Ep. 30: Creating a Bonus Plan for your Dental Practice
A bonus plan is a great way to motivate your team and reward them for their hard work, but if you structure it the wrong way, it can create problems. So in this episode, Jeff discusses some “do’s and don’ts” and example bonus plan systems to make sure both the owner and the staff win with your bonus plan.
Topics:
:47 – The “do’s and don’ts” of creating bonus plans
9:02 – Example of a workable bonus plan
14:23 – Ensuring the practice owner and the staff both win
20:08 – Adding special one-off bonus game like group trips or extra year-end bonuses
Links:
Overhead Sheet - https://www.mgeonline.com/overhead-materials
Sample Bonus Plan Ideas - https://www.mgeonline.com/bonus-plan-ideas
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Questions From This Episode
Why should an office-wide bonus be based on collections rather than production?
Because a practice can only actually pay staff with money that's genuinely come in the door, not treatment that's been diagnosed or even scheduled but not yet paid for. If everyone is doing a good job, that naturally shows up as collections anyway, so basing the bonus on production risks paying out real money the practice hasn't actually received yet.
Why does the bonus threshold need to be set well above actual overhead, rather than right at breakeven?
Because overhead alone doesn't leave any room for variable costs, retiring debt, or genuine financial cushion. If overhead is $80,000 a month, the bonus threshold should start meaningfully higher, at least $95,000, so the practice still has real breathing room even in a strong collections month before any bonus gets paid out.
What should you do if you need to raise the bonus threshold partway through the month?
Let the current month finish under the original rules the team already agreed to, and only apply the new, higher threshold starting the following month. Changing the terms mid-month, even for a legitimate reason like a new hire raising overhead, reads as unfair and can seriously damage staff trust and morale, even if honoring the original terms costs a bit more in the short term.
How does Jeff recommend actually distributing a collective bonus among staff?
Using a simple share system, where each staff member gets one share and someone like the office manager might get two, then dividing the total bonus pool by the total number of shares to get a per-share dollar value. It's simple enough for any team to understand at a glance, while still letting a practice weight it slightly toward more senior roles.
Should a staff member already on an individual incentive plan also participate in the overall office bonus?
Generally not if that individual plan already pays them well, since stacking two separate bonus systems on the same underlying performance is effectively double-dipping. If someone like a treatment coordinator already earns a percentage of what they personally close, running the actual numbers is the only way to know whether adding them to the office-wide bonus too still makes financial sense.
Episode Transcript
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Creating an incentive or bonus plan for your practice is an excellent way to make your office more consistently productive. It motivates your team to take a genuine stake in the practice, lets them share in its success, and gives both you and them more income potential. Even better, it's genuinely not that hard to put a system like this in place, and in a competitive labor market like we have today, it gives you one extra edge to offer prospective and current staff.
That's what I want to cover this week: how to create an incentive or bonus plan for your practice. My name is Jeff Blumberg, and I'm your host. I've structured this into two parts, first the basic rules and theory behind building a working incentive plan, what works and what doesn't, and then a sample plan you can adapt for your own practice. To keep things focused, I'm covering an overall office bonus system here, not individual, job-specific incentives like giving a hygienist a percentage or a treatment coordinator a cut of whatever they close, I'll cover those individual incentive structures in a future episode.
Generally, an overall office bonus breaks down into two categories. The first is an occasional, one-off bonus tied to a specific goal or specific month, an end-of-year push, for instance. The second is a regular, standard incentive built directly into your practice's business model, something you're running every month, sometimes with an additional quarterly or annual incentive layered on top. I'm personally a bigger fan of a consistent bonus structure with an occasional one-off or jackpot-style game to spice things up now and then, maybe a special push toward year end. But I think a consistent, ongoing structure genuinely belongs as a standard part of your practice, especially for ambitious team members who want a real opportunity to earn more.
As you set a system like this up, there are a few important points to keep in mind. First, why are we doing a bonus in the first place? You're already paying someone for the work they do, so paying them more should reflect genuinely higher productivity, that's the whole premise. Second, if you're paying out a bonus and you, the owner, haven't made more money, or you've actually made less, that simply doesn't work. Everyone has to win in a bonus system, not just the doctor, and not just the staff.
Which brings us to what you're actually basing the bonus on. I've seen bonuses tied to new patients, say $25 for a staff member who refers a new patient into the practice, that's fine on its own. I've also seen bonuses tied to production, which I don't think is a good idea. An overall staff bonus should be based on collections specifically. If everyone's genuinely doing a good job, that naturally shows up in collections anyway, and you can only actually pay people with money that's come in, not with production that hasn't been collected yet. Basing it on production risks paying out a bonus when the practice doesn't actually have the money to cover it.
That raises another question: what if a staff member is already on an individual incentive plan? Say you have a treatment coordinator earning a percentage of whatever they personally collect. I wouldn't necessarily also put them on the overall staff bonus, that's a bit of double-dipping. Same logic for a hygienist already on a percentage structure. You don't want someone earning two separate bonuses off two different systems. If an individual incentive already pays someone well, they may simply not participate in the overall bonus plan. If it's a smaller incentive, you'd need to actually run the numbers to see what makes sense.
