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Better career opportunity or better location?
What’s on the mind of Dentist Money™ Show listeners? Well, with so many choices in dentistry, and so many young dentists wondering, Reese and Ryan weigh in on “favorite location” vs. “best opportunity.” You’ll also discover more about “momentum investing” and who uses it as an investment strategy. Plus, there’s a good discussion on the effectiveness of bonuses vs. ownership for motivating employees.
Ryan Isaac: Hey, Dentist money show listeners. This is Ryan Isaac. We have a great show for you today. Today we’re talking about questions that you’ve submitted about, how do you pick the job versus the location or the location versus the job? Big Question. We’re talking about momentum investing and we’ll be talking about how to bonus employees. All of these questions came from our Facebook group. Please go to dentistadvisors.com/group join our free Facebook group and you can post your questions for upcoming episodes just like this one. Also, if you want to talk to us, we’d love to hear from you. Go to dentistadvisors.com and Click on book free consultation or call or text us at 833-DDS-PLAN. Thanks for tuning in. Thanks for listening. Enjoy the show
Speaker: Consultant advisor and conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by dentist advisers or registered investment advisor. This is dentist money. Now here’s your host, Reese Harper.
Ryan Isaac: Welcome to the dentist money show where we help dentists make smart financial decisions. I am your host Reese Harper here with my trusty cohost, Sir Ryan Isaac.
Reese Harper: And Good morning to you. Top of the morning, top of the mid-morning, afternoon.
Ryan Isaac: I’m excited. We’ve got a good powder storm coming in, I’m looking at 30 to 40 inches over the next few days.
Reese Harper: Oh really?
Ryan Isaac: I almost went to see a client in Lake Tahoe because they have 66 inches coming in over the next few days. Shout out to anyone in Lake Tahoe.
Reese Harper: Anyone randomly listening in.
Ryan Isaac: Squaw valley is demanding a visit.
Reese Harper: Tahoe?
Ryan Isaac: No.
Reese Harper: So, you do Jackson?
Ryan Isaac: Well, California is not known for its… I mean this has been a particularly good year for California.
Reese Harper: Yeah.
Ryan Isaac: Yeah. Typically.
Reese Harper: It feels like all the West, the snow’s been really, really good.
Ryan Isaac: Better than Colorado. [crosstalk]. Better than Utah. It’s been unusually great. So when you live next to like six ski resorts, you don’t typically leave your state but-
Reese Harper: And you’re within driving distance, like 15 minutes of four of them.
Ryan Isaac: Yes.
Reese Harper: You don’t usually leave, but man, this is like me and my wife had to have a long conversation last night about-
Ryan Isaac: The old.
Reese Harper: The advisability of leaving two weekends in a row.
Ryan Isaac: You? leaving two weekends in a row?
Reese Harper: For me to leave two weeks in a row. It just wasn’t passing the all sniff test. So, we had a little reshuffle of priorities.
Ryan Isaac: Well shout out to the powder then from-
Reese Harper: I’ll have to find my way up to alta or snowbird.
Ryan Isaac: All right. The old standbys, good thing people still travel from all over the world that come here. Yeah, I guess I’ll go do it.
Reese Harper: So there’s a reason we’re talking about snow fall to begin with.
Ryan Isaac: Exactly. And that is…
Reese Harper: As the flakes fall from the sky. So to the questions fall from the podcast listeners and our Facebook.
Ryan Isaac: It’s exactly what happens.
Reese Harper: In social media, it’s like in the winter for some reason-
Ryan Isaac: And they’re all unique like a snowflake.
Reese Harper: There’s a plethora of questions coming in and we’ve found a couple of Dandies, a couple of doozies, that we’re going to hit today.
Ryan Isaac: Dandies and doozies. I think we have both categories today. Dandies and doozies.
Reese Harper: And I’d like to just get right to it.
Ryan Isaac: All right. The first question is about investment strategy.
