April 1st, 2020

HR News

Reducing Staff Costs to Weather the Storm

During these chaotic times, one of the tougher things you’ll have to manage is a reduction in staff costs. However, the difficult truth is that labor expenditures are the largest cost a hospital incurs—so effective management of these costs is vital for the long-term success of your practice. Adjusting staffing levels today puts your businesses in a stronger position so that you can increase hours and/or rehire staff once things start to normalize.

In the same way you add more staff to support revenue growth in the practice, you should also be considering reducing staff when revenue is slower, like during the current COVID-19 crisis. By basing staffing levels on the revenue being generated, you ensure your payroll margin (payroll costs as a percentage of revenue) doesn’t deviate and cause major profitability issues.

For example: if your hospital is down 30% in revenue from normal levels, you should consider reducing staff costs by 30%. The benchmark for payroll expenditures as a percentage of revenue is 38% (roughly 19% DVMs and 19% support staff). These are very large costs to the business, and as top-line revenue is impacted these numbers can dramatically grow if action isn’t taken as soon as possible.

Reduce Hours or Lay Off Staff?

We strongly recommend you explore all options before deciding to lay off employees. Reduction in hours is a starting point for reducing staff costs. Ask your team if anyone wants reduced hours or if the total hours needed in reduction is known, the team could collectively decide what hours to reduce to achieve the desired result.

If these options don’t yield results, then as a business owner or practice manager you will need to make hard decisions on who to reduce or potentially lay off. Assuming a decision has been made at the practice owner level that layoffs need to happen, employees may elect for a volunteered layoff. Please familiarize yourself with the differences in employee exits here.

Deciding which positions to lay off will be unique to the practice and how you maintain staffing levels. If you are scheduling support staff based on DVM days, DVM day reduction should be reflected in support staff reductions. If you know you are overstaffed today in a certain position and revenue is negatively affected, now would be a good time to lessen the capacity of that position and lay off employees in that department.

 DVM Compensation

The other part of the equation for total staff costs is DVM pay. If your providers are set up on a production-based salary, slowdown in top-line revenue is somewhat mirrored in DVM production pay (if they aren’t making production, you’ll just pay out production above base pay). This isn’t always the case, so it’s just as important to monitor DVM days in the same way you monitor support staff levels.

Similar options for a collective decision about reductions exist with DVM days—you can ask if your doctors want to do less days. We would recommend a temporary reduction in base salary to reflect less days worked, but you can still maintain the production side of pay to continue to incentivize revenue production on the days they are working. Given how challenging it is to hire DVMs these days, we would advise that you do your best to opt for DVM pay reductions over DVM layoffs.