Which brings me to the numbers specifically, and this is genuinely one of the more important parts. Before releasing any bonus plan to your team, no matter how good it sounds in theory, you have to game the numbers out first. You need your overhead, which I'll get into, and you need to model out exactly how much you'd pay in bonus at different collection levels, and what that leaves you. You don't want to release a bonus system that works out fine for your team but leaves you regretting ever having done it.
So, you absolutely need to know exactly what your overhead is, including properly paying yourself as the owner doctor. And by paying yourself, I mean actually paying what you genuinely need to live comfortably at home, not a token salary. Some doctors pay themselves a base salary and then take profit distributions monthly or quarterly, needing both to actually cover their living expenses. If that's your situation and you only count the salary portion in your overhead calculation, that's an inaccurate overhead figure, since you're building your bonus system on a number that doesn't reflect what you genuinely need to live on. Make sure your real, full living requirement is built into that overhead number.
If you want help figuring out your overhead, we have a download on the episode page, the MGE Overhead Sheet. It's thorough, covering essentially every expense category in a dental practice, including semi-annual expenses that are easy to forget when doing quick mental math, malpractice insurance, for instance. It's available in both an analog and a digital spreadsheet version. If you're having trouble working through your own overhead, you're welcome to email us for a free consultation or fill out the contact form on MGE's website.
Once you know your overhead precisely, here's the key rule for a collections-based bonus system: your bonus threshold has to exceed your actual overhead by a considerable amount. Say your real overhead, including properly paying yourself, comes to $80,000 a month, that figure covers everything. Now you want to set up a bonus for your team. Here's the important part: don't sit your team down and explain that overhead is $80,000 but the bonus threshold is something else, just give them the bonus number directly. This isn't about hiding anything from a bad staff, you could have the best team in the world and this distinction still matters. We cover this in detail in our finance seminar, but the short version: if overhead is $80,000, your bonus threshold should be at minimum $95,000, since that still leaves room to cover variable expenses, retire debt, and maintain genuine financial control.
Last point on bonus theory before we get into a concrete example: have clear, explicit guidelines for how someone actually gets onto the bonus plan, especially new hires. That might mean a minimum length of employment, completion of certain training, or hitting a specific performance level first. Work with an employment attorney on this if you have one, and I'd genuinely recommend every small business owner have one, they're not as expensive as people assume. It's far better to spend a modest fee having someone review your employee manual or policy upfront than to get something wrong and discover it costs tens of thousands later. Whatever your policy is, make sure it's clear and consistent, so a new hire knows exactly what qualifies them to join the bonus system.
Now let's walk through a simple system you could adapt for your own practice. We have a download called Sample Bonus Plan Ideas on the episode page that walks through this with real numbers, I'll keep the actual figures here simple since this isn't a video and numbers can get hard to follow purely by ear.
Say your overhead is $80,000, and you've set your bonus threshold at $95,000. Here's how it works: anything collected over $95,000 in a given month, the team gets 20 percent of that amount, less a 30 percent deduction for variable costs. I know that sounds a little convoluted at first. To simplify it, that math actually works out to roughly 14 percent overall. So essentially, anything above the bonus threshold, the team gets about 14 percent of it, I just walk through it with the variable-cost step included so you understand where that 14 percent actually comes from.
Let's run an actual month. Say the office collects $120,000. Our bonus threshold is $95,000, so we're $25,000 over that threshold. First, we subtract 30 percent for variable expenses, 30 percent of $25,000 is $7,500. Will it genuinely cost 30 percent in variable expenses? Probably not, but here's why we build that in: if the practice was averaging $98,000 a month and suddenly jumps to $125,000, you're going to see higher material costs, lab fees, and supplies that month. That 30 percent variable buffer accounts for that, and when it comes to your own finances, it's always better to have more cushion than you strictly need.
So, $25,000 minus that $7,500 variable buffer leaves $17,500. We then take 20 percent of that $17,500, which comes to $3,500, and that's your total staff bonus pool for the month. To recap: $120,000 collected, $95,000 threshold, $25,000 over threshold, minus 30 percent variable buffer ($7,500), leaves $17,500, take 20 percent of that, $3,500 total bonus pool.
Now, how do you actually distribute that $3,500? You'd establish this before rolling out the system, but here's a simple approach: every staff member gets one share, and someone like the office manager might get two shares. Say you have six people on the bonus system, one of them the office manager. Five staff members each get one share, the office manager gets two shares, seven total shares. Divide the $3,500 by seven, and each share is worth $500. Every regular staff member gets a $500 bonus, and the office manager, with two shares, gets $1,000.
How you actually pay that out, as part of a regular paycheck or separately, and how overtime rules might factor in, is genuinely a question for your accountant and employment attorney, that's outside what I can advise on directly. But in this example, your team each earned an extra $500, and your office manager earned an extra $1,000, for a total payout of $3,500.