Reese Harper: Okay.
Ryan Isaac: And the question is, this was from the Facebook group. What is momentum investing? What does that mean? How should I think about it? When does it apply? Who does it? Who doesn’t do it? That was the question, so let’s start with a little bit of basics. What is momentum investing?
Reese Harper: Okay, well, it depends on if you’re talking about the ski brand. Okay, I’ve got to get off that 10.
Ryan Isaac: No, do you like momentum ski clothing?
Reese Harper: When you’re investing in your in momentum gear. That’s momentum investing. When you’re on the slopes. Momentum investing is pretty simple. It’s a system of investing where you’ll buy stocks that have… or other securities, it doesn’t have to be stocks that have done well and [crosstalk], period, namely maybe a three month period, maybe as high as a 12 month period. And then you’d sell stocks that have had poor returns over that same period of time. So you kind of keep the ones that are going up the fastest and you get rid of the ones that are dropping the most and there’s a ton of momentum strategies.
Ryan Isaac: Yeah, a lot of them, ill just throw in that.
Reese Harper: The time period you use is pretty critical, and then the type of asset that you trade is critical-
Ryan Isaac: And the indicators you use to tell you when to actually execute the trades is varies a lot too.
Reese Harper: Yeah. Detail that out a bit for us.
Ryan Isaac: Some people use, well it depends on the time period, but they’ll use moving average indicators. They’ll use a 10 day, a 50, a 200.
Reese Harper: Slow down on me. What’s a moving average indicator?
Ryan Isaac: I like throwing these out actually. This is how I talk when I go to dinner with friends. I just start saying things like, hey are guys moving average, 10 day.
Reese Harper: You know what I’m talking about. The old 200.
Ryan Isaac: You guys check out the 200 lately. Call them Memes.
Reese Harper: So back up and tell us what the moving average is.
Ryan Isaac: Moving average is an average of price over a certain period of time. And it’s a trend line. It’s kind of a smooth trendline and then you can have it in different time periods. So you can a trend line of the last 10 days of pricing, 10 day moving average. It’s the average of the last 10 days of prices. You can do it over 50 days or 200 days.
Reese Harper: So basically what you’re saying is, deciding when to buy or sell the stock, which is kind of this purpose of momenting, is one of the big variabilities in your trading is what you determine is high movement or-
Ryan Isaac: What’s your trigger?
Reese Harper: Do you want to see a 20% incline? What is your incline before you’re willing to sell or before you blend to buy?
Ryan Isaac: And over what timeframe and you said what kinds of securities they are too. So, I guess the bottom line is this is something that was documented kind of first discovered in the early 90s by a couple of people. And it’s like you said, it’s just the tendency of winners to keep winning from anywhere from three to 12 months. And so people build strategies based on this momentum of how things are moving. And then you said, there’s so much variability. Some of them are only long strategy, so it’s only buying winners, but then some of them are short strategies too. And then some of them are combinations of the two.
Reese Harper: And a short strategy is what?
Ryan Isaac: So that’s what you were saying when you have momentum to the downside, when a stock is like losing price, again based on whatever metrics you’re tracking it on, then you would short those stocks too. Yeah.
Reese Harper: So, I guess what do we want to talk about as it relates to this now that we know the definition?
Ryan Isaac: Yeah. So the question was who uses it and who should use it and when is it appropriate? When does it make sense and what are the alternatives?
Reese Harper: I would say it’s gotten more press in the last few years than it would have had over the last 10.
Ryan Isaac: Yeah. It’s funny because when you search different posts or articles or things about, or papers about momentum, even four or five years ago, people were bagging on it pretty bad. But it’s got a little bit better in the last few years.
Reese Harper: And so, why do you think the question’s coming up today? Right now? Maybe because we’re hearing about this a little bit more often because of how it’s performed or?
