8 Important Considerations to Make Before Increasing Your Wages as the Practice Owner
By Courtney Dryer, O.D. December 02, 2021
A practice owner is always reluctant to raise their own salary. We always come last. Deciding the amount and when to pay yourself more money may be one of the most difficult decisions to make as a business owner. If your business is in the black, paying yourself is crucial for business sustainability and for future evaluation and success in selling your practice. If you are not taking due compensation and an adequate owner’s salary is not included, your company appears less successful in an evaluation.
An assessment of both your existing compensation and key elements of the business's financial status is important when considering an increase in owner’s compensation. Monthly cash flow, employee salaries, retirement investments, tax allocations, cost of goods, and equipment purchases are important to consider.
1. Current Compensation
A practice owner should assess their wages when compared to others at similar jobs in their industry and if not, they may be due an increase. This is referred to as market wage and is important for business appraisal. Other benchmarks to use for owner compensation maybe 20 percent of profits, 2 percent of gross sales, or a maximum of four times the next-highest employee's pay.
2. Monthly Cash Flow
After turning a profit, an owner should have an idea of the business’s average cash flow by routine oversight. Larger than average monthly payments such as a credit card or an increase in annual rent payment should be considered before a salary increase. Although some months are better than others, when you begin to see a consistent monthly average in your checking account exceeding a year prior, it may be time to increase your salary. Business owners should also have at least 3-6 months of emergency funds on hand.
3. Employee Salary Increases
If any of your employees are due for a salary increase, investments in your staff should be made prior to an owner salary increase. A business owner knows it’s less costly to maintain your current staff then hire staff--particularly in today’s hiring environment. Hourly rates have increased due to worker shortages, and you will have to compete. Studies show the replacement cost is $15,000 per person for an employee earning a median salary of $45,000 a year.
It is typical to start a new OD associate at 20% production, but as that OD proves themselves in your practice, you may want to increase their salaries up to 24% production. By investing in them, you are more likely to keep them in your office. Employee turnover affects morale and productivity and can be quite costly.
4. Max Retirement Investments
Consultation with a financial expert is advisable to insure you are putting max contributions toward your retirement based upon your practice’s tax structure. I contribute the max amount to a SEP IRA which is tax deductible. While max contributions are best for tax purposes, you must also contribute a portion to your employees with over 3 years of services. This may be an alternative employee investment over a per-hour pay raise. Experts suggest 25% of your profit should be allocated towards retirement. Good information on personal savings, retirement, and investment can be found by joining the Facebook group, ODs on Finance or at their website.
5. Tax Increases and Allocations
Before an owner's salary increases, they should consider the business tax status and any future tax payments. A discussion with your CPA regarding potential tax increases in the upcoming year or quarterly tax payments can be helpful for projections. Mid-month when I get hit with a quarterly tax payment, I may pay myself less or move my owner’s distribution towards the end of the month. Advisors predict taxes will be 30% of your profit.
6. Equipment Purchases
Optometry equipment purchases are typically completed at the end of the year to capitalize on tax deductions. After business owners are in the green, you need tax deductions. Section 179 of the tax code allows business owners to deduct the full price of equipment during that tax year. Prior to a salary increase, an optometrist should consider any potential purchases and the effect on monthly cash flow. Each piece of equipment is an investment in practice growth and profitability.
7. Cost of Goods
Many doctors are so busy seeing patients, they forget to assess how much they are paying for contacts, lenses, and frames. Many forget to update contact lens pricing as manufacturers increase their rates or they do not evaluate the total cost of optical jobs annually. I have made it a goal to evaluate my optical pricing against other lab pricing annually to ensure my cost of goods remains in line. The cost of goods should be 30% of gross sales. I would also evaluate the number of frames in your optical every 6 months. The first several years of practice I collected frames. Each year I would buy more inventory and it would accumulate until I had more frames than necessary. Most ophthalmic consultants recommend a 3x a year turn. By reducing your cost of goods, you may be able to pay yourself more.
8. Loan Payoff
When I finish paying off a loan whether student or business loans, I add that amount to my monthly salary. This is my favorite way to increase my salary!
While it is often difficult to know when and by how much to increase your salary as the business owner, paying yourself what you are worth is important for your health and your practice’s health. An educated decision can be made by practice owners when they evaluate both current pay and key elements of their business.