Compensation Agreements

 

Introduction

An optometrist’s compensation agreement can encompass various calculation methods, each tailored to align the interests of the optometrist and the practice. Some compensation models may include a base salary with commission or bonuses based on production incentives or other performance factors. This approach offers financial security while rewarding performance. For instance, an optometrist might receive a fixed salary plus a percentage of revenue exceeding a certain threshold. ​There no define rules as to how a Compensation Agreement structured to meet the needs of the Practice as well as the doctor. Understanding these models is crucial for both parties to ensure transparency, motivation, and financial viability.

Below are the primary forms of compensation calculations commonly found in optometrist employment contracts:​

Salary-Based Compensation

A fixed annual or monthly salary provides stability and predictability. This model is often preferred in settings where patient volume is consistent, and the emphasis is on comprehensive care rather than sales.​

An example of Commission-Based Compensation for an associate OD is outlined below.

• An associate doctor’s salary is based $500 per doctor day or $130,00 annually.

Commission-Based Compensation

Optometrists can earn a percentage of the revenue they generate, which may include a percentage of fees from eye exams and other clinical services or a share of profits from eyewear or contact lens sales or any combination of the two. This model incentivizes higher productivity and sales but may introduce income variability. ​

An example of Commission-Based Compensation for an associate OD is outlined below.

Assumptions:

• • Practice Annual Revenue: $1,000,000

• Medical Exam Fees: 60% of total revenue ($600,000)
• Retail (optical sales): 40% of total revenue ($400,000)

Associate Optometrist Commission Structure:

• 18% commission on medical exam fees
• 5% commission on retail (optical) sales

Compensation Calculation:

+ Commission from Medical Exams = $108,000

Calculation: Medical Exam Revenue x Commission Rate = $600,000 x 8% = $ 108,000

+ Commission from Retail Sales = $20,000

Calculation: Retail Revenue x Commission Rate = $400,000 x 5% = $20,000

= Total Annual Commission-Based Compensation = $128,000

Calculation: Medical Exams Commission + Retail Commission = $108,000 + $20,000 = $128,000 

Productivity-Based Bonuses

Productivity models may to bonuses tied to specific performance metrics as incentives for seeing a certain number of patients, for achieving predefined revenue goals, or rewards for high patient satisfaction scores or low return rates. ​

An example of Productivity-Based Bonus Compensation for an associate OD is outlined below.

Practice Assumptions:

• Total Annual Revenue: $1,000,000
• Annual Patient Volume: 4,000 patient visits/year (approx. 80/week)
• Average Revenue per Patient: $250

Compensation Structure:

• Base Salary: $100,000 annually
• Performance-Based Bonuses:

• • • Patient Volume Bonus: $5,000 for exceeding 4,000 annual patient visits.
    • Revenue Achievement Bonus: $7,500 bonus for achieving annual practice revenue above $1,000,000.
    • Patient Satisfaction Bonus: $3,500 for achieving an average patient satisfaction score ≥ 90%.

Compensation Calculation:

 + Base Salary $100,000

+ Patient Volume Bonus: $5,000

• Target: 4,000 patient visits/year
• Actual Visits Achieved: 4,300

Calculation: Target (4,000) was exceeded; 5,000 was awarded.

+ Revenue Achievement Bonus: $7,500

• Revenue Target: $1,000,000
• Actual Revenue Achieved: $1,075,000

Calculation: Revenue exceeded target revenue; $7,500 bonus was awarded.

+ Patient Satisfaction Bonus = $3,500

• Target Satisfaction Score: 90%
• Actual Satisfaction Score Achieved: 92%

Calculation: Patient satisfaction exceeded target; $3,500 bonus was awarded.

= Total Compensation = $116,000

Profit-Sharing Arrangements

Optometrists may receive a portion of the practice's net profits, aligning their interests with the overall success of the Practice. This model is more common in partnerships or practices aiming to foster a long-term commitment to the Practice. ​

An example of Profit-Sharing Compensation is outlined below.

Practice Assumptions:

• Revenues $1,000,000
• Net Profit $150,000

• • Two doctor practice operated as a Partnership
  • Doctor A owns 75% and Doctor B owns 25%

Compensation Structure: 

• Base Salary: $100,000 annually for each partner
• Net Profits divided based on a percentage of ownership

Compensation Calculation:

• Doctor A Compensation

Base Salary = $100,000

+ $150,000 (Net Profit) x 75% (Ownership %) = $112,500

Total Compensation = $212,500

• Doctor B Compensation

Base Salary = $100,000

+ $150,000 (Net Income) x 25% (Ownership %) = $ 37,500

Total Compensation = $137,500

Percentage of Collections

Compensation based on a percentage of actual collections rather than billed charges. This model accounts for factors like insurance reimbursements and patient payments, providing a realistic reflection of revenue. ​

Review of Optometric Business

Practice Assumptions: 

• Revenues $1,000,000
• Two doctor practice. Doctor A generates 60% of revenue and Doctor B generates 40% of revenues.

Compensation Structure: 

• The doctors are each paid based on 17% of revenue produced.

Compensation Calculation: 

• Doctor A Compensation = $102,000

Calculation: $1,000,000 (Total Revenues) x 60% (% Doctor A Generates Revenues) = $600,000 ($ Doctor A Generates Revenues). $600,000 ($ Doctor A Generates Revenues) x 17% (Compensation as % of Production) = $102,000 (Doctor A Compensation)

• Doctor B Compensation = $68,000

Calculation: $1,000,000 (Total Revenues) x 40% (% Doctor B Generated Revenues) = $400,000 ($ Doctor B Generated Revenues). $400,000 ($ Doctor B Generated Revenues) x 17% (Compensation as % of Production) = $68,000 (Doctor A Compensation)

When structuring or considering entering into a Compensation Agreement, it is essential to consider factors like practice size, patient demographics, and long-term goals. Tailoring the compensation model to fit the specific context ensures mutual satisfaction and promotes the practice's success.

If you have any questions regarding this information or an evaluation of your Practice, please feel free to contact Ken Ferreira, Chief Executive Officer at Vision One Credit Union, kferreira@visionone.org.

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