Ryan Isaac: I don’t know what prompted this. Right now we’re January, 2018 so it’s been a period of… January, 2019. So, the end of 2018 was kind of a down period and then a sharp spike back up. So that’s probably, there’s just more volatility in the last six months and there’s been for a few years actually. It’s probably what brings it up.
Reese Harper: So should someone do momentum investing? Why not? What’s the difference between momentum investing and regular investing?
Ryan Isaac: The old regular standby investing.
Reese Harper: Yeah. Well, what are some other characteristics about momentum that would make it not quote unquote regular? You have a high amount of turnover with momentum I guess this is another variable is do you hire a manager or by a fund who’s manager does all the buying and selling or do you do that yourself with your own individual securities?
Ryan Isaac: Okay. Well, let’s assume that either way we’ve got a disk… I would say that most people are not going to be momentum investors individually. They’re listening to this podcast, but there are a few. We’re going to address the people that are buying funds. Well and I’d say there’s a difference between, there are indexes that invest this way and they have very, very strict rules that govern when securities are bought and sold. And then there are active managers who specialize in this like AQR. And some of these managers highly focused and highly specialized in this area and some are more, and we’ll say they have a little bit of leeway around the way they look at their 50 to 200 day moving averages and when they exit and when they determine Is it a three months or 12 or seven.
Reese Harper: And there’s some flexibility. Where an index is going to be a little bit more rigid. And when the rule is triggered regardless of the tax consequence or the turnover, I mean, they’re just going to be a little less expensive. And there are a lot of mutual funds and ETFs that aren’t actively managed that still pursue the same strategy.
Ryan Isaac: Okay. So how about we start with a, let’s do this. what would someone say the pros of momentum investing are? What would someone say that would be?
Reese Harper: Well returns is your primary driver like over certain periods of time focusing on momentum as your primary investment attribute of return.
Ryan Isaac: It’s because of returns.
Reese Harper: Yeah. It’ll be mostly because of return.
Ryan Isaac: Now the cons are at the expense of what? You’re pursuing returns at the expense of?
Reese Harper: Cost, tax minimization, turnover and predictability because you don’t have… Investing in the total market would just be owning all the securities.You’re getting exposed to momentum through owning, let’s say in the United States, all 3000 plus securities. If you own all 3000 plus stocks in the United States, you’re still getting exposure to momentum.
Ryan Isaac: It’s not focusing solely.
Reese Harper: You just not exclusively focusing on it anymore than you’d be exclusively focusing on small capitalization stocks or the tech sector.
Ryan Isaac: You’re getting some.
Reese Harper: I mean if I said right now, well what was better momentum or the tech sector, well you could say, well, there’s a lot better if returned maximization over a historical period is your goal, we could isolate another segment of the market for you right now that looked a lot better than momentum.
Ryan Isaac: In hindsight.
Reese Harper: In hindsight, it’s an investing strategy that if you chose to overweight that in your portfolio, the downside of that is going to be some cost-
Ryan Isaac: Tax inefficiency.
Reese Harper: And some tax inefficiency.
Ryan Isaac: And I would say probably, a lack of diversification because if that’s your strategy in your portfolio, you’re not going to be diversified at all times.
Reese Harper: Not, you wouldn’t be as diversified no. You wouldn’t. And the same way you wouldn’t be as diversified if you overweighted in any sector or if you had too much gold in your portfolio or too many commodities and a lot of people choose to do that. They’ll take one particular strategy and they’ll emphasize that. And there is over any period of time historically you’ll find strategies that you could look at and say, Oh, do you know what, this would have been done better than owning the broad market.
Ryan Isaac: That would have thing. They’ll just get you though. It’s like what are you going to do about that.
