Comparing Compensation Structures in a New Grad’s Contract

Congratulations! You’ve made it through school, and now you actually get to start being paid for your hard work!!! Kind of unbelievable, isn’t it? Well, believe it….

When a new grad enters the optometry work force, there are a million things to consider. What kind of practice do you want to be in? Where do you want to live? What’s a fair starting salary?

These are all very important decisions to be made, but one area that graduates need to make sure they understand before starting negotiations concerns the different structures of compensation that one may encounter in a contract.

While there are many different variations and subtle differences within each practice’s new hire paperwork, most will fall into one of three broad categories when it comes to salary structure.

Option 1: Salary-only, aka “the safety net”

This type of contract will most likely be found when considering an associate or employee position. Doctors with this arrangement will receive a set amount of compensation per their agreement, regardless of how many patients are seen or how much profit the practice makes.

Pros-

  • There is a fixed amount of money paid to the doctor no matter what. So, a slow month does not equal a hit to your pocketbook.
  • Knowing how much money will be coming in per month means being able to plan your finances accordingly. There is no guesswork involved, so you can feel more secure in your spending and saving habits.
  • Just because there isn’t a production based component of the contract doesn’t mean that the company or practice may not give occasional bonuses or rewards for great work. They just aren’t a guaranteed part of your contract.

Cons-

  • If not considered ahead of time, this structure can make it difficult for growth or raises down the road because you have signed an agreement to work for a certain set amount. Make sure that the requirements and expectations for a future raise are included, in writing, within your contract and agreed upon by both parties. Otherwise, you may end up five years down the road making the same salary as you did in year one.
  • Busy months don’t equal more compensation. Since there is not a production component within your contract, having a stellar month will not result in your paycheck reflecting that extra work. (Keep in mind, though, that this is balanced by not being negatively affected during slower months.)
  • Sometimes, depending on individual work ethic, this form of income may not incite much professional development or motivation to work harder. It is up to you to make sure you don’t become complacent just because you know your paycheck won’t be affected by a slow clinic. A lackadaisical mentality will never pay off in the end, and it could cost you your job.

Option 2: Production-only, aka “you eat what you kill”

Okay, so kill may not be the best word to use when talking about healthcare, but you get the picture. With these types of arrangements, the doctor’s paycheck is directly related to the practice’s bottom line. The more the practice brings in, the more you make. These types of contracts are typically seen in certain commercial environments, and the concept applies to ownership of a private practice as well.

Pros-

  • Your earning potential is relatively unlimited. Any factor leading to an increase in the net profits of the practice can directly increase your salary.
  • You have motivation to grow the practice. By knowing that your efforts and hard work have the potential to positively impact your paycheck, there is an increased level of personal investment in the day-to-day activities of the office. While money is definitely not the only thing that makes doctors want to have an efficient and professional practice, it can help keep you encouraged to be on the lookout for creative and new ways to see more patients, deliver better care, and expand your office’s reach. This benefits both you and your practice.
  • You control your fate. While for some, this may be a scary thought, for many, it is a welcomed challenge. Doctors often prefer to know that they can do very well for themselves if they work hard to keep improving their clinic and that they are responsible for their own success. Though the percentage of production reflected in your salary may be negotiated with the owning company, the final amount made is up to you and how hard you work each day.

Cons-

  • Planning finances can be difficult. Without knowing exactly what your paycheck will look like each month, it is somewhat challenging to be able to fully plan your expenses and discretionary income. After being in a position for a bit, though, most are able to roughly predict what to expect.
  • This is the highest risk category. Slow months within the practice equal less compensation for you, and income can fluctuate drastically month-to-month.
  • There are no traditional, dollar-value raises. All increase in income is tied to increase in profits. The only form of a “raise” would be to negotiate a higher percentage of production to be paid to the doctor or to increase exam fees if the doctor receives all exam charges.

Option 3: Combination compensation, aka “the best of both worlds”

In some cases, doctors will be able to negotiate a contract that allows them a base salary with production related income added on top. Typically, the base salary is lower than salary-only agreements, and the difference is made up (sometimes surpassed) through production. There is great variation in these type of arrangements, as some will have a larger base and only add production if a certain profit goal is met, while others will have a smaller base and pay a percentage of all production. Associate contracts, partners, and some commercial practices may utilize this type of compensation agreement.

