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Transcript
Jason: [00:00:00] three-part series on this topic of compensation. In a prior episode, we sort of unpacked the challenges that the, that the industry faces right now. And so now I think w- we would both agree we're excited to pivot to solutions, uh, because that's where I think the magic happens, and there's so much untapped potential.
So in this episode, Larry, uh, what we wanna do is really unpack what the opportunities are for us as an, an, an industry to actually positively impact, um, uh, retention and recruitment of therapists and to really cause therapists to actually want to stay in clinical care. But before we do that, um, let's start off with the elements of compensation.
I know you've got some great, uh, insight there. I think it's important for our listeners and our viewers to really understand when we talk about compensation, what are we actually talking about? It's not just the amount of money that you're earning. There are other components to that. So walk us through that, if you would.
Larry: Yeah. And, and first I wanna reset the goal. Just like you said, our goal is to keep our clinicians being clinicians and paying them more to be clinicians. Yeah. Because the natural reaction for practice owners is, "I can't pay them more, I won't have any margin." Yep. And so they have to factor in all the indirect costs of recruitment and all these other kind of things, retention and everything.
And if they put a little bit of their, you know, combined section, you know, booth into the payment of their therapists- Mm-hmm ... they probably would be better off. And we're gonna talk about those solutions, but it's [00:01:30] really critical that we have a base level understanding of the elements of compensation.
Yeah. So let's review them thoroughly. The first one is what we call base pay. Okay? Base pay, though, is the primary reward for paying their individual's value to the organization. Mm-hmm. That's what base pay is. You pay for skills and competencies that generate results. Okay? You pay for consistent performance over time.
You pay relative to the market. You know, you have to, the mark- you look at the market. And you pay for generating additional skills and competence. I wanna pause on that point, because we oftentimes forget as an employee and as an employer that part of my base compensation, you know, right now I'm paid by Dental Care Alliance as their CEO.
Part of my pay is to in- increase my skills, talents, and competencies. Yes. So in my spare time, I'm studying AI and I'm doing other kinds of things. If I'm a clinician, in my spare time, guess what I'm doing? I'm going to seminars, I'm going to there and I'm studying. People think that that's an extra pay.
That's part of your base compensation is to improve at what you do. That's base pay. Then you have what I call indirect pay, some would call it benefits, and that's the supportive role. Traditionally, these are benefits that are paid, and they started out in America to be able to pay them because you didn't have to pay tax on them.
So when I get my health insurance, I don't have to pay tax on my health insurance. I get that as a [00:03:00] benefit. It is a way, it's a workaround. Um, you know, tax is life. It's very, very, very, uh, true in, in compensation study. And so that's for subsidized health and maybe dental insurance. It's for your 401match.
It's for your cafeteria plan, liability, malpractice, all of those kind of professional educations. If you have an internal leadership program, which I highly recommend, guess what that is? That's an indirect compensation. It's a benefit. If you have a scholarship payback or an IRS, uh, approved tuition reduction program, there's, there's IRS tax advantage plans for that, and those are good.
Those are great plans, but those are parts of compensation, but they're indirect. Direct base compensation pay for current, you also have base... Or I'm sorry, you also have benefit. But a third component is really important, and that's variable pay. It's largely the most ignored part of compensation for PTs, and that's for perhaps maybe your team results.
Your team produced a certain amount of visits or profits, you share in those results. That's variable pay. That's on top of what you're getting paid. Variable pay could also be I'm paid a base or a guarantee, and then I'm paid a portion of what I produce. That would be an example of variable pay. Um, you know, if you have a certain company expectation, like a lot of, lot of, uh, you know, pr- I probably have 50 people in my organization who have a base pay and then their variable pay is their [00:04:30] end-of-year bonus if we've achieved our company goals- Mm-hmm
whether it be budget and maybe some individual goals, okay? That is variable pay. Not the only, we're still not done with compensation. Then you have what I call celebration or recognition pay. Some people refer to it as fun. These are examples where you'll take a day out of the clinic and maybe go to Churchill Downs.
It's, uh, where you go and have a pizza party or where you go and play Topgolf or where you go... All those are great, they're wonderful, but they're elements of compensation. And, and so if you take... By the way, in that benefit pay, your paid time off, your vacation pay, if you will, whether that be the number of government shutdown days and the number of vacation days.
All of those components create the entire element of compensation. And oftentimes employers only think of base pay and benefit pay. They forget the celebration pay, they forget the variable pay. If they start paying attention, particularly the variable component, um, and compensation analysis and research will tell you, as an employer, if you want to mitigate, go to variable pay.
Mm-hmm. Sales commission for sales folks. They're, in many cases, 100% of their pay is variable pay. They get a percentage of their commission. Commission is the ultimate in variable pay. Mm-hmm. They don't g- even get, in some cases, a guarantee. That's their entire- Mm-hmm ... but for whatever reason in PT, we've only defined it as hourly or as salary, as you alluded to in the last episode.
But we can't [00:06:00] address the s- the challenge with a solution unless we understand all of those elements are what make up compensation.
Jason: Yeah. Yeah. Some of our listeners I'm sure heard what you just detailed- Yeah ... and are thinking, uh, we can't equate sales with physical therapy because physical therapists are not salespeople.
So under what circumstances could I put them on that type of a model? One of the things that I've, uh, said for quite a while now in working in this space and working with practices to help them introduce these models is, first of all, clinicians are salespeople. Because if you can't effectively communicate the value of the services that you're providing, then your outcomes are going to go down, your cancellation rates are going to go up, and there's this sort of snowball that occurs.
So we do need to somehow get therapists in the mindset that you do need to actually effectively communicate the value of the services that you're providing, and that's part of delivering high-quality care. But the other component to that is this idea of paying therapists according to what they're actually generating as a, um, potential negative.
So what is your response to that when you hear therapists, um, that might potentially push back on that approach and say, "If I'm being paid a portion of what I'm generating, I'm, I'm, I am almost guaranteed to be doing unethical things." How would you respond to that?
Larry: Well, there's a lot, lot there to what you, what you just said, and, and we have to take the [00:07:30] perspective of the employee.
We also, I don't know a ton of employers that are offering variable pay. Mm-hmm. But let's start out with the first thing you said, and you're absolutely right. Physical therapy is a relationship management business that happens to be done by a licensed PT, okay? We are interpreters of the body. We are constantly selling, persuasion, tacit knowledge skills.