Reese Harper: I think the debate that scary for me around picking a particular strategy is just what if I’m wrong for an extended period of time, would I rather have the possibility of more upside and incur a little bit more cost at the possibility of more upside? Or would I rather have the expectation of the market average? And know that I will get that no matter what. And I’m not going to miss at least getting the average. Anytime you taking a page out of John Vogel’s playbook, I mean, he talks a lot about this zero sum game in investing which essentially means that there’s a certain amount of return that’s available for everyone to get, so let’s say it’s 10% in stocks per year. And some people are going to get more than that and some people are going to get less than that, but once you back out fees and expenses then people in aggregate or combined are going to get, there’s only one total amount of return that’s available.
And so if you have more expenses and fees than the next person and you’re targeting, hopefully you’ve trying to get higher than the average is what you’re doing when you’re becoming a momentum investor or-
Ryan Isaac: Focusing on anything specific.
Reese Harper: Anything specific concentrated, you might get more, but you might get less, but you’re not going to get the average.
Ryan Isaac: You lose some predictability.
Reese Harper: You lose some predictability. And that’s a choice you can make. And if a client was like, you know what, I want to have 10% of my US equity portfolio that’s concentrated in momentum, I would be like, oh, okay. That’s your call. [crosstalk]. But try to be consistent with that philosophy over the next 15 to 20 years because there’ll be periods where you’ll win and there’s periods where they’re going to get crushed.
Ryan Isaac: And you’re going to question it. Just like anything. I mean, people say that about having a diversified portfolio. You know, you’re diversified when there’s always something you hate in the portfolio. So I think what the point, maybe we could end this section on that I like that you’re saying is, no matter what the investment philosophy is that you choose to pursue, I would say number one, understand what it is and set up the right expectations if right from the beginning, right. Don’t expect I’m going to get the average market return, but I’m not going to do the average market thing. So you can’t, I mean, just line up your expectations with what your actions are, what you’re actually doing in your portfolios. And then the other thing you said, you have to see things through. So momentum is not going to be something you can just pick for a couple of years and test it out and then like go to something else and then go to something else.
Reese Harper: Yeah. And this is the exception in the active management world. In this strategy would not be as common as someone who relies on fundamental factors and value factors and accounting based metrics to pick stocks. So very different from, this, is it someone that, a momentum investors typically depending on more technical indicators to allow them to determine which parts of the market are having the most momentum right now, which ones are growing the fastest? I think it’s important to realize this is a minority of active managers that are pursuing this strategy. And you’d see far more people pursuing accounting based analysis for active management.
Like, which stocks are cheap, which ones have the highest future dividend expectations. Based on their current financial statement. Their momentum wouldn’t be a factor that more fundamentally tied analyst would use to pick a stock. And so, don’t feel you’re left out in the dark if you don’t have a momentum in your portfolio. But it would be something that if you’re pursuing, this as part of the diversified plan, you wouldn’t want to overweight this significantly. This would be a sliver of emphasis rather than your primary way to capture stock returns because you could be really wrong and not even get market returns over the next 10 to 15 years depending on how you are going to tackle it.
Ryan Isaac: Okay. And the other part of that is if you were on a ski slope on the mountain in momentum clothing and trading at the same time on your iPhone, that’s momentum investing.
Reese Harper: What if you’re trading a momentum strategy with momentum clothing?
Ryan Isaac: Ooh, that’s momentum inception.
Reese Harper: I’m just saying, it gets deep.
Ryan Isaac: Okay. All right. Question number two, more philosophical. A little lighter here. This will be an interesting one. Had someone ask, coming out of dental school, should I choose the career opportunity and the location second or should I choose the location first and the career opportunity second. Meaning what’s the highest priority for a new dentist coming out of school? What would you tell a student maybe they grew up in a certain place. A lot of people leave to another dental school, right? So they go somewhere that maybe they don’t want to stay, but they went to dental school somewhere and then they have somewhere they want to go. Maybe they want to go back home, maybe they want to go somewhere else. Do they just take wherever the best opportunity is or do they go to the place they actually want to go and find the opportunity? What would you tell any student?
Reese Harper: As with most choices in life? It depends.
Ryan Isaac: Tell me there’s an answer.
Reese Harper: No, you don’t get an answer.
