Ep. 13: Is Your Payroll Too High?
Do you feel like your payroll is too high? Well, let’s get into the numbers and actually calculate it. It is typically the largest expense category in your overhead—especially in this era of high inflation and rising personnel costs—so keeping it under control is vital for profitability. In addition to the numbers, Jeff will also cover the reasons WHY your payroll has gotten too high and how to fix it.
Topics:
0:45 – What SHOULD your payroll be, as a percentage of your total revenues?
6:25 – What to do if your payroll is too high
8:59 – 5 things that cause your payroll to be too high and what to do about them
Links:
Overhead Guidelines - https://www.mgeonline.com/overhead-materials/
Learn more about MGE - https://www.mgeonline.com/
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Questions From This Episode
What's the actual payroll percentage benchmark, and what does it include or exclude?
In the US, payroll should not exceed 22.5 percent of collections, including employer payroll taxes but excluding the owner doctor and any associate doctors entirely. In Canada, the benchmark is 20.9 percent of gross wages, not including employer payroll taxes, since provincial requirements vary too much to give one universal number.
How do you actually calculate your own payroll percentage?
Average your last three or four months of payroll, excluding doctor and associate compensation, then average the same months of collections, not production, since production can't actually be used to pay staff until it's collected. Divide the average payroll figure by the average collections figure to get your real percentage.
If payroll is running too high, how do you calculate what collections should actually be to justify it?
Divide the current payroll amount by 22.5, then multiply by 100. A practice with $37,000 in monthly payroll, for example, would need to be collecting $164,444 a month to keep that same payroll at a healthy 22.5 percent.
Why does heavy managed care participation push payroll out of range even when staffing itself hasn't changed?
A discounted PPO fee doesn't come with a matching discount on any of the actual costs behind it, the assistant's time, the lab bill, the rent, so the practice absorbs the entire hit alone while collecting far less revenue for the same work. That artificially suppressed revenue is exactly what payroll gets measured against, so the percentage climbs even though nothing about staffing actually changed.
What's the difference between misallocated personnel and genuinely underproductive personnel?
Misallocation means the practice has enough people overall, just distributed in the wrong places, three doctors and six hygienists sharing a single receptionist, for example, so the fix is redistributing existing roles rather than replacing anyone. Underproductive personnel is a specific individual not delivering what their role requires, which sometimes comes down to poor training or a disorganized practice rather than the person's own ability, and only after ruling that out does it become a genuine staffing decision.
Episode Transcript
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Do you ever get the feeling that your payroll is too high, and how high is too high? And if it is too high, what should you actually be doing about it? That's what I want to talk about in this week's episode of Dental Business Rx: what your payroll as a percentage of revenue should be, how to figure out where you currently stand, and, if you find your payroll is too high, the primary reasons that tends to happen and what to do about it.
Managing dental overhead is really a game of percentages, certain expense categories shouldn't exceed a certain percentage of revenue. We have a handout that lays out the appropriate range for each expense category, we call it the Overhead Guidelines, and I'll link it on the episode webpage. Let's go straight to the payroll category.
On our overhead guidelines, payroll as a percentage of revenue should not exceed 22.5 percent. A couple of qualifiers here. That 22.5 percent does not include the doctor or any associate doctors, it's strictly your staff, hygienists, office manager, front desk, and so on. It does, however, include payroll taxes, the FICA you pay, Social Security and Medicare, that 7.65 percent on top of an employee's salary is included in that 22.5 percent figure. So to reiterate: payroll, including payroll taxes but excluding the doctor and associate doctors, should not exceed 22.5 percent.
If you're listening from Canada, and we do have a lot of Canadian clients, I wasn't able to land on one universal payroll percentage, since it varies provincially. But here's a working number: for a Canadian dentist, payroll excluding the owner doctor and associates should not exceed 20.9 percent of revenue, not including employer payroll taxes like the Canada Pension Plan, Employment Insurance, or employer health tax. So 20.9 percent on gross wages alone.
