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Bonuses Part 2: When to Use Them, How to Structure Them, and How to Account for Them

by | May 18, 2024

Last week, we discussed the limits of using bonuses to motivate staff and influence their behavior. (Read the Bonuses Part 1 blog to learn more.) In many cases, clear goals and KPIs are all a practice needs to shape behavior, assuming the team is making an appropriate wage. 

This week, let’s consider situations where bonuses make sense, a few structures to consider, and some accounting notes. 

When should you use bonuses? 

There are three situations where bonuses make sense and are effective: 

  1. You want your team to focus on improving a specific behavior or result area. If there are areas of your practice you want to improve, such as second pair sales, Plano suns, or annual supplies of contacts, a 90-day spiff program can be very effective. The spiffs are usually small, but investing in regular monitoring and coaching can help your team develop new skills and habits. 

    Also, spiffs aren’t just for optical. For example, you could pay the reception or scheduling staff $20 per day when a new doctor sees a full load of patients. Frequent, low-stakes spiffs can benefit many areas of your practice.

  2. You’re dealing with salary creep but still want to give your team the ability to grow their income. This is where benchmarking overall payroll and individual pay rates becomes crucial. Salary creep happens when compounding raises outrun inflation and employee(s)’ wages are above market rates. 
    As in the First Law of Holes, the first step in addressing salary creep is to stop giving raises. However, team members still want to be able to earn more. This is where an individual or group bonus plan can allow employees to earn more without continuing to raise their baseline wages. When inflation brings those baseline wages back into line, you can resume giving periodic increases. 

  3. You want senior individual contributors to take ownership of their work. Usually, this is for associate ODs, but opticians also fill this bill. For key individual contributors, I prefer to award bonuses based on the total collected revenue they generate in their roles without thresholds and spiffs. Total revenue allows them to ask, “How do I provide all the services and products that benefit this patient, and nothing more?” 

Bonus structures to consider 

Based on the three examples above, here are some thoughts on how to best structure bonuses: 

  1. Do the math on spiffs. Multiply the goal number of achievements, such as second pair sales or Plano suns, by the spiff. Is the payout enough to be enticing? Now, multiply by the best-case outcome and ask, “Is this too much?” 
  1. Keep group bonuses simple. I prefer that practices set a revenue growth goal (start with dollars, then calculate the percentage). Ideally, it’s a goal you think you should hit 60% or 70% of the time. It should challenge you. One of the issues with doing a dollar threshold is that the threshold is often too low and then the “bonus” becomes a raise. 

    For every month that revenues exceed the growth goal, pay the non-OD staff 1% of total revenue (associate ODs have different bonuses). You can pro-rate based on hours if you have a mix of part- and full-time employees. You might also consider paying out missed months as a year-end bonus if the practice hits the growth goal for the full year. 
    For example, let’s say that your practice collected $100,000 in revenue in May 2023 and the growth goal is 10%. In May 2024, you collect $115,000 in revenue. Because you’ve exceeded the 10% growth threshold ($110,000), the payout is 1% of $115,000, or $1,115 in bonuses for the staff. 
  1. Be aware of team vs. individual bonuses for key staff. I think associate ODs should own their work to the point that their individual production IS the source of their bonus. I prefer paying 2%–4% of total collections (professional fees and materials) for associates, but the practice might also pay out the difference between a base salary and 14%–18% of total collections as a bonus.  
    Opticians may fight over patients if there’s an individual bonus (ODs could too, but that probably means you have too many). For opticians, it’s usually wiser to have a group bonus, typically 3% of collections on eyewear. You can always reward outstanding individual performers with a better hourly rate or base salary. 

A quick note on accounting and taxes 

Remember that bonuses are taxable income! That means the practice must pay its share of payroll taxes on the bonus, and the employee owes payroll and income taxes on the bonus. This has two significant implications: 

  1. Run your bonuses through your payroll. Do not pay bonuses with checks. When you communicate bonuses, remind your employees that the bonus is pre-tax income. 
  1. Using gift cards for bonuses may not be the wisest choice. Check with your CPA before trying this because gift cards are also taxable income.
  1. If you promise a fixed amount of after-tax bonus, gross it up in payroll. Yes, it’s going to cost you more, but it will also save you and your employees a lot of headaches if there’s an audit. 

Know your numbers and have a good team 

Hopefully, over these past two weeks, we’ve shown that bonuses aren’t the obvious solution to team motivation and can complicate your team management and taxes. The first step in deciding whether bonuses are right for you is to have a clear picture of how your team’s compensation compares to other practices. Contact us today to find out how Books & Benchmarks can automate and simplify payroll management for optometrists and help you decide if bonuses might be a good fit for your practice. 

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