Sharing pay, control,
and other stuff
William P. Prescott, Esq., EMBA
GROUP PRACTICES need to consider compensation allocations, decision-making
control, dispute resolution mechanisms, employment of family members, and real
ALLOCATION OF COMPENSATION
Compensation, bonuses, direct business expenses, benefits,
and insurances are usually allocated in one of five ways:
( 1) by the respective collections or productivity of one owner
as a percentage of the collections or productivity of all
owners, whereby operating expenses may or may not be
equally shared; ( 2) by pro rata ownership percentage;
( 3) by administrative and management responsibilities;
( 4) by the number of days or half days worked; or ( 5) by a
It is common to calculate yearly or quarterly compensation by the sum of the available compensation multiplied
by a percentage, the numerator of which is the percentage
of the respective owner’s collections as a percentage of all
owners’ collections, and the denominator of which is the
collections of all owners. Operating expenses are not usually equally allocated but paid by the practice. The result
is that the owner is paid profit equal to the percentage of
owner collections for which the owner is responsible. For
example, if Dr. Senior collects 60% of owner collections
and Dr. Junior collects 40%, Dr. Senior receives 60% of the
profit and Dr. Junior receives 40% (table 1).
However, if operating expenses are allocated equally to
owners on the basis of ownership, profits are still distributed
as a percentage of the collections of the respective owner
as a percentage of the collections of all owners. The result
is much different for the owner(s) with the lowest collec-
tions than for the owner(s) with the highest collections. In
Table 1, practice collections are $2,000,000, owner profit in
all forms is 40% of practice collections, Dr. Senior’s collec-
tions are 60% of owner profit, and Dr. Junior’s collections
are 40% of owner profit. Where overhead is equally allo-
cated, Dr. Senior receives 75% of the owner profit, and
Dr. Junior receives 25%.
An alternative to an equal overhead allocation is to
allocate 60% of owner compensation on the basis of respective collections and 40% to ownership. The compensation
allocations include hygiene and associate profit. Either
way, monthly or biweekly draws, direct business expenses,
insurances, and benefit costs are subtracted from the yearly
or quarterly profit allocation.
Irrespective of the compensation allocation used, an
example should be attached as a schedule to the shareholder employment agreements or multimember operating
agreement and agreed to by the CPA for the practice.
Without the CPA’s involvement in the compensation calculations, profit may be distributed differently than the
formula agreed upon, which can cause a significant dispute
when discovered at a later date.
Decision-making control can be equally allocated among the
owners or vested in one owner or more under a particular
state’s close corporation or shareholder agreement statutes.
Only a handful of states have such a statute in effect.
1 In the
states that do, Dr. Senior can avoid the necessity of retaining
a 51% ownership interest in the practice for maintaining
control or the use of a separate class of stock for voting and
nonvoting interests. If the practice operates in a corporate
format under such a statute, operational control or the “
tie-breaking” vote can be vested in Dr. Senior as long as Dr. Senior
owns at least one share of the professional corporation’s stock.
Future voting control can also be allocated to the other owners on the basis of seniority or by some agreed-upon method.
For those practices operating as limited liability companies,
management control can usually be allocated in accordance
with the operating agreement, depending upon the state.