So if you're a US doctor collecting $100,000 a month, your payroll shouldn't exceed $22,500. I bring this up because a lot of the newer clients we see are typically running in the 25 to 30 percent range, unless they're genuinely understaffed as a result of the last couple of years, meaning they used to have three people at the front desk and now have one simply because they can't hire anybody. In that case, their payroll percentage looks artificially low, but their revenue tends to suffer proportionally too, so the percentage sort of works itself back out. But for the most part, the newer clients we see are running 25 to 30 percent, and that's not where you want to be. 22.5 percent is the target.
So how do you figure this out for your own practice? First, get a couple of real averages. I'm a big believer in using a genuine period of time for financial calculations, not just one month, at least three months, four is even better, so you can see sustained performance rather than a single unusual month.
Take three or four months of payroll and the same months of collections. Say you're recording this in November, so you'd pull August, September, and October. From the payroll figure, subtract any doctor or associate compensation and related taxes. I won't get into the finer points of payroll tax cutoffs here, let's keep it simple, just remove doctor and associate compensation from that payroll number, then average it out. Do the same with your collections for those same months.
Here's an example: say your payroll, excluding doctor and associate compensation, was $37,000 one month, $38,000 the next, and $36,000 the month after that, totaling $111,000. Divide by three for an average of $37,000 a month, that's your average monthly payroll.
Now let's look at collections, and I want to be clear here, this needs to be collections, not production. You can't pay staff with production, production is great, but until you've actually collected it, it's not usable for payroll purposes. So say your collections over those same three months were $140,000, $136,000, and $138,000, totaling $414,000, an average of $138,000 a month.
So we have an average payroll of $37,000 and average collections of $138,000. Divide $37,000 by $138,000, and you get a number less than one, in this case 0.268, or 26.8 percent. In this example, that's too high, since we want to be at 22.5 percent, we're instead at 26.8 percent, 4.3 points too high. Looking at the raw numbers, that 4.3 percent of collections works out to almost $6,000 a month, or nearly $72,000 a year, in excess payroll cutting directly into profit.
If you're like most doctors, your payroll percentage is probably running too high too, unless you're genuinely understaffed or you've simply been very disciplined about managing it. If your payroll is too high, here's a useful follow-up calculation, something I do regularly with clients since I've reviewed a few thousand overhead sheets over the years. If your payroll is too high relative to your current collections, what should you actually be collecting to justify that payroll?
Here's the formula: take your payroll amount, in our example $37,000, divide it by 22.5, then multiply by 100. So $37,000 divided by 22.5 gives you 1,644.44. Multiply that by 100 and you get $164,444. In other words, that $37,000 in payroll represents 22.5 percent of $164,444. So if you're paying $37,000 a month in payroll, excluding the doctor, you should be collecting $164,444 a month to keep that at a healthy percentage. In our example, the doctor is only collecting $138,000, solid collections on their own, but the expense side is out of proportion.
So if you run these numbers and find your payroll is running at 29 or 30 percent, what should you actually do about it? When I show clients this, the instinct is often, should I just start letting people go? Not necessarily. I'm not saying you shouldn't, there are certainly cases where a specific staff member is genuinely causing problems, poor customer service and so on, but that would be my last resort, and I'd only let someone go if they're genuinely not performing. There are usually a handful of other things contributing first. Let's look at the five most common culprits that push payroll too high.
Number one: too much managed care, too many reduced fee plans, PPOs, HMOs. I covered this in depth in episode seven on dropping insurance plans, so I won't rehash all of it here, but let's look specifically at the financial mechanics. Say your normal private fee for a crown is $1,400, and you're doing that same crown for $800 under a plan, a roughly $600 hit, nearly 50 percent. The idea that you can simply make it up in volume doesn't actually hold up, because your assistant isn't taking a pay cut to help you with that crown, your lab isn't charging you less because it's a PPO patient, your landlord isn't discounting your rent for that chair time, and your scheduler didn't do anything differently to book that appointment. You're the only one absorbing that hit.
