THE RELATIONSHIP BETWEEN REMUNERATION AND PRODUCTIVITY

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Egbert Miles
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1 THE RELATIONSHIP BETWEEN REMUNERATION AND PRODUCTIVITY Dr Glen Richards Greencross Ltd A. Remuneration Design With a highly competitive employment market in the Australian Veterinary Industry, Veterinary employers need to offer their employees something that their competitors are not. Consider this a unique employment edge where employers offer a flexible range of both financial and nonfinancial benefits to veterinary employees. An organisation s Remuneration system serves many purposes; these are often summarised as the need to attract, retain and motivate employees. But it is also broader than this: the total reward structure involves base pay, performance-based pay, compulsory employer provided benefits (such as superannuation and various paid time off such as sick leave, annual holidays and long service leave), as well as those benefits provided at the discretion of the employer (eg employee share plans, health care, study leave and the like). These are factors that can have a direct impact on employee productivity and morale; for this reason, the design of a total reward structure must be consistent with the management philosophy and values of the enterprise, and deliberately support its business objectives. Another important aspect of reward is to link it with performance. Remuneration planning is really concerned with retaining valued employees and deriving income by remunerating employees in such a way that motivates and encourages them to achieve their goals as well as those of the organisation to recognise their role as stakeholders. Effective remuneration planning is therefore not just about paying employees but is also concerned about rewarding employees. Rewards can be classified into three distinct types; Base Remuneration Salary and Wages Other Benefits? Short-Term (Annual) Bonus Cash Bonus Long-Term (Loyalty) Bonus Retained Bonus Equity Savings Plan Equity Shadow Share Plan Commission Cars Fringe Benefits Entertainment Other Benefits

2 Modern Remuneration Design How we pay people is how they will THINK and ACT If we pay them an incentive based or short-term, individual return, what do we expect them to do? If we pay them a base salary only, a fixed amount for each week of work do we expect an attendance and a mindset of other than 9am to 5pm? If our only Bonus system is Discretionary, it creates no certainty but rather creates uncertainty which can lead to mistrust. A Bonus system designed on a Team Performance before Individual, paid over the Long- Term in conjunction with Short-Term Bonus/Commission, if necessary, is the best There is an increasing trend globally to decrease fixed remuneration and increase the percentage of remuneration at risk both short-term and longterm. The most important aspect of designing a successful incentive scheme is to create a team. For professional and productive employees, the ideal model is based on earnings, that is, they should receive a percentage of what is earned and (banked) by the business THOUGH NOT ALWAYS ACHIEVABLE. Thus annual base remuneration is based on facts not negotiation. Reward schemes: Must motivate staff and retain staff. Include financial and non-financial motivators. Create sensational team kudos. Be a competitive advantage over the opposition. Create some ownership mentality by the staff: Reinforce that every interaction, every dollar, every client, every transaction and every "moment of truth" (Jans Carlson... Scandanavian Airlines) must COUNT Must fit in with Exceptional service, Best Practice, Patient Advocacy philosophies. Must be simple, transparent, consistent and easily calculated by staff. Staff must be already paid at market rate and perceive better value in working at our practice than any other competitor. Current Veterinary Income For vets, average income for 2006 was $61,464, a 41 percent increase on 1996 figures. According to data from Access Economics, in 2006 male vets earned average annual income of $71,552, while females earned average annual income of $50,908. This compares with the average annual income earned by the ten medical subgroups (general practitioners, ophthalmologists, radiologists, cardiologists, anaesthetists, gastroenterologists, ear nose and throat specialists, dentists, veterinarians and pharmacists) Access economics examined of $86,371 (males) and $68,848 (females) and the average Australian annual income of $51,225 (males) and $33,852 (females). Of the ten medical professions examined by Access Economics, vets were the fourth highest paid, after general medical practitioners, dentists and pharmacists. Vets earn 43 to 50 percent more than the average Australian income of $51,225 for males and $33,852 for females. In 2001, according to survey work by Heath and Neithe, male vets that own city practices earned an average annual income of $88,000, while their female equivalents earned average