Ryan Isaac: Do we have one of those magic eight balls and studio? I think we need to get one of those.
Reese Harper: Well, you know, that could be one way we could give advice. Yes.
Ryan Isaac: That’s part of the advice. Okay.
Reese Harper: For me, me and you would probably pick this answer. We would probably answer this question differently. I know your preferences and I know my preferences and we would definitely probably look at this slightly differently. And I don’t think there’s a right or wrong way. Different people are wired differently and you just need to know how you’re wired. Like you’re going to do the type of person that looks back and is like, I never got to live where I wanted to live though. I never got to live in Seattle where I grew up. I wanted to live there or I wanted to live in the east coast, I want to live in Manhattan. I wanted to say that I did that and there are people that, that is their biggest driver.
They’re like, tell me what job gets me to Alaska because I want to live there. And that’s okay. If that’s a strong driver for you. The other type of personality might be somebody that just says the job and the quality of the job, maybe the income or the financial security it provides me. They wouldn’t even pick occupation first. They’d be like-
Ryan Isaac: what makes the most money?
Reese Harper: Some people would say what’s it makes it-
Ryan Isaac: And within dentistry, see that’s really interesting too because you could say I choose career first over location, but within that decision there’s probably, well are you looking for a really hands on deep clinical experience, slow with patients? Are you looking for the biggest opportunity to have no competition within miles and miles? Are you looking for the best opportunity to build a DSO?
Reese Harper: I mean look at where we are having this conversation last week over Voxer in our group chat in our office and we were talking about weather patterns and how weather, the global climate affects population density and the bulk of the population of the world lives in the warmer climates. That’s where the majority of people end up going. Right. And it’s just more comfortable. And so a lot of people, they’re more comfortable in a more temperate climate and that’s just Math. It’s statistically-
Ryan Isaac: This is where humans migrate.
Reese Harper: Yeah. And less people are comfortable with Alaska and less people are comfortable with Canada. There’s 30 something million people there, but it’s colder than the United States. And for the most part it’s population is driven by climate a lot of times. And so a lot of people are just driven by climate. A lot of people are driven by work. I would say if you’re driven by work, you’re still not put in a box where it’s money only. It could be the experiences and market. I had a friend that just launched a business, the last place he wanted to live was salt lake, but he launched a business in Salt Lake because it made the most sense for his business. But he doesn’t like it here. And I love it here because it has a lot of things that for me drive my personality. So, I just get to do what I want all year long and then also build a business and it’s great. So just don’t feel bad if you’re driven by one or the other.
Ryan Isaac: How do you figure that out though? How do you figure out who you are if you’re a new dentists coming out and you’re like, I don’t know. I don’t know if am…
Reese Harper: Well if you don’t know then I’d say don’t let location drive your decision. Because if you don’t know that you want to be somewhere-
Ryan Isaac: And don’t get stuck somewhere. If you don’t know, maybe don’t go get that big mortgage yet. And if you really don’t-
Reese Harper: Well I would say period, don’t get that big mortgage yet. But if you don’t know if where you want to live is driving your decision then try to make the best career decision you can possibly make. And I think that’s going to be something that you’ll never regret. If you make a lot of money and have a great career and you are in a good financial position, you can travel wherever you want to travel the whole world over-
Ryan Isaac: And go see what you want.
Reese Harper: You can experience a lot of things. And so, I don’t know, I know a lot of people that just, they’re driven differently that way.
Ryan Isaac: I’m thinking about a dentist, a client who had a location in mind for years. He was in corporate dentistry’s in the Midwest, had a location out in the west in mind for years and was like heavily shopping and then buying two practices in a place he never thought have opened up and he ended up going there. And so far so good. Super happy in the practice is really successful. So I think that’s another thing too. kind of just never know. You never know it’ll happen. I think you have to do your best to try to figure out who you are and then pursue the best opportunities in front of you. But then just keep an open mind because you never know. You might choose something that you didn’t think you’re going to choose or you know,
Reese Harper: I’m really big into the book of joy that I’ve referenced here on the podcast before. It’s Desmond tutu.