So heavy managed care participation artificially suppresses your revenue, while none of your other actual expenses come down to match it. Going back to our earlier example, if that practice collecting $138,000 with $37,000 in payroll were instead collecting at full fee, say $170,000, the percentages would work themselves out naturally. Managed care throws off payroll and plenty of other expense categories as a percentage of revenue, precisely because you're bringing in less revenue for the same amount of work. That's culprit number one, and I'd genuinely recommend going back to episode seven if you haven't already, getting out of these plans is something worth pursuing.
Number two: poor case acceptance. You might be thinking, Jeff, this is a staffing episode, why are we talking about case acceptance? I'll get to the three staffing-specific culprits next, but poor case acceptance drives your payroll percentage up too, because it directly suppresses the revenue that percentage is measured against, and I mean that you genuinely should be making more, not simply that it would be nice if you did.
Here's an example. Say you're presenting a case, six crowns, at $1,200 a crown, a $7,200 treatment plan. Say that presentation takes you 20 minutes, and at the end the patient does nothing, or, as happens often, says the six crowns sound great but they only want to do what insurance covers this year. Insurance has a $1,000 or $1,500 annual maximum, fully covering two of those crowns. So in that same 20 minutes, you've closed $2,400 worth of treatment instead of $7,200.
If you got a bit better at treatment presentation, that exact same 20 minutes could turn into the full $7,200 case instead, no additional time required on your end. That might sound like a stretch if you're not familiar with how this actually plays out, but we see it constantly with clients, once they genuinely improve their communication skills, which we teach in the MGE Communication and Sales Seminars, it's not nearly as difficult as it sounds.
There's also a real trust dimension to this worth mentioning. If you tell a patient they need six crowns, and they hesitate and ask what insurance will cover, you explain that insurance will fully cover two, and they say they'd rather just do those two for now and handle the rest next year, think about what that actually communicates. You spent real time explaining why all six crowns mattered, and thirty seconds later, the patient tells you they're only doing two, and you simply agree. From the patient's perspective, that raises a real question: if the other four weren't actually important enough to insist on, how important are the two we're actually doing? I'm not saying phased treatment never happens, it will, but it shouldn't be a purely insurance-driven decision, it should be a health-driven one. Poor case acceptance lowers your revenue, and since payroll is measured as a percentage of that revenue, it pushes your payroll percentage too high even though nothing about your staffing changed.
Now let's get into the three staffing-specific issues. Number three: paying the person instead of the position. Say the going rate for a receptionist in your area is $20 an hour, but you have a receptionist who's been with you seven years and is now making $30. You'll see this especially in practices that have been around 30-plus years, with long-tenured employees who've simply received incremental raises year after year, sometimes to the point where your receptionist is earning more than your dental assistant.
This becomes a real problem because every position in your office only carries a certain amount of actual value, regardless of how good the person in that role becomes. I'm not saying staff shouldn't be paid well, and I'm a genuine fan of incentive programs, since those let everyone benefit when the practice does well. But from a base salary standpoint, which you're on the hook for regardless of performance, there's a real ceiling for each position. Take hygiene pay as an example, it's climbed dramatically. I was talking with a doctor recently whose area averaged $40 an hour for hygienists back in 2019, and it's now $56, close to a 40 percent increase.
So every position carries a low end and a high end. Say your ceiling for reception in your market is $25 an hour. Once someone hits that ceiling and wants to keep earning more, you have two real options: an incentive program tied to practice performance, or genuine upward mobility, moving them into a role with more responsibility as your practice grows. But if you keep paying the person rather than the position, indefinitely raising their base pay regardless of what the role is actually worth, your payroll as a percentage will eventually go out of range. If you're unsure what a given position should actually be earning in your area right now, salary.com lets you check by zip code and role, giving you a low, median, and high range. I'm not certain how current their figures are given how quickly wages have moved recently, but it's a reasonable starting point.