Yeah. And one of the fair points I have on education in this sort of post, you know, C- COVID hiccup is we deregulated a bit, and so therapists aren't getting enough reps in the clinic before they become, you know, they sit for their license exam, so they're less clinically ready, and they're less clinically confident.
Let's put that on the shelf- Yeah ... 'cause that could be its own podcast, but now let's relate it back to compensation We are not a true doctoring profession. Name me one doctoring profession that does not have variable pay as part of their compensation, and I'm not talking the cherry on the top for achieving the budget.
I'm talking about as their core compensation. If you're a dentist, you're expected to get 25, 30, 35% of what you produce. If you're a doctor, you get paid on an RVU basis if you're a surgeon, perhaps. Or if you're a primary care, you get a percentage of what you produce. You get a salary plus a variable pay.
There are all kinds of flavors, and there's all kinds of hybrids of one another, that we don't even have that inculcated in the culture of a PT. Mm. The culture is you come out and you make an hourly or salary component. I also blame the employers, though, because we don't create normalization around variable pay.
We create normalization about [00:09:00] doing everything we can to take you out of the clinic so that we can pay you more- Yeah ... and we have to reverse that. And I think, um, it's very difficult to change an entire profession into a true doctoring profession overnight, and so we have to do incremental adjustments to it by becoming normal that part of your pay is going to be variable.
We have to then go from part of it is gonna be variable, we're going to have some level of a guarantee floor for you, but you're gonna do a whole lot better under variable, and, and migrate that along a continuum. Uh, so I'm not of the belief we can change it directly. I think we have to do it over time.
But again, what do we do instead? We are so in fear of losing a therapist that, um, if they wanna work 31.5 hours, okay, you can work 31.5 hours. If you wanna do this, I'll... Because they're so in fear, and guess what? They leave anyhow. Yeah. You know, the average therapist stays on their first job less than nine months.
But by the way, PTs, don't be too concerned. I work in the dental world, and the average dentist stays on their first job less than six. Mm. That's their first job. That's statistics, okay? So retention and turnover are part of life. Yeah, you can mitigate it. You absolutely should. You should create a culture and all the things that you should around it, but you're gonna lose folks anyhow.
So don't operate out of this position of fear. Operate out of a position of what's best for the therapist compensation, what's best for the patient, is going to be absolutely best [00:10:30] for what you're doing as a business. Think patient and therapist first. How do I keep my therapist practicing therapy? Pay 'em more, okay?
Don't spend all this money recruiting therapists, sign-on bonuses, scholarship paybacks. What are those? Indirect pay. All of these things that we just mentioned, you're already paying them. Mm-hmm. You're just doing it in a different way. If you took a core set of benefits and you took everything else out and compensated them more, you would be able to have a much better business and a much enlightened, flourishing clinician that is more likely gonna continue to practice for a long, sustainable period of time
Jason: Yeah, and I think the other concept is if you interview a dentist or a physician and you ask them, "What i- what exactly is your pay tied to?"
You would not hear that dentist or that physician say, "Well, my pay is tied to the fact that I treated patients for 36 hours this week." Mm-hmm. It's not tied to hours worked. It's tied to what they produce while they're working, in some respects independent of how long it took them to do that. But one of the things that I've observed, and I'm curious to hear your thoughts on this, is therapists think of pay as a time component.
So my pay is tied to how long I'm working, how many hours I actually work. It's not tied to, in most cases, what I generated while I was working. So part of the value there, when we go back to [00:12:00] burnout, is if a therapist wants to work 34 hours a week and they don't wanna work 40 hours a week, you as an owner could choose to allow them to do that.
Their pay is probably going to go down because they simply can't generate as much revenue in 34 hours as they could in 40 hours or 42 hours. So the advantage of switching to that approach, in my mind, is it frees up your therapist, whether they know it or not, from the, what I would say, are the shackles of thinking about my pay as being tied to hours, because there's only so many hours in the week, right?
And so if I only want to work X number of hours, I should have the opportunity to do that within reason. You can't run a business with everybody that wants to work 18 hours a week, obviously. Yeah. You have to have some parameters around that. But it does give some therapists some flexibility. I would be willing to guess, tell me what your experience is, in the dentistry space, for example, if a dentist in a given week is very busy and has a lot of cases, he or she might work, I don't know, 46 hours or whatever the number is to get all of that work done.
Then in the following week, for whatever reason, they might have less patients on their case list, so maybe that week they work 41 hours or 39 hours. They're not thinking of that as my pay is tied to whether I'm working 34 or 39 or 42 hours. They're thinking of it as my pay is tied to how much I actually generated for the practice.
It... Would you say, in your experience, that's an accurate statement in the [00:13:30] dental space?
Larry: Yeah, it is. But let's not even, let's not even go there towards dentists. Hairdressers, electricians, plumbers, massage therapists- Mm-hmm ... have even figured this out. Mm-hmm. You can't look at your profession as an hourly profession.
Yeah. You can't look at it as a point of fear. Okay? So you mentioned something in the past that therapists are fearful that if they get paid as a production that they're somehow unethical. Mm-hmm. Well, it, it doesn't- nobody's questioning the ethics of a neurosurgeon or orthopedic surgeon or cardiovascular thoracic surgeon getting ready to do a heart transplant surgery that's gonna get paid a percentage of that heart transplant surgery.
Is anybody questioning their ethics? No. I've never heard that- No ... as a challenge. But what we have in the PT world is all these fear points because somebody in Brooklyn or Miami, according to the data, you know, uh, did something illegal, and therefore, we put all these rules into effect that affect the 99% of the PTs that are doing things fine and ethical.
Sorry, Brooklyn and Miami, but that's what the Medicare data has told us. So we can't operate from this point of fear. We have to operate a point of authority- Yeah ... and data and liberation and being able to really allow folks to engage. Um, yeah, I'll give you an example. Uh, think- imagine in your mind if all of a sudden a therapist was paid by, in a production model, what they can create, the innovation around it.
And what if that therapist came back and said, "You know, I could produce more if I had a PTA that worked for me, and I could take [00:15:00] that PT and for my Medicare patients, I could, I could be involved in the care, but it also frees me up to do everything else." So that PTA salary comes from my production, not from your payroll.
Yep. That sounds absurd. Happens every day in an orthopedic practice. Mm-hmm. Orthopedic surgeons were very late to the game in, in being able to adopt nurse practitioners and PAs. You go find a total joint doc where you're going to see the surgeon your first visit or two. You're always seeing the nurse practitioner or the PA.
