DermatologistsDefine the question and the period
Start by writing down what decision the analysis is meant to inform. The question might be whether an owner who manages the practice should receive additional compensation for that role, whether clinical production compensation is comparable among owners, or what income could remain if an owner reduced hours. Those questions overlap, but they are not identical. State the decision, who will use the analysis, and which owners or roles are in scope. This prevents the exercise from turning into an unfocused debate about who contributes more to the practice overall.
Choose a completed accounting period that can be supported by records, such as a full fiscal year, and use it consistently across payroll and accounting records; production figures and duty records. If the period includes an unusual event such as a temporary closure, acquisition, major leave, or a one-time payment, identify it instead of quietly blending it into a typical operating pattern. For comparisons, a normalized period can be useful, but retain the original actual figures so a reviewer can see what was adjusted and why.
Define the units as well as the dates. A compensation figure may mean gross wages, total employer cost, cash paid, or taxable compensation. A production figure may mean charges, collections, or an internal credit measure. These bases answer different questions. Write the definition next to each number and avoid comparing a gross wage figure with an employer-cost figure or cash collections with charges. If the practice cannot establish a consistent basis, mark the limitation and avoid overstating precision.
Create a short scope note that identifies the legal entity or entities, owner positions, included compensation categories, and any related-party payments. A dermatologist may receive amounts from a professional entity, a management company, or another affiliated business. The analysis should disclose which entity paid each amount and whether it is included in practice economics. This map helps advisers spot transfers between entities and keeps a payment from disappearing merely because it did not appear in the main payroll report.
Separate work compensation from ownership returns
Organize economic value into three separate buckets: compensation for production, compensation for administrative or leadership work, and ownership returns. Production compensation pays for services delivered and may be linked to collections, work units, sessions, or a salary arrangement. Administrative compensation pays for responsibilities such as hiring oversight, budgeting, operations, compliance coordination, or partnership governance. Ownership returns arise from owning equity and bearing business risk, and may take the form of profit distributions or retained value. Keeping these categories distinct makes analysis more useful than treating every dollar flowing to an owner as salary.
Build a compensation map for each owner. Include wages, bonuses, incentive payments, benefits paid by the practice, retirement contributions, expense reimbursements, and any other amounts tied to services. Then separately list distributions and draws, along with other equity-related transfers. For each line, note the paying entity, accounting description, payroll treatment if known, and the record that supports it. Benefits and reimbursements deserve attention because they affect total economic value even when they do not appear as cash wages in an owner's bank account.
Do not assume that the accounting label captures the economic purpose. A monthly payment called a management fee might compensate an owner for operating work, or it might be an intercompany charge covering shared services. A distribution may have been made to satisfy estimated tax payments, but it remains an ownership transfer in the cash-flow analysis. Ask what service, right, or ownership interest each payment represents, and document the answer with agreements, board minutes, payroll records, or consistent practice policy.
The three buckets need not be identical for every owner. One owner may perform substantial operating work, another may focus on production, and a third may contribute capital while working limited hours. The analysis should describe those differences instead of forcing all owners into the same compensation formula. Fairness can mean applying a consistent method to different roles, not paying identical amounts despite different duties or ownership rights.
Reconcile payments, payroll, distributions, and duties
Gather source records before drawing conclusions. Useful materials include payroll registers and general ledger detail; tax and financial statements, bank transaction reports and owner distribution schedules; benefit invoices, employment or management agreements, production reports, time or schedule records, and meeting or responsibility records. Establish a period and a file naming convention, then note the source and date range for each dataset. If a report is revised or has filters, preserve enough information to reproduce the figure.
Reconcile each owner's payroll total to the payroll register and general ledger. Begin with gross wages and bonuses, then account for employer-paid benefits and retirement contributions if the analysis measures total employer cost. Tie the totals to the financial statements or payroll tax records, and investigate differences instead of plugging them. Differences can arise from timing, accrued bonuses, voided checks, payments through another entity, or a reporting filter that omitted a location. Record each reconciliation item and whether it changes the compensation analysis or only the accounting period.
Next, reconcile cash transfers to owners. Compare the distribution schedule with the general ledger and bank statements, and separate distributions from expense reimbursements, loan repayments, and payroll. For any owner advance or loan, identify the agreement and repayment terms. Do not classify a transfer solely from its memo field. When the purpose is uncertain, list it as unresolved and ask the bookkeeper or adviser to trace the entry. A clean reconciliation makes later tax review more efficient and reduces the risk that compensation is counted twice.