Now let's look at how the doctor made out. The office collected $120,000. Overhead was $80,000, and remember, that figure already includes paying the doctor exactly what they need to live comfortably at home, not half of it, the full amount. We set aside $7,500 for variable expenses, and remember, you likely won't spend the entire $7,500, that's a safety buffer. We paid out $3,500 in bonuses, plus whatever employment taxes apply to that payout.
So total spend in this scenario runs somewhere between $91,000 and $93,000: the $80,000 overhead, up to $7,500 in variable costs, and $3,500 plus tax in bonuses. Against $120,000 collected, that leaves roughly $27,000 to $29,000 left over, on top of the doctor already having been paid well at home through that $80,000 overhead figure. That's close to $300,000 a year in additional profit on top of a comfortable personal income, and the team walked away happy too, five staff members with an extra $500 each, and the office manager with an extra $1,000.
As for actually rolling this out to your team, keep it simple. I wouldn't explain the underlying overhead calculation or how the bonus threshold was derived, just present the bonus level directly: anything over $95,000, you take 30 percent off for variable expenses and 20 percent of what's left goes to the team, which works out to about 14 percent overall. You can explain that 14 percent framing however you like, but be clear about what percentage the team is actually earning. A simple dry-erase board in the break room showing progress toward that month's bonus threshold works well to keep everyone motivated and engaged.
Now, if you're growing, adding new equipment or new staff, you'll eventually need to raise these thresholds, and there's a right and a wrong way to handle that. How much you raise the threshold by is genuinely subjective, you'd go back to your overhead sheet and game it out again, there's no fixed formula or interval, though I'd personally review overhead at least monthly or quarterly, and immediately whenever I know a new expense is coming.
Say you hire a new employee on the 15th of the month at $3,000 a month. Your overhead just went up by at least that $3,000, plus associated employment taxes and any related costs, computer subscriptions, insurance, whatever applies. So your real overhead might now be closer to $85,000, meaning your bonus threshold, previously $95,000, should move up to $100,000 or $105,000.
But here's the important part: what do you do about the bonus game already in progress that month? My advice: nothing, let it finish exactly as promised. Your team already knows the threshold is $95,000 for this month, let that play out to the end. Maybe in the final week, you let everyone know the threshold is moving up to $100,000 or $105,000 starting next month, so they can finish the game they're already in and start fresh with the new terms next time.
I've seen people change the rules mid-month instead, and I always advise against it. It's genuinely unfair to change the terms on someone in the middle of an active game, and I've seen it create real resentment, even something close to a staff revolt, when handled that way. Finish the current game under the original terms, then apply new terms starting the next period. Even if that costs you a bit more in the short term, it's the smarter move, and it preserves your team's trust and goodwill.
That's the core of a regular monthly system. On the Sample Bonus Plan Ideas download, there's also a slightly more involved version, a three-month structure where staff only receive part of the bonus in the first two months, since they have to sustain a certain level toward the target, and receive the full bonus in month three. My honest recommendation, if you've never run a bonus system before: don't start there. Keep it a simple monthly game at first, get comfortable with the basics, and add complexity later. You also don't want to make it so elaborate that your team genuinely can't follow how it works anymore, I've seen that happen too, where nobody can quite explain what the bonus even is anymore.
Lastly, there's the one-off or jackpot-style game. I've seen clients use this for things like an end-of-year trip or a special milestone bonus. Say a practice normally averages $100,000 a month and, after instituting the regular bonus system, is now consistently closer to $125,000. In the final quarter, you might announce that anything collected over $400,000 for that quarter triggers an additional one-time bonus on top of the regular monthly bonus, an end-of-year push. Again, game the numbers out first to make sure it genuinely works, but this is a nice way to add some extra energy and fun periodically. If you're just getting started with bonus systems generally, run the standard monthly version for a while first before layering something like this on top.
Realistically, there's no real limit to what you can build here if you genuinely know your numbers. And you do have to know them, even if you don't love looking at them, that's simply part of owning a business. I'll leave you with this, less a warning and more a caution, since this is genuinely a fun subject to work with: make absolutely sure any bonus system works numerically before you release it to your team. Run it through as many different scenarios as you can think of. The worst outcome is rolling out a bonus system, getting everyone genuinely excited about it, and then realizing partway through it doesn't actually work financially and having to change it on people. That's worse than never having done one at all.
So, make sure it genuinely works before you roll it out broadly to your team. I've always been a bit cautious about walking through real numbers on a podcast, but I hope this stayed clear enough to follow, even if you're listening in the car. If you have questions about any of this, email me directly at jeffb@mgeonline.com, or leave a comment on the episode webpage, I'm always happy to help. If you have broader questions, how to actually set a system like this up, how to properly figure out your overhead, you can reach us at MGE for a free consultation at 800-640-1140, or visit us online at mgeonline.com.
And if you enjoyed this episode and want to hear more, take a moment to subscribe or follow wherever you listen. That's everything for this week, I hope this helps, and we'll see you at the next episode.