I'm not recommending that for PT, I'm just giving you the analogy- Yeah ... that that unlocked broad innovation- Yeah ... and expansion of your practice. Think of an environment where now PTs are, who average two new patients a day, are now being able to have their own practice within a practice. That's right. And they are paid according to their overall production model.
You don't need to worry about this patient in a three-week waiting period. I'm working extra to get that new patient in. I'm working through my lunch hour- Yeah ... to do that. Why? Because it's the right thing to do for the patient. The patients have better access. And so we think of the unethical things.
Think of the ethical things, the access, the care, the compassion, the empathy that happens when all of a sudden you've unlocked a therapist to have a broad portion of what they do. Mm-hmm. And that really creates a fun, you know, atmosphere with incredible vibe, um, and, and a much more fun, sustainable workplace than what we have now, which is rules, regulations, hours, units, visits, BI tools, regional directors [00:16:30] coddling on my therapist, telling them who, what, when, where, and how, the opposite of autonomy, mastery, purpose, doctoring profession, the profession where the business supports my clinical role.
This is, I'm a widget maker supporting- You know, by big corporate enterprise.
Jason: Yeah. Nobody wants to be beat over the head with metrics. No. Nobody wants to do
Larry: that. I've never known a PT that went in a, a, to became, f- went to physical therapist to become a PT that wanted to do compliance reports, that wanted to, uh, be told how many times a day through beeps and pagers and BI tools what their productivity was- Yeah
who wanted to be beaten ahead with 11.2 patients per day, um, and y- all those kind of rules, regulations, and, and really went to school to add 15 plus 8 plus 23, plus 8, plus 30, plus 8 to do all this kind of mental gymnastics. It is just ridiculous.
Jason: Yeah. I mean, I want to be sensitive to the fact that folks that are listening to this are gonna recognize, and they're gonna be thinking this, this is a fundamental shift in how we think about- It is
rehab. Um, and it's our responsibility to do this for better or for worse. It would be wonderful. You know, we were talking, you and I earlier, um, where you mentioned that an orthopedic surgeon or a dentist, when they graduate, they fully expect to be paid a function of what they're generating- 100% ... for practice.
It's a fundamental assumption that they have. So there's no deprogramming and reprogramming that has to happen for them. Mm-hmm. For [00:18:00] us, for the rehab industry, for physical therapy in particular, there is. We have to, regardless of, and this is a whole other conversation, where this thought process came from, regardless of that, we as, as, uh, those that are employing these providers, have to deprogram how they think and then reprogram how they think.
That's a whole other topic in how we do that, but I think we've given our listeners and viewers some things to think about there, and some tools. But I do wanna shift over into then what the actual mechanics once we've done that. Mm-hmm. Once we've gotten the attention of a therapist who says, "Okay, I get it.
The time punch mentality is, you know, if I work at a pizza shop, I, I punch in and I punch out. That's how I get paid. I don't wanna get paid that way. I'm a doctor of physical therapy. I went to six or seven years of school. I want to get paid structurally the way a doctor should get paid, and I certainly want to get paid monetarily the way a doctor should get paid."
So I- you've got my interest. Now what does that look like? So let's talk about the mechanics of what that might look like. What are your thoughts there?
Larry: Yeah, so I think, you know, if I was to line this out, and by the way, again, chief guilty officer here, my thinking has evolved over time- Yeah ... because the data is convincing and compelling that less, the minority of PTs that are licensed are actually seeing patients.
Yeah. That ought to scare the hell out of you. Yeah. The second data point is if you ask most PTs, "Do you want your kid to become a PT?" They'll say no. Yes, that's true. Okay. Those two [00:19:30] points are drivers for me and how I think. And, um, I would completely change the pathway model to where... I've always been really good about getting ownership to PTs- 'Cause I think it's really important and the data on a local level is unbelievable.
Clinics that are owned by PTs are better margins, better growth, um, uh, you know, better quality likely it all, uh, because there's just more of a care component there. And so I think you have to, again, look at the holistic side of compensation. So I would get a therapist, train them and upskill them, because your better upskilled procedures actually reimburse better.
Manual therapy reimburses better than a modality by way of, by way of, uh, contrast. And so I would still have this apprenticeship model where they come in to become a master clinician, 'cause I think that's base. I think that's level set. And along the way, I would get them, because you have to onboard PTs, they're less clinically ready and less clinically confident.
So my expectation their first year is only 60 to 70% productivity. What are most practices now? Here's your goniometer and, a- a- a- and, and you go, and I gotta get you, I'm paying you a lot, I gotta get you to max productivity. It's unrealistic. Yeah. And so for that first year, I would pay them probably a guarantee.
Okay? After the first six months, though, I would show them that here is what you're producing relative to what you're paid. Because then they'll know, man, this employer's investing the hell out of me. They're losing money on me. Mm-hmm. You know what? You are. Okay? They're losing money [00:21:00] on me, but they're upskilling me to become a master clinician so that I will migrate at some point to getting a portion of what I produce, which is more than what I'm being paid now, and you know what?
It's win-win for me and the employer. Yeah. And so after that first six months, I would show them for the second six months, and then the second year I would put them on a guarantee, and that guarantee would be exceeded by the variable component. And over time, you wouldn't even need to have a guarantee component, but let's not even go there.
The other thing that I would do along that pathway model is at a certain point, it's, it, it is sweat equity. They are producing... You know, an average PT in the US is producing between 250 and 350,000 in revenues. Well, how do they produce more? If they br- had brought in a PTA or a technician that came under their total comp- Yeah
where they got rewarded for it, they could produce a lot more than 250 to 350. And, and they should receive a portion of it, but I also want them to become an owner in the clinic. And so then their comp becomes their direct pay, variable pay, celebration pay, all those kind of things we talked about. Mm-hmm.
But now, look, I get distributions. Yeah. You know, I get cashflow distributions quarterly, maybe monthly, depending on the type of practice. Oh, and my equity is increasing at a tax-free capital gains basis. So now I've got what I produce, what I, what I kill. I know PTs hate to hear that kind of terminology, but it's a production model, a rev share model.
I get distributions, I have equity, I have a 401for my retirement. I've got the whole [00:22:30] enchilada. Whereas now what we do is we produce Just the ingredients of the enchilada. Mm-hmm. And then I, and then we incent them to get out of the clinic and to move on. But I do believe the culture is such we have to shift it over time incrementally, but strategically, and don't go backwards.