Match documented duties to the same period. Create a role inventory that lists recurring responsibilities, estimated time, decision authority, and the evidence supporting the assignment. Evidence can include calendars, meeting agendas, task logs, formal job descriptions, or a manager's reports. A title alone is weak support: "managing partner" may mean a few monthly approval tasks in one practice and daily operational leadership in another. Ask each owner to describe recurring duties independently, then resolve material differences in a discussion supported by records.
Make an exceptions log. It should capture missing time records, unusual payments, inconsistent job descriptions, unexplained entity transfers, and estimates that depend on memory. Assign each issue an owner and a resolution path. This list keeps uncertainty visible and helps the analysis distinguish a verified conclusion from a reasonable estimate. Avoid turning an estimate into a precise-looking figure by reporting extra decimal places.
Document the cost of work that would continue
A useful compensation benchmark asks what it would cost the practice to obtain comparable work if the owner stopped doing it. This replacement-cost approach applies to production and administrative responsibilities, though the evidence differs. For each continuing role, define the work, qualifications, expected availability, decision authority, and location or coverage requirements. Then identify a credible substitute: an employed physician, a part-time executive, an external manager, or a combination of existing staff and contracted support.
For production work, collect compensation evidence that matches the arrangement being evaluated. Relevant comparables may use a base salary, a productivity formula, a guarantee during transition, or a combination. Confirm whether quoted amounts include benefits, employer payroll taxes, paid leave, malpractice coverage, recruiting costs, or other employer expenses. If the comparable is based on collections, define how collections are attributed, what happens to refunds and adjustments, and whether the role includes non-production duties. Do not treat a compensation survey number as directly transferable without checking its definitions and geography.
For administrative work, estimate the hours and scope needed to sustain the practice's current operations. A role that includes staff supervision and vendor management, plus budgeting and partner reporting is not equivalent to a few hours of monthly committee work. Obtain wage or fee evidence for the relevant level of responsibility, then add employer costs where appropriate. If one person performs several functions, compare the combined scope to a realistic staffing plan instead of summing several full-time job titles.
Document the source and date range, geography, plus adjustment logic for every benchmark. Record whether the source is a survey, recruiter input, actual hiring experience, a vendor proposal, or an adviser's estimate. If a practice has recently hired someone into a similar role, that evidence may be more specific than a broad survey, but note differences in experience and responsibilities. A range is often more honest than a point estimate. Explain what would make the result fall near the low or high end.
Replacement cost is not automatically the amount the owner should be paid. It is one input for separating labor value from ownership returns. The owner's actual role may be broader or narrower than a substitute's, and a practice may choose an incentive structure that differs from market evidence. Keep the benchmark and the policy decision separate so the reader can see which part comes from evidence and which part comes from the owners' chosen compensation approach.
Compare scenarios on a consistent basis
Scenario analysis shows how different arrangements affect the practice and each owner. Set a common time period and use the same definitions for all scenarios. At minimum, compare the current arrangement and a market-replacement arrangement, then the proposed future arrangement. For each, show production compensation, administrative compensation, employer costs, distributions, total cash paid by the entity, and any retained earnings assumption. If an owner's hours change, reflect the change in both available capacity and compensation instead of holding one side constant without explanation.
Normalize hours and responsibility measures before comparing owners or scenarios. Useful measures include clinical sessions, scheduled hours, administrative hours, leadership scope, decision authority, and on-call or coverage commitments when relevant to business operations. Do not compare a full-time production role with a part-time role using annual pay alone. Present both the annual amount and the unit measure, such as cost per clinical session or per administrative hour, while noting where the work is not linear. Leadership responsibility may not scale cleanly by hour, and a short high-authority task can carry more accountability than its time estimate implies.
Keep revenue and expense assumptions visible. If a scenario changes owner availability, estimate the resulting effect on capacity using the practice's own scheduling and historical financial data. State what costs are variable, what costs remain fixed, and whether replacement recruiting or transition expenses are included. Avoid assuming every lost owner hour can be replaced immediately or that every added hour translates into collections. The scenario is a decision aid, not a forecast with guaranteed results.
Illustrative worked example: Assume a dermatology practice has two physician owners. Owner A records 1,200 production hours and 240 administrative hours in the period. Owner B records 1,000 production hours and 60 administrative hours. The practice paid Owner A $420,000 in wages and bonuses, plus $35,000 in employer-paid benefits and retirement contributions, and paid Owner B $360,000 plus $32,000 in those benefits. Assume the figures are illustrative and the amounts reconcile to payroll records. The practice also paid Owner A a $90,000 distribution and Owner B a $90,000 distribution. Those distributions are presented separately from labor compensation.