Number four: misallocation of personnel. Picture a practice with three doctors, six hygienists, eight dental assistants, and one person at the front desk. That single front desk person simply cannot keep three doctors and six hygienists fully busy, there aren't enough hands to make the necessary calls and manage that volume. That practice is going to underproduce relative to its actual capacity, and since it's carrying a lot of higher-cost clinical personnel already, its payroll percentage will climb as a result. That office needs more people up front, and possibly fewer in back.
I've also seen the reverse: an office manager, a financial coordinator, a receptionist, and a scheduler, all supporting just one doctor and one assistant, with that doctor essentially running between three chairs alone. That practice likely needs another hygienist and possibly one fewer person up front. When you have too many people concentrated in one area and not enough in another to actually support the practice's real capacity, your payroll as a percentage gets thrown off. This connects to broader questions of organizational structure, genuinely worth its own separate discussion, but that's culprit number four.
Number five: underproducing personnel. Say someone is supposed to be producing a certain result, and they're only delivering about half of it, half the reactivation calls they should be making, a low collections percentage if that's their role, whatever it may be. There are a few different reasons this happens. Sometimes it's simply that the person isn't a strong fit, we've all encountered this, a practice of ten people who all get along well, and a new eleventh hire ends up stirring up conflict with everyone. That person likely isn't the right fit for your practice. I'm not an employment attorney, a tax attorney, or an accountant, but I'm confident saying that what matters most with personnel isn't who they know or even their level of experience, it's whether they can actually perform. If someone is performing, that's exactly why they're there. If they're not, that's where real problems start.
By performing, I simply mean doing what's genuinely expected of them. But underproduction isn't always about the individual's own ability, sometimes it comes down to poor training, or a disorganized, inefficient practice. I've seen this constantly, in a lot of cases, someone labeled as non-productive actually has the underlying ability, the real issue is that the practice's structure isn't set up for proper training and onboarding in the first place. The large majority of people you hire, I'd say around 80 percent, genuinely want to do a good job. It's your responsibility to actually equip them to do that, through proper training and clear information.
I try not to turn these episodes into a pitch for our services, but this is exactly where the MGE Power Program comes in, training for the doctor and office manager that covers how to organize and manage the practice, and how to properly onboard and train staff. We also offer an online platform, DDS Success, with dedicated training for schedulers, treatment coordinators, and other roles, to get people productive as quickly as possible. Because most people genuinely want to do well, but if you're dealing with a truly non-productive employee, or a training and organizational gap that's making someone non-productive, your payroll as a percentage is going to run too high, and your office will be underproducing relative to what you're paying for.
One last point worth making here. Say you have a receptionist who's genuinely doing a poor job, converting incoming new patient calls poorly, not especially pleasant with patients, and not well liked by the rest of the staff. If you and your office manager keep discussing replacing them but hold off because you'd rather have someone there than nobody, I'll tell you directly, that's not true. You are better off with nobody in that seat than someone actively damaging the practice, you'd be better off having your dental assistant answer the phone in the meantime.
There's a second piece to this too. We talk in one of our seminars about the idea that roughly 20 percent of your patient base will occasionally cause some kind of problem, the same concept applies to personnel. If you have someone who's genuinely causing problems in the office and you keep them on anyway, you're sending a real message to the rest of your team. First, you're creating a genuinely worse work environment, backbiting, drama, and the longer that persists, the more likely you are to eventually lose other good staff who simply get fed up. Second, you're setting a precedent, if everyone can see this person isn't performing and nothing happens to them, what's stopping anyone else from behaving the same way? It's simply not a good dynamic to allow in your practice, and letting it continue will keep your practice underproducing, which drives your payroll percentage even higher.
I've covered a lot of ground here, but I'd genuinely recommend taking a close look at your own payroll percentage and how it's actually playing out in your practice. If you have questions about any of this, we're happy to help, you can reach us here at MGE at (800) 640-1140, or visit us online at mgeonline.com for a free consultation. If you'd like us to take a look at your own payroll and let you know whether it's too high, too low, or right where it should be, we're glad to walk through it with you and help you figure out what's actually driving it. We'll see you at the next episode.