Yeah. If employers don't move to a higher variable base, they're gonna, they're g- they're going to salary themselves out of a business. Yeah. There are too many large PT platforms not making any money right now. They have spends in their TA groups of $1 to $3 million. Imagine if you, if you took the $1 to $3 million spend you have in your talent acquisition recruiting-
booths, prizes at CMS, and you actually shifted it to compensation for your PTs. Yeah. And you're still gonna have probably a 10% turnover, okay? But right now, these practices have 20 to 30% turnover. If they're being honest, it includes- Mm ... voluntary and involuntary, and you get these unprofessional managers that come in, and they only want to convince their board that voluntary turnover is what...
It isn't. You know, if you're interviewing bad therapists that are failing the exam, you sh- get discredited for that. You still gotta recruit for that other involuntary. And so what we have now is churn and burn, and what we need is sustainability and growth and a new model that pays therapists more.
Mm-hmm.
Jason: Mm-hmm. Yeah, one of the things, w- and we have some really good data to back up a lot of what you just said, and [00:24:00] it's very interesting because one of the things that we've observed is, um, what you just described is the ideal end state mathematically, and certainly for the practice, and certainly for the individual.
The challenge is getting the therapist there in their mind, and one of the ways to do that is what you've just described, to not require them on day one to make that decision, but to give them sort of a ramp-up period over time. And it's interesting because the data that we have shows if you, for example, gave a therapist choices, and let's say you gave them three different choices in compensation.
Option number one is to be guaranteed a full salary. Option number two is a somewhat reduced full salary- Mm-hmm ... and a rev share. And let's say option number three is a significantly reduced salary and a higher rev share. So just mathematically speaking, if you had three therapists on those different, on all of th- uh, one on each of those models-
Larry: Mm-hmm
Jason: and those individuals were working shoulder to shoulder with each other and were producing exactly the same amount of money for the practice, exactly the same number of patients, the same billing methodology, et cetera. If the models are structured properly, those three individuals would be earning three different amounts of money.
Yep. The person that's on the salary model would be earning the least. The person who took a somewhat reduced guaranteed base would be earning more, and the person who took the significant reduction in base would be earning the most. If you try to mathematically show a therapist [00:25:30] that on day one- The data that we have shows they won't bite at it, largely because therapists are risk-averse.
But something very interesting happens if you fast-forward two years from that very moment in time. The vast majority of therapists will be on whatever the most risky model is- Uh-huh ... that you're offering. And the reason they're doing that is th- because they're making a data-driven decision- Yeah ... over time.
So rather than you saying, "I'm going to guarantee you a full salary for six months. After that, you gotta choose from one of these variable comp models, and your base is going to drop." If you leave it on the table, and you let the therapist track and watch their own data, eventually they're gonna get there anyway.
Larry: Yeah, yeah,
Jason: yeah. And a lot of owners are afraid to do any of what we're describing for fear of turnover, but the point that you raised a few minutes ago is turnover in this industry is a thing already.
Larry: Yeah,
Jason: yeah. There's already a significant amount of turnover for all the reasons that we've been discussing.
So introducing choices and transparency is not going to create more turnover if turnover already existed. So what are your thoughts on that?
Larry: Well, you're absolutely right, and I think to have this normalized, you may have this transition period where you're giving the therapist three choices. What you hope to, over time, is that there's no more choices.
Maybe it goes from three to two to this is the way the comp model works. Yeah. [00:27:00] But, but here, but, but here's a point that I think a lot of owners are missing. We default, again, chief guilty officer here, we default to the 6 or 8,000 addressable market of new graduate PTs, but think of the experienced PTs.
Now, let's go back in the history of time. One of the companies I have a great deal of respect for is USPH. The company's been around a long time. USPH model years and years ago was, um, when private practice wasn't very large, they would take the rockstar PT that was in a hospital and say, "You know what, buddy?
You'd be a good private practice. We're gonna pretty n- we're gonna give you 20, 30% ownership because you're gonna have a following of patients that are gonna come with you." Great model. It's been very successful for USPH over time. It's kind of a thing of the past, but that is, you know, from a history lesson, that's in part how they got started from what, from what their original founder shared with me probably 20 years ago.
Why don't we do that with our experienced PTs now? If I, all of a sudden, in my market in Louisville, Kentucky, you know, one of my clinics there, I've got a rockstar there. He, his day is in- inundated with texts and messages from the who's who around the whole city because he is an absolute rockstar. What happens if one of my, a competitor comes and says, "You know, Eric..."
His name is Eric. Um, "We're gonna pay you 30% of what you produce," or, or depending on your market, your reimbursement. That's an experienced therapist, comes over. They bring over a whole tool of patients that right now they're on an hourly or a salary. Mm-hmm. Okay? And- That [00:28:30] creates a recruitment advantage.
Jason: Yes.
Larry: We're worried about the fear of losing a PT, what about the unlock of attracting PTs? Yep. And so, um, why would a therapist who is a rock star, where patients are crawling to get in to see that therapist, why would you pay them back on an, a- a- hourly or compensation model? You're pen- penalizing them.
Jason: Yep. Yep. One of the things that I think a lot of owners don't even realize they're doing, and certainly employees don't realize this, is that guaranteed full salary models suppress earnings, because you have to factor in risk. So if I'm an employer and I have a new grad that comes to me and asks for some ridiculous dollar amount, which is happening, you know, all across the country right now.
Let's say a new grad comes in and says, "I want to make $95,000 a year," in a market where we should not be paying them $95,000 a year. You know, let's take, uh, you know, Upstate New York or something like that, where reimbursement is relatively low, and there's just not enough revenue to pay that th- person $95,000.
What the employer in many cases is doing is they're saying, "Okay, if I don't agree to that, I don't know when the next candidate is gonna come along." Ah. Right? It could be nine months before I find somebody with a license and a pulse, and the pulse is optional. I just wanna hire somebody, I've gotta get somebody into this spot.
I can't lose, uh, a therapist. I can't lose a candidate. So reluctantly, I agree, "Okay, I'm gonna pay you [00:30:00] $95,000." Two things happen there. Number one, I have to, as the employer, factor in risk. The risk is, what if this individual that I just guaranteed $95,000 under-produces? If they under-produce, I can't cut their pay.
