Suppose you are a four doctor Orthodontic group, of which two of the doctors handle management functions of the practice while the other two provide minimal management services. There is a clear dividing line between the two contributing time, effort, and expertise for management functions such as financial, accounting, real estate (the practice has multiple locations), personnel, systems, etc. and the other two shareholders who do not contribute such services.
As you can imagine, the two physicians contributing such services are now interested in some compensation for their efforts. Everyone does not have an issue with this concept until amounts are discussed – $200,000 each! The physician suggesting this is basing it on the fact that the $200k only represents 4% of revenue. He is proposing a differential in base pay – $400k for non managing shareholders and $600k for them. Is there a different solution?
I have long used a “management fee” to the principal/s who maintain and direct the management of the practice. It is a better definition for the intent of a value to a managing principal to offer the management fee as a percentage of profit, not of revenue. Mine has ranged at 4% or less of practice profits first allocated to the manager/s. I realize that “management is work” and does deserve compensation. The real measure of his/her performance is the direction of profit of the entity, which is shared by all under some fair distribution of earnings formula. Assume that total revenue is $5,000,000 – at a 55% overhead, the profit would be $2,250,000. The management compensation would be $90,000 at 4% (total value). Each management doctor would receive $45,000 annually for this directed service. The dollar value of the percentage will vary based upon the fortunes of the practice. I consistently recommend that the most adept owner continue that responsibility as long as he/she agrees to serve. There is no business justification to “rotate” this position, or to rotate the officers for that matter. Such is usually ego gratification more than management skills.