Suppose the practice's documented production benchmark for a comparable full production workload implies a replacement employer cost of $330 per production hour, including estimated payroll burden and benefits. Administrative benchmark evidence supports an illustrative replacement cost of $100 per hour for defined operational tasks. Applying those rates produces a production replacement estimate of $396,000 for Owner A and $330,000 for Owner B. Administrative replacement estimates are $24,000 for Owner A and $6,000 for Owner B. These figures do not establish what the owners must be paid; they establish a consistent labor-cost comparison for the stated hours and scope.
In a current arrangement scenario, total labor-related employer cost is $455,000 for Owner A and $392,000 for Owner B, before distributions. In a replacement benchmark scenario, the corresponding estimates are $420,000 and $336,000. The differences prompt concrete questions: Does Owner A's production benchmark adequately reflect the actual compensation design? Are the administrative duties sufficiently documented to support the estimated hours and rate? Does Owner B's lower administrative workload match the governance responsibilities assigned? The equal distributions remain in the ownership-return category unless the governing documents or advisers conclude otherwise. The example is illustrative only and should not be used as a market quotation or tax conclusion.
Avoid common analytical mistakes
A frequent mistake is treating distributions as salary or adding them to wages and calling the total "compensation" without qualification. That obscures the distinction between payment for labor and return on equity. Present a combined total only when it serves a clear purpose, label its components, and retain the separated view. Similarly, calling every owner benefit a distribution can hide employer cost, while calling every cash payment compensation can misstate the nature of an equity transfer.
Another error is comparing gross amounts with different work levels. Annual income comparisons can be misleading when one owner works more sessions, spends more time managing operations, or has different benefits. Use common measures and explain what cannot be normalized. Avoid relying on production totals that use inconsistent definitions, such as charges for one owner and collections for another. If source systems assign credit differently, reconcile the method first or present the limitation plainly.
Do not select a benchmark because it supports a preferred outcome. Evidence should fit the role, location, experience, time commitment, and employer-cost basis. A broad survey can be useful context, but it may not reflect a part-time administrative position or a practice's particular compensation design. Likewise, a single recruiter conversation may be anecdotal. Triangulate evidence where possible and show a reasonable range with its assumptions.
Do not infer hours or responsibilities from titles, ownership percentage, or recollection alone. These may be relevant context, but they do not establish what work occurred. Require specific examples and records for recurring duties. At the same time, avoid overengineering time tracking where exact measurement is impractical. A transparent estimate with a stated method is more defensible than a manufactured precision unsupported by records.
Finally, avoid using the analysis to settle unrelated disputes. Compensation, voting rights, equity value, and distributions can be governed by different agreements and policies. Keep the analysis focused on its stated purpose, identify questions that fall outside scope, and route them to the appropriate adviser or governance process. A clear boundary helps owners discuss economics without accidentally rewriting their agreements through an informal spreadsheet.
Review intended treatment with advisers
Before changing compensation, share the analysis with the practice's accountant and tax adviser. Ask them to review how the proposed payment categories should be recorded, whether payroll treatment is appropriate, and how entity structure, owner status, and governing documents affect the planned arrangement. The analysis can identify intended economics, but the correct accounting and tax treatment depends on facts and applicable rules that should be evaluated by qualified professionals.
Provide advisers with the scope note and reconciliation schedules; duty inventory and benchmark support, plus scenarios and unresolved-items log. Ask for written feedback on assumptions that affect reported income, payroll, deductions, distributions, or intercompany charges. If the practice has an attorney who advises on ownership agreements or employment terms, coordinate review where the change could affect contractual rights or approval procedures. Keep the advisory review connected to the actual proposal, not a general for a general sign-off on an abstract model.
Record the final decision, effective process, approving parties, and any conditions for review. The minutes or internal memo should state which scenario was adopted, what was not adopted, and why. Preserve the original analysis and revised version so later readers can trace changes. If the compensation plan uses targets or formulas, specify the data source, calculation frequency, adjustment rules, and person responsible for verifying the result. Clear administration reduces disputes about whether the practice followed its own decision.
Action checklist
- Define the decision, entities and owners in scope, the period covered, and the compensation terms.
- Collect payroll and ledger records; bank and distribution records, benefit records, production reports and duty records.
- Reconcile owner payments and document unresolved items.
- Separate production pay, administrative pay, and ownership returns.
- Record each owner's recurring responsibilities and hours, plus authority and supporting evidence.
- Build replacement-cost ranges for roles the practice expects to continue.
- Compare scenarios using the same period, definitions, hours, responsibility measures, and employer-cost basis.
- Label assumptions and illustrative estimates, then test how sensitive the result is to them.
- Have accounting and tax advisers review the intended treatment before implementation.
- Record approvals, calculation rules, and the next review trigger in the practice's records.
Questions about your own practice? Contact Richard@DoctorsInvestorClub.com.