I'm on the hook to pay them $95,000. Right. I have to factor that in to what I'm willing to give them. But the second thing that I've just done in guaranteeing them that amount is I've front-loaded future earnings. I've pulled from the future merit raises and I've brought it up front so I can get that person in the door.
But in most cases, the employer isn't telling the employee that that has happened. So this employee comes in at $95,000, and what happens 12 months from now? They ask for a raise. They want a 3%, a 4%, a 5% increase. Now I've painted myself into a corner as the employer, because I front-loaded three years' worth of merit raises up front just to get that person in the door.
What a lot of, I think, employers, and certainly employees, don't understand is a variable comp model would unlock for that individual more than $95,000 in earnings. Because if we're not factoring the r- the risk in the offer- If it's inherent in the comp model itself where the risk piece takes care of itself, we then as the employer can afford to offer additional income to that employee.
So that candidate that walks in the door and asks for [00:31:30] 95,000, your response if you're offering a variable comp model could be, "Sure, we have a path to that. By the way, we have a path past that. Would you like to see what that looks like as
Larry: well?" What are your thoughts, Seth? 100%. I think here's a, here's a somewhat dogmatic but simplistic way of looking at it.
Hourly or salary is always win-lose. Mm-hmm. Always. F- the flip side of that is find me a successful business enterprise, healthcare service related or otherwise, that doesn't integrate variable pay. Okay? I'm not talking about celebration pay where we reached our budget, you get a bonus. Yeah. I'm talking about variable pay into their, um, general compensation, their direct pay component, if I'm using the elements of compensation.
Software engineers, highly, high degree of variable pay, high degree of autonomy, mastery, and purpose at really enlightened tech companies. And so when you have this win-lose situation, the 95,000, you know, example that you, that you used, let's flip the switch a bit. So we talked about how much companies spend on recruiting and talent acquisition.
If you eliminated 90% of that cost and passed it on to the PTs, the PTs would be paid more, you'd have more retention, you'd have more autonomy, mastery, purpose, more sustainable business. But let's also look at customer acquisition costs. [00:33:00] Let's take a therapist who's paid on a variable comp model, 'cause they're effectively building their practice.
They're a doc- true doctoring model. Yeah. If I'm spending X amount on marketing and I bring in an experienced therapist that already is the magnet, I've decreased my customer acquisition cost, which can be 2 to 6%, lead generation, funnel, marketing, ads, all of those kinds of things. And now what I've done is I switched that, I've eliminated that cost or lowered it, and the therapist is getting a cut of all of what they produce, but I'm making more.
Yeah. You know, 50% of 300,000 is not nearly as much as 50% of 400,000, right? It's just the math of it. And I allow that therapist to say, "You know, Larry, I, I could really use a PT assistant." "Oh, I'm not gonna hire a PT assistant. That's gonna cost, 'cause I'm gonna pay him a salary." Win-lose. How about I add on whatever they produce to your total production?
Yeah. And yeah, we're gonna pay him a portion, but you're still gonna get 30% or whatever the percentages are, 'cause I realize the reimbursement numbers. Variable comp works under every scenario- But what we have in PT is we do not have a lot of common sense as common practice. I always re- preach that we wanna be the first company where common sense is common practice.
I'll give you another example. I had, after that Substack article on compensation models, I had somebody from California reach out to me, [00:34:30] low reimbursement state, and they told me the model doesn't work in California. And I'm like, "It has to. Variable pay is the only model that probably can work in California for sustainable high mar- you know, margin business to stay in business."
And he said, "No, our reimbursement's too low," and he passed me the numbers. He, "We have to pay our therapists too much to attract them." "Okay, what do you have to pay your therapists?" Well, as it turns out, that payment, let's say it's 60% of what they produce just because the reimbursement is low. If you, at some point in time, if you have a margin at that 60%, pay them 60%.
Your portion of your 40% will go up, and theirs will also go up. Yeah. So under every scenario, a model where, that is based on doctoring and receiving a revenue share for what you produce produces better comp for the PT and the employer. If it's lower comp for the employee, it's also lower comp for the employer.
Yeah. They just have to go together. And what people will do is they will eliminate themselves if they can't produce enough. So what you do in the medical and the dental world is your guarantee is a very low guarantee. If an average dentist, I'm just using these numbers to be directionally correct, makes, an average general dentist makes 300,000 a year, their guarantee's at, like, 150.
Yeah. Well, they don't wanna work for their guarantee. They wanna work for the 300. Yeah. Okay? And so the variable comp model is, is very pure. Primary care the same way. And [00:36:00] PTs, I think you could increase the salaries of PTs by 10 to 15% one time and receive the benefit of variable comp, 'cause they're gonna get paid more, but they're also gonna produce more.
The flip side of that is the 95 example you used, guess what they want year one? Two to 3% raise. Yeah. Year two, you're sitting across from the desk, "Is it 2% this year, or is it 5%?" Year three, "Is it 2% or..." Well, guess what? In three years you've just increased their, their compensation by 15%, and their production has stayed the same or gone down.
Yep. Okay? When you have the variable comp model, you don't need to worry about the year to year 2 to 5% inc- They're, they're, they're profession. They don't, you know, professionals don't get that kind of incremental 2 to 5%.
Jason: Yeah. Yeah. There's two things that I'm guessing folks are thinking about right now in this conversation, and the, the first is bonuses, and the second is PTO.
So I wanna make sure that we address both of those. So let's address bonuses for a minute. Um, some folks are probably thinking, "Well, why can't I just get the same result that the two of you are talking about by giving somebody a full guaranteed salary and then bonuses on top of that? Because then I don't have to worry about this sort of-" culture shift that needs to happen in our industry.
My response to that would be if you look at the literature, and I've done that, and there's a lot out there. If you look at journals that talk about, um, um, HR and payroll studies on this topic of compensation, it's very, very clear that [00:37:30] bonus models themselves, and what we're talking about is a, a full guaranteed salary and then some sort of carrot dangled on top of that.
So full guaranteed salary that you can live off of that's relatively comfortable, but if you do just a little bit more, if we incentivize you to do a little bit more, then you'll make a little bit more money. What we've seen happen in the literature is that at best, the needle does not move. At worst, it actually goes backwards.
Larry: It's worse. It's a
Jason: disincentive. It actually... It's a disincentive, that's right. And the perfect example is if you think about holiday bonuses. Let's say you're an employer and you had a good year, so you give everybody a holiday bonus, and let's say it's $1,000. And then fir- the first question is how many thank yous do you get from that?