3 annual income of $57,000. In the country, male practice owners earned average annual income of $74,000 and females earned average annual income of $42,000. In the same survey from 2001, employed male city vets earned average annual income of $54,000 and their female equivalents earned $43,000. In contrast country employed vets earned average annual income of $46,000, with female country employed vets earning average annual income of $38,000. B. A better approach: linking personal performance with business vision The Balanced Scorecard allows organisations to examine and communicate objectives and measures across four perspectives of a business: Financial, Customer, Process and Innovation and Learning. All perspectives are linked; what happens in one affects another, reflecting the fact that an organisation is a system of interacting elements. The balanced scorecard forces organisations to be very clear on their strategic objectives and to measure progress against them. By measuring both outcome (lag) KPIs and driver (lead) KPIs The Balanced Scorecard provides continual feedback related to strategic success historically and futuristically. At the human resource level, The Balanced Scorecard provides a road map for all employees to link their every day activities with the strategies and goals of the business. It is through linking each staff members own personal scorecards with company or practice scorecards that allows strategy of the business to be communicated to every team member.. no matter the position in the practice. The Balanced Scorecard reflects the four quadrants of the outcomes & the drivers. FINANCE How do we look to our shareholders? Are we producing the right financial results? CUSTOMERS How do customers see us? Are we meeting the needs of the market place? LEARNING INNOVATION How can we make critical processes work better? What initiatives do we have to undertake to develop our people, technologies and work practices for the future? PROCESS What processes are critical to achieve strategy? Where do we need process improvement?

4 FINANCIAL CUSTOMER Objectives: Staff Understand & take an interest in the business success. Objectives: Star Performance Internal & External customers Outcomes: Measures: Incentives - bonuses Profit Sharing Training Opportunities Business Financial Measures Sales Targets Practice Performance Outcomes: Measures: Happy staff & environment happy clients Personal skills Evaluation Client Evaluation One-minute surveys Mystery Shopper Feedback: Communicated at meetings Reviewed: Your impact Quarterly, 6 monthly or Annually Feedback: Evaluation forms Meetings Your feedback to business Performance Impact Objectives: Personal Growth Objectives: Process Improvement Outcomes: Personal Growth Career Development Outcomes: Better Business Practice Easier to work Measures: Goal setting Training Personal Business Skills Innovation Papers written/delivered to other practice members Measures: Feedback: Reviewed: Performance Evaluations Procedure Audits Competencies Performance Review 6 monthly Feedback: Career Development meeting Reviewed: 6 monthly LEARNING & INNOVATION PROCESS

5 The balanced scorecard and the vision it supports is communicated via regular feedback to employees as part of the six monthly performance and career development process. The review process tackles the issues of performance as well as provides the opportunity for career development discussions. MANAGING ABOVE & BELOW THE EMOTIONAL INTELLIGENCE LINE Performance Review STRUCTURE SYSTEMS PROCESSES PROCEDURES Career Development RELATIONSHIPS CULTURE IDENTITY INFORMATION PERSONAL GROWTH COMMUNICATION Performance Reviews and Career Development Interviews are used: To set mutually agreed goals for future performance & development. To evaluate past performance & improve or correct performance. To provide regular, comprehensive feedback to all employees on how their supervisor sees their performance. To identify training and or development needed. To identify people suitable for promotion, or further development. To determine merit based pay increases. To monitor the effectiveness of selection or promotion procedures. Business owners, managers and leaders in the practice are required to provide the governance, vision and strategy for the business. But it will be the engaged team that will bring the business its success and the rewards. Active feedback and formal interviews with employees Helps them to understand that they are all part of a business machine. Each with his or her own part to play and knowing that someone is always counting on someone else. Helps them to understand their strengths and weaknesses in the team. Helps them to find motivation to use and develop themselves and their role in the business. Helps them to understand leadership and individual responsibility/capacity for performance. Helps them to set new standards and goals for career and personal development. The six monthly discussion is aimed at helping staff identify their business targets and helps them keep in touch with their position within the business. This two way process enables management to give staff feedback and for staff to give feedback about how the business is performing in their task area. Just as importantly it will help staff identify both personal and