Pros-

  • There is some built-in financial stability that comes from having a guaranteed base salary. No matter how slow the practice may be in a month, you will always know that at least X amount is coming with each paycheck. This takes some of the guesswork out of the equation and can help you know how to plan. There is less risk involved with this contract than with production-only types.
  • Like production-only contracts, you will be rewarded for exceptional months. The more the practice brings in, the more you bring in.
  • This arrangement helps motivate you to be an engaged and forward-thinking part of the practice team for the same reasons as the production-only contract does. The fire lit may be slightly less intense than the production-only version due to your safety net of a base salary, but this agreement will still help you to avoid the complacency sometimes seen in salary-only doctors.

Cons-

  • Typically the percentage of production paid in these types of contracts is smaller than production-only arrangements. This means that, when the practice is doing well, you won’t see the same degree of boost in compensation as you would’ve if your entire paycheck was linked to profits.
  • In slower months, you do have a risk of bringing home less than you would’ve if you were 100% salary.
  • You may encounter a practice that does not want to give you a raise in base salary over time due to the possibility of  your income growing through production. However, if you think of this before signing, you may be able to negotiate the terms of an increase into your contract.

As you can see, there is no perfect compensation structure. Each of these options bring with them rewards and challenges.

It is up to you to consider your long-term goals, personality, and ideal work arrangement in order to decide which agreement style will be best for you.

Be sure to do your research before you sign a contract. In particular, you will want to thoroughly examine the books of a practice before you sign any agreement that hinges all or part of your compensation on production. Also, keep in mind that your pay structure is not the only thing to consider when negotiating your contract.

Each offer you review will likely contain certain benefits that may or may not sway your decision. These perks could include, but are not limited to: insurance coverage, a professional allowance (an amount the company will reimburse you for or directly pay for related to your professional expenses), mileage reimbursement if travel is required, a 401K, and/or paid time off.

The addition of these elements may substantially effect your overall happiness with your contract and should be closely evaluated during the decision process.

While contracts can be overwhelming, if you keep these points in mind, you will have much more confidence and be able to make a well-informed decision about your future.

Just Remember….

      • Salary is SAFE! 
      • Production equals more risks, more rewards! 
      • and…Combination gives you a little bit of both!

About Patricia Fulmer O.D.

Patricia Fulmer O.D.
Patricia is a 2012 graduate of The University of Alabama at Birmingham School of Optometry and former AOSA National Liaison to the AAO. After graduation, she moved to Amarillo, TX, to complete her residency in Ocular Disease and Primary Care at the Thomas E. Creek VA Hospital. Patricia is the current Center Director for VisionAmerica of Huntsville, a co-management practice specializing in secondary and tertiary care, cataract surgery, strabismus, and oculoplastics in Huntsville, AL. She recently earned her Fellowship in the American Academy of Optometry at the 2015 meeting in New Orleans. In her free time, she enjoys traveling, attending concerts, art, and Alabama football.

2 comments

  1. If I am to consider a production or combo pay structure, can you give some details on the productivity part…what “productivity” should the doctor’s pay be based on (i.e. exam fees alone, exam fees plus contact lens sold, or also optical sales)? Ideally, it would be best to have all of those including optical sales, since an O.D. can have a significant impact on the optical sales. Can you give some more tips on the details regarding this?

  2. Patricia Fulmer O.D.

    Hi, David. Thank you for your great question. Production can be an interesting component of a contract for sure. There are some contracts that base production solely on exam fees, while others do incorporate optical and CL sales. Typically, when it comes to exam fees, there are two different ways for production to be structured. The first is a production contract in which the doctor gets a percentage of all exam charges. For example, some commercial practices will pay the doctor the entire exam fee for each exam performed (the doc is then responsible for filing their own taxes on those fees). In these cases, the commercial establishment makes their profit from the sales side (glasses, sunglasses, CL, etc). The other option is for a doctor to be paid a base daily salary, then have a production component added on. There is a lot of variability here- some will give a small percent of each exam performed, while others will give a larger percentage of anything beyond a set daily production goal. So, for example, a doctor in this arrangement may get $300 per day plus 20% of all charges above the established daily goal.

    When considering production based upon optical and CL sales, things get a little trickier. If you are in a commercial setting, it is extremely difficult (if not impossible) to have a sales portion included. This is due to kickback laws currently in place. Since the optical in a commercial setting is a different business entity than the optometrist’s office, it is considered to be a kickback if you are compensated for sales from patients you have seen who then get glasses or contacts at the commercial location. If you are in a private office where the optical and medical practice are the same business entity, you do have the option to have sales included. Most often, you’ll see this included as the doctor being paid a certain percentage of overall profit or charges for the office, not just exam fees.

    I hope this helps. As with any contract, the specifics will all depend on the area you are practicing in, the practice itself, and the other parties negotiating. Good luck! Please let me know if I can answer any other questions or be of any more help.

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