Probably not very many, if any at all. Then fast-forward 12 months. Maybe you had an okay year, but maybe it wasn't as good as the previous year. So maybe you give out $700 bonuses. How many of the employees will get that $700 bonus and say, "Wow, this is great," versus how many will say, "Well, wait a minute.
Last year it was 1,000. Why is it 700 this year? I got short-changed. Now I'm demotivated. I feel like I've been gypped by the company that just bonused me $700." That's a perfect example of that. So I know we wanna talk about PTO as well, but I wanna pause and give you a chance to respond to this
Larry: point.
Yeah. So, you know, all the studies on bonus programs show that over time they w- they can work for a short period of time, and then they become a disincentive and they don't work. [00:39:00] Why? Because they create an entitlement mentality. Correct. It starts out as an unknown. I'm not even gonna rely on my bonus. Oh, I got a bonus.
Now I feel entitled to that same bonus every year. Yeah. And the bonus is also distant. It's distal, uh, from them such that what they do is not a direct impact of what that bonus is. Yeah. If you're gonna do bon- bonuses is not a variable pay. So a lot of employers listening to this are gonna think, "Well, yeah, I have a variable com- component.
I have a bonus." But the variable pay is variable of their base compensation. Yeah. Not a bonus program or a- Yes ... celebration pay or the other elements of compensation that we discussed. Variable pay is means a component of theirs is tied into what they do. Okay? If it's a, if it's a salesperson, maybe they're on a salary plus commission.
Yeah. If they're on something else, th- maybe they're on this as their base and this on the additional. That's the variable component. In fact, what, what the bonus programs do is actually gets you to produce more, and then over time people leave because, "Oh, all of a sudden I didn't get my bonus." And, and that entitlement mentality is horrible.
It's the opposite of what you're trying to create through a culture of production and owning what you do. It's an owner- the ownership model is, is, is tremendously better. And so, you know, wouldn't it be better if I had a great understanding every month of what I'm going to be paid, okay? Because I'm paid 30% of collections.
Oh, and by the way, I'm gonna be talking to my [00:40:30] collection people a little bit more often to make sure they're doing their job, that cross-accountability, another positive upward spiral of a, of a model. Attracting other PTs as a recruitment tool, another upward spiral. So the consequences of this have long-term benefits downstream, rather than just the direct payment of a variable component model.
What ends up happening under bonuses and incentives, oddly enough, people wanna talk about ethics. You can, you, you, you... The biggest thing I learned as a business owner, one time I started, uh, paying our front desk people a bonus based on if their no-show percentage calculation was less than 10%. Month three, everybody in the company, you know, all couple hundred clinics I had at that time, they were all below 10%.
I said, "What a brilliant- Magic ... management decision." They were all gaming the system. Yep. You know? They all knew how to game that system real quickly. Is that unethical? Illegal? I don't know. If I pay somebody on visits, so somebody'll say, "Oh yeah, I have a variable component. I give them, I pay them an incentive based on the number of visits."
Yeah, well that's, you know... Does a Medicare visit count? Does a visit with a one-time home exercise count? Does a new eval count, or does that count 1.5? And you get into all this math. Yeah. You know? We do all these, uh, I call it, I, I, you know, I call these kinda cost of quality, cost of monitoring. If you had a comp model that was effective, you could get rid of all your, not all your BI tools, and I'm not suggesting that, but you could get all, get rid of a lot of analytics and overhead that's sitting around just [00:42:00] monitoring- Yeah
your PTs. I know companies that spend more money monitoring their PTs, and they pay those people more than their PTs. Yeah. They pay their recruiters more than their PTs. Yeah, yeah. Think about that. Yeah. I'm gonna go to CSM, and the recruiters there are making more than my PTs. Yeah. And they're, guess what?
A lot of the recruiters are paid- Yeah ... a portion if they get- The number of people that they recruit Yeah Right? Yeah. So what does that create? It creates an environment where I wanna just recruit a pulse because I get 20- I get a 20% bonus. Yeah. Or I get a, you know, an uptick in a dollar amount for every PT I recruit.
Yeah. There's so much waste within a practice, and the waste is mostly in terms of overhead. Yeah. You could have a lot lower overhead, a lot higher margin, and a lot more flourishing environment if you created a culture around a doctoring profession where the business supports the doctors, not the doctors there to support- Yeah
the business.
Jason: Yeah. The side benefits are just, there, there are so many. There, there are so many that we don't even have time to talk about them all. But one of them is when you have a provider who is on a variable comp model, couple of things. Number one, it's almost instantaneous versus, uh, a- an annual pay- Direct
Larry: feedback
Jason: right. Immediate direct feedback. You have a really good week, boom, your next paycheck is larger. It's almost immediate. So there's a behavioral modification that occurs there that doesn't occur if we, "Well, we do a profit-sharing model, and at the end of the year, we're gonna pay out..." Well, first of all, your provider doesn't even know if they're gonna be there at the end of the year.
And even if they are, the [00:43:30] profit-sharing model that happens 12 months from now is not impacting their behavior in January. It's just not. It might as well be 12 years from now. So that's a, a, a benefit where when we have providers that are on variable comp models, the ownership becomes, because of the fact that the therapists police themselves with their own metrics, the ownership then becomes a, or the leadership or the management, becomes a mentor, a coach, and a cheerleader rather than a boss.
So I'm gonna come alongside this individual and say, "How successful would you like to be? I wanna do everything in my power to help you get to that point. And if I do that, you're successful, and then I'm successful as a result." That's just one of the many side effects that I think I've seen of this approach.
Larry: Oh, 100%. And, and you become... When I am responsible for building my practice, guess what that is? That's a proxy for quality. Yeah. 'Cause if they're gonna come back, I must have had an engaging, great experience. Yep. Oh, and by the way, when I start posting on social, I might tell people I'm a PT, and they can access me directly.
Yeah. Guess what that does? Cuts down on my marketing costs. Yeah. And you create all these upward spirals for effectively unlimited income, if you will. Um, or within a salary con- You know, i- i- for a therapist to make a good salary, go home at night, be a good human being, be a good, you know, father, mother, family person, you just create, you know, tremendously a better environment around it.