6 professional goals and targets, and enable practice leaders to create a supportive environment to help employees strive for business and personal goals. The Career Development and Performance Review: Steps to success: Prepare material for the meeting well ahead of time including all kpi data, surveys, questionnaires, competency and skills assessment, proof of participation. Reconfirm date, location, and time for meeting Employees and employers review material prior to meeting Discuss performance and discuss new performance objectives across the balanced score card Discuss career goals and plans. Discuss pay and conditions. Set date, location, and time for next Development and Review meeting. Example: Monthly KPI Vet Scorecard (2004) KPI Vet A target Vet A actual Vet B target Vet B Actual Gross Total $30,000 $31,803 $17,500 $28,396 Number Exams Generation Rate $200 $228 $200 $175 Hours Worked Fees/hour $166 $254 $97 $ Med % of Gross 30% 33.1% 30% 39.2% Wages Ratio (boss) Patient Advocacy Progress Exams % 25% 20.1% 25% 6.8% Radiology Exams % 3% 6.5% 3% 0.6% Fluids % 4% 5.8% 4% 1.2% Lab & Diagnostic % 30% 25.9% 30% 28.4% Anaesthesia % 15% 22.3% 15% 11.1% Hospital % 4% 4.3% 4% 2.5% Dental % 2% 1.4% 2% 2.5% Surgery % 10% 18.7% 10% 6.8%

7 PERSONAL SCORECARD FINANCIAL My Financial Targets CUSTOMER My Customer Targets My Learning & Innovation Targets My Process Targets LEARNING & INNOVATION PROCESS & QUALITY

8 C. Linking salaries and wages to practice productivity Veterinary practices are business enterprises! Practice leaders need to ensure all team members accept that basic business disciplines are important to their future, and are communicated regularly. Issues such as the following should be regularly visiting by the team: Budgets and expectations for earnings, capital expenditure, marketing, and wages Drive revenue growth through best care medical and surgical standards Develop the business so it is relevant to the local community in which it operates Benchmark the practice via MPV consulting and other survey opportunities. Regularly give feedback to veterinary teams via weekly and monthly key performance indicators related to the practice and individual team members. Up skill and develop team members to be the best they can be via active and passive education opportunities Invest in facilities and equipment supported by best business case scenario The veterinary industry is slowly evolving from the dark ages with many practice owners now directly linking production and remuneration. A common method combines a base salary with a production linked salary. Linking production and remuneration helps foster long term client relations with individual vets as well as the practice, rewards vets and veterinary teams who create excellent client rapport, who are productive in the work place, and who develop areas of special interest. Total veterinary wages for a practice is budgeted to be approximately 20% of veterinary related revenue (which equates to approximately 17% of the Average Australian Veterinary Practice Sales Revenue). As practice revenue grows then the budget for veterinary wages increases. One method of remuneration reviews wages every six months for the veterinary team based on team and individual productivity looking back over the previous 12 months of veterinary production. Incremental wage changes for individual members of the veterinary team are reviewed based on multiple criteria including reaching budgeted EBIT (Earnings Before Interest and Tax) for the practice as a whole, revenue growth, profit growth, client satisfaction, skill and education upgrades, team happiness and rapport, patient advocacy and personal financial productivity. It is important to note that if practice revenue and profit has not grown then it is difficult to justify a change to veterinary wages. Veterinary salaries are then linked and intimate with a successful veterinary practice.

9 SOME LITTLE QUESTIONS! How much do you want to pay associates? How much are they paid? What does the vet team gross for the practice? What should they gross for the practice? How many examinations per day? No. $ Key invoice issues Lost opportunities How many surgeries per day? No. $ Key invoice issues Lost opportunities How many working days per week? How many working weeks per year? What CAN they gross invoice per year? Possible salary (20% of Gross)?

IIII HILLGROVE RESOURCES LIMITED IIII ACN

REMUNERATION AND BENEFITS POLICY IIII HILLGROVE RESOURCES LIMITED IIII ACN 004 297 116 Level 17 Australia Square, 264 George Street, Sydney NSW 2000, Australia T +61 2 8247 9300 F +61 2 8247 9399 www.hillgroveresources.com