct employee’s salary reviews and increases to coincide with each person’s anniversary date with the practice.  By using their date of hire as the time when you conduct their evaluation and then grant pay increases, you reduce the financial impact on you r practice of everyone getting a pay increase at the same time.  For some larger practices, this could be a real plus.  Using an employee’s anniversary date also distributes the “evaluation workload” for you because everyone does not have to be evaluated at the same time.  One caution, however–(depending on the size of the practice) it may be easy to overlook someone’s anniversary date.  If this happens, you could lose a valuable employee just because of an oversight.  Guard against just such a situation occurring.

How do you establish pay raises? (Reply Here)

Mike DeVries is a CERTIFIED FINANCIAL PLANNER ™ and a Certified Healthcare Business Consultant focusing on helping healthcare professionals. If you would like to learn more about becoming a client of Mike’s, contact him at www.vmde.com

Please note: I reserve the right to delete comments that are offensive or off-topic.

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