And, um, all the [00:45:00] side ecosystem of all the people getting paid for all the overhead kinda goes away or- Yeah ... or, or becomes, you know, far less. I think, um, you know, the, the, the true profession as it goes forward has to have arms locked between employers employees over time. And what I mean by that is one of the obstacles for this model is they get patterned in PT school, go out, oh, you need to go out, find what the highest salary is, and they all get on their social and their, and their text channels and they say, "This employer's offering this, this employer's offering that."
And so a lot of them do go for the most money there. Again, average PT stays on the first job less than nine months, it doesn't work. Mm-hmm. Right? But think of this, think if you had employers banding together and they started going to the PT programs, all, you know, 250 plus, and said, "You know, we're moving to a model because of reimbursement and other changes where we're gonna actually treat when you graduate like you're doctors.
Where we're going to pay you a compensation model like your compatriots in medicine and dental, and, uh, this is what it entails, this is what it looks like." If we had all three, you know, 250, 300 PT programs being indoctrinated into the real world of what the economics looks like, and to the expectation, then they would come out and they would expect that, yeah, they're gonna be patterned first year, they're gonna be under a guarantee, but my guarantee is gonna be less than a great salary, so I need to produce [00:46:30] more.
I need to do that. Oh, I need to build a practice. I need to get on social and promote myself. Oh, and over time I might be able to have a PTA or a tech that is actually under my volume portion of it. Boy, that would be a lot of upward spirals. Yeah.
Jason: Yeah. It certainly would, and I wanna make sure we go back to PTO a bit.
Oh, yeah, yeah. So- So PTO. Yeah. Yes. This is a, this is a, this is an important point because this comes up a lot. Any time I'm having conversations, I'm sure any time you're having conversations- Yeah ... the question always comes up, what about PTO? And one of the things that I've observed is you could show a...
Let's say you've got a therapist that is on a model where, l- we'll just use round numbers. Let's say they were making $80,000 when you first hired them. That was their guaranteed base. And now they're on a rev share model. They're on a revenue share model where they're being guaranteed, let's say, $40,000.
That's the portion of their pay that's guaranteed. The rest of their pay is coming from their revenue share. And let's say that therapist is tracking to make $100,000 at the end of the year according to their W-2. That therapist, in many cases, if your approach to PTO is, well, when you take PTO, you're gonna get paid your base pay, which is the equivalent of a $40,000 salary, because the rest is coming from rev-share.
Yeah. If you're on vacation, there's no revenue, so you're just getting your base. I've run into many therapists where it's virtually impossible to have that conversation with them where you say, "I know you're concerned about what your pay is during the three weeks that you take off each year, and that you feel that your pay shouldn't drop.
But look at your [00:48:00] W-2. At the end of the year, you're making $20,000 more than you did last year, and that's with your PTO dropping down to your base." In many cases, therapists will say, "Yeah, I know, but I just don't think that's fair." Because my pay shouldn't drop when I'm on PTO. That's my time and I earned it.
Have you run into that, and what are your thoughts on that?
Larry: Yeah. So let's talk about that, this in a holistic way. Again, I see employers doing a lot of stupid things. I see them with ridiculous sign-on bonuses. I see them s- you know, actually giving scholarships to PTs who aren't even PTs yet, and they're paying them more than they're paying their PTs in anticipation that that person is gonna graduate and then become an indentured servant for them.
Yeah. That's real, that's real smart- Yeah ... in a doctoral level. It's different when it's an undergraduate degree and it was relatively cheap. Okay? I see that happening in, in there. I see more benefits, student debt re- retirement, not a bad benefit. I see i- increasing paid time off- Mm-hmm ... as one. What do we define that?
If you look at it, again, the elements of comp- compensation, that is an indirect, that is a benefit pay. Mm-hmm. So the reality is, in most environments, if they're paying the therapist $90,000 a year, about 8 to 10% you have to add to that for just the PTO benefit. And the way that works mathematically is most PTs are paid somewhere between a day and a half to two days of accrued PTO for all their vacation time, sick time, and the seven governmental holidays, or nine, or whatever your employer- Mm-hmm
you know, uses, and a floating day [00:49:30] for- Mm-hmm ... you know, other, other, like your birthday, right? Yeah. And, and however you mathematically do that, that ends up somewhere between 8 and 10% of the pay. So what that means is for an employer, if you're paying a therapist 90 grand, you're really paying, um, 99,000 because you have to accrue that 10% of the pay or bank it, and hopefully they'll never collect it.
I mean, employers take all kinds of, you know, liberties there. However, if you really think about it, if you... It's interesting, when you do cash payment for PTO time, I've seen employers do this, most of them will take 50 cents on the dollar. So most employees would rather get paid money than have excessive time off.
Everybody needs time off. Nobody argues that. So again, I would, over time, eliminate PTO as a benefit, and I would just pay the therapist more. I would pay them the extra 8 to 10%. Now, I wouldn't do that automatically. The first year you're under a guarantee, and that includes two weeks vacation and maybe the seven government holidays, or maybe it just includes the seven government holiday.
It, whatever the case may be. I would, over time, phase that out as well, because I don't know of any doctoring profession that pays PTO. Mm-hmm. It is done. Now, if you wanna take a low risk, more oriented job, you're gonna get paid less. That's what they do. So if you're, uh, if you're a dentist or a doctor and you wanna be on salary, you can find an employer that'll do it, but you're not gonna make a whole lot of money.
Mm-hmm. And your life's probably gonna be pretty miserable. So I think PTO is an [00:51:00] important adult conversation to have, but over time, I would eliminate it. Um, you know, we just had these January storms, right? Very lose-lose. It's a loss for the employer- Yeah ... loss for the employee under variable comp. But what is it when it's not variable comp?
It's a loss for the employer, it's a win for the employee 'cause you're still paying. Yep. Okay? Do you really want that environment where the li- oh, now dentists and doctors are coming back from these storms and they're gonna work longer hours. They have to, to make up with the loss. Yeah. That's win-win.
That's synergistic, and, uh, that's ultimately, again, another advantage of this. PTO is important. It's a good conversation to have. You can deal with it effectively because I do believe that you offer, under variable comp, you offer a core set of benefits. Mm-hmm. And you can make some PTO part of that core set of benefits, but it's gonna implicate the percentage of the rev share.
Yes. It has to. It's just math.
Jason: Inverse relationship. Of course. Has to be an inverse relationship between the value of PTO that you're paying- Yeah ... and the percentage of the revenue share. Yeah. And that goes back to the choices. You can give, choose to give your providers- 100% ... those choices and options, but what you can't do is have somebody max out on the rev sha- side- Right
and max out on the PTO side. There's only so much money to go around.
Larry: Exactly.
Jason: And part of that is inviting therapists into the economics of healthcare delivery rather than shielding them from it, which I think is historically what we've done as a profession. We've been afraid that therapists can't handle the truth.
Larry: That's exactly right, and we've been afraid to pay, uh, experienced therapists what they're worth. Yeah. [00:52:30] Instead, we pay them to get out of clinical care. Yeah. And, and the combination of those two are really bad. And again, I, I, I just wanna emphasize, I'm all for patterning this in a PT over their first year or over some type of onboarding experience that is win-win.
Upskill, training, indoctrination, get them to understand the value of production, understand of the, all the components of the b- of benefits, you know, for sure. But over time, i- and, and I would've said this, what I know now, I would've implemented this 20 years ago. Mm-hmm. Um, but it's even more important to implement now where you've had reimbursement, call it what you want, frozen, declining.
I say it's declining. Reimbursement down, regulatory up, meaning it's even declining further, and we have graying of America where a higher number of our p- patients are Medicare patients. Oh, and by the way, a higher percentage of our patients are Medicare Advantage because 52% of Medicare patients have now opted out of Medicare and Medicare Advantage, although that's going through a lot of, uh, a lot of turmoil right now.
Yeah. And it's even more important that you have a strong variable component- Yeah ... uh, that today than ever, I don't know how you have in a traditional outpatient environment, um, I don't know how you have any margin without it. Yeah. What you do is you have floating margins. It's win, lose, lose, all the storms, I'm gonna lose this month.
Yeah, yeah. And what do then companies do? Well, I'm gonna normalize, I'm gonna add back the revenue that I lost in the storms to show... We do too much short-term thinking in private equity-backed PT platforms, um, and way too [00:54:00] much short-term thinking in traditional, you know, brick and mortar private practices around this issue.
Because again, we shift to where- We're, we've lost sight of the fact that it's the therapist that we're supporting- Yeah ... rather than the business. And so, uh, it's all about short-term thinking. If you're private equity, what is my next transaction? How can I add back? How can I show them that, yeah, our turnover was X amount, but at fully, that's what our normalized earnings were.
It's all just bullshit. Mm-hmm. It's all this fake adjusted EBITDA. I'm gonna write an article. I've got a series of articles coming out about ... Shameless self-promotion. A series, a ser- a series of articles about metrics that don't matter. Okay? One of them is net promoter score. We will talk about that later.
It's a good metric, but we interpret it incorrectly and we use it, you know, we use it. Adjusted EBITDA might be the, might be the biggest impediment to the flourishing of our profession right now because so many people are worried about their next turn or their next transaction- Yeah ... rather than what's best for the patient, what's best for the therapist.
Jason: Yeah, yeah. I want to wrap up this, uh, session by going back to something that you said earlier, and I think it's important for us to highlight it and flesh it out a little bit more. Um, some practice owners would be reluctant to introduce variable comp models because their fear would be therapists are then going to be doing X, fill in the blank, and here are some things you might hear.
Fighting over patients, that could be one, or, um, looking too deeply [00:55:30] into payer regulations. They may be interested in cherry-picking certain patients that have better payers than others. So I'm no longer interested as a therapist in seeing this patient because they have a lower paying insurance. I only want to go after those patients over there that have higher paying insurances.
Uh, I've had those conversations with owners who are concerned about those types of behaviors. So what would be your response to that?
Larry: Yeah, so we, we should talk about each one of those distinctly. So the idea of fighting over new patients. First of all, if you have a truly variable comp model, wouldn't you talk to your therapist, say, "Is it time to bring on a new therapist right now, or is it not time?
Can you handle the demand?" Invite them in the conversation. Invite them in the conversation. Yeah. And by the way, if they started battling over, you know, the new patients that were coming on, I'm not so sure that's such a bad thing anyhow. Um, where it's a bad thing is all of a sudden you've brought on a therapist under a build it and, and people will come model- Yeah
where you haven't had the adult conversation to say, do we really need to bring on somebody? Should we bring on a PTA or should we bring on a part-time therapist? You know, or, or just, you know, how do, how do we get that conversation? Ultimately, though, if it's a clinical issue and your clinicians are worried about that
I've never seen, by the way, a therapist have any influence over the payer side of it. Most therapists schedule my patients, I'll see them. I'm not, you know, valuing one payer over another. Business owners do that. Mm. But I, I've never seen therapists actually do that. Now, would they become a little more educated to it?
Perhaps now. But what you'd have to say is, "Look, we're gonna fill your schedule. You [00:57:00] tell us no or when to back down." You know, because it's a, you have to have this, uh, you know, collaboration and partnership. But I've never seen therapists ex- exert, uh, w- what they do now though, under a c- under a salary model, is they say, "Don't add more than two patients on.
Don't schedule, uh, eval less than an hour." That's what they do now. Yep. Right? And that makes no sense 'cause evaluation's an untimed code. We have to get out of this hourly mindset and go more to a hairdresser/plumber model where they're not paid by the hour, right? They're paid by the production. Mm-hmm.
But we don't. And so I don't really worry about, uh, fighting over patients 'cause they'd be invited into the conversation and they would be allowed to help you co-create. But then if there are hassles, guess what you do? You bring in a clinician, not a business guy. Yes. You bring in a clinician that say, "I need to come in here and referee here a little bit."
Yep. And let's come to some agreements. Maybe your hours aren't the same. Maybe you shift hours. Maybe you're open from 7:00 to 7:00 and one person comes in at 8:00. That, you know, then you create all these positive enabling unlocks rather than what you have now. And I think the other one of, um, the fear points are just that.
They're, they're, they're, the fear is much greater than the reality. Um, again, incrementally go to variable and don't look back. Yeah. Will you lose some PTs? Of course you will. You're gonna lose them anyhow. And you have to have the guts, the fortitude, and the determination and say, "I'm really gonna be part of creating a doctoring profession where our clinicians are [00:58:30] gonna be paid more to do clinical work rather than be incentivized to become a non-clinician."
Jason: Well, and that's a great place to wrap this session up. So on the next session, let's unpack how to do that and what the potential pitfalls are that we need to watch out for. Absolutely. Great discussion. Thanks, Larry.