Ryan Isaac: We should do a little contest and we can send some books of joy.
Reese Harper: So, the book of joy focuses on what makes people happy and as he’s fundamental like four human emotions that drive people, there’s sadness, there’s fear, there’s anger and there’s joy. Those are kind of your four fundamental things. And three out of the four are negative emotions.
Ryan Isaac: I remember that part.
Reese Harper: And one’s kind of a positive emotion and for the most part, climate and where you live and your environment or your job or whatever you do, it won’t ultimately derive the joy that you experience and joy measurably is driven by how much of your life is spent worrying about people around you and trying to help lift up people around you and serve others and empower people around you. Whether it’s family, friends, patients, coworkers. The more time you spend on yourself, the less happy you are. And it’s actually, most people confuse the drivers of joy in their life and they don’t realize that joy and that happiness is not as much about the things they think it’s about. And so it’s just important I think to remember that.
Ryan Isaac: Interesting. Okay. That was deep.
Reese Harper: I just don’t think for me personally, the job that you have, the career that you have, the place you live, all of these things, they are important because they do interact with an important part of your personality that I think can ultimately make you more content. But joy or real happiness will never really be matched up with those things.
Ryan Isaac: Yeah. Exclusively.
Reese Harper: Some people bounce around a lot trying to find that and there’s nothing wrong with making some changes in life and switching things up and trying a few things out. But I think what makes someone happy is very different than what we it to often.
Ryan Isaac: All right new dental student.
Reese Harper: Don’t forget that young man. The Dalai Lama has spoken.
Ryan Isaac: And Reese and he’s getting older.
Reese Harper: Not me. That was directly from the book. I don’t know that stuff.
Ryan Isaac: We should really host, kind of, hey, the first three people that share this and tag you in it on Facebook or Instagram. This post, you’ll personalize a copy of Dalai Lamas book.
Reese Harper: How can I personalize a Dalai Lama book?
Ryan Isaac: You’re just like, hey…
Reese Harper: He doesn’t even know.
Ryan Isaac: He really wants you to have this and you’ll find a lot of joy. Love Reese.
Reese Harper: I want to meet him one day. He’d be like, greetings.
Ryan Isaac: It would be great. All right, let’s go to another one here. This was a question about employee bonusing and comp structure and how to motivate employees through comp.
Reese Harper: Wow, ask the question. I didn’t hear it. I just heard general.
Ryan Isaac: That’s the general. So how do I build an employee bonus and comp structure that’ll motivate my employees? So I thought maybe we could talk just kind of generally your experience as an entrepreneur and business owner. Have you seen people react to compensation? Incentives? How much that really drives people? Where that fall short? And maybe some advice. I found a resource from little shout out to a good friend, Gary Takacs. He has an episode on his thriving dentist podcast. It’s a couple of years old. It’s called a bonus system for thriving dental practice. If you Google that.
Reese Harper: Gary shout out.
Ryan Isaac: That was a good one. I listened to it a couple of times and have recommended to people as a foundation to listen to you. But what would you say of your experience of motivating people through compensation? How it works, where it falls short?
Reese Harper: I’m kind of struggling with, I’ve got all this academic kind of research that is Ben built from the 60s through now on bonus and comp. And for me and even my board that I interact with, they have a different philosophy on compensation than I do. A lot of them are from a different generation and I’m kind of like this is a really important topic for me because I’m not sure I feel the way I should feel and maybe I’ll change my mind one day. But the data is telling me something different than I feel.
Ryan Isaac: Okay. So what does the data tell you? What do you feel you are felling?
Reese Harper: The data tells me you’re supposed to have very deliberate bonus compensation. And I’ve found that in some cases that’s helpful. I would say you have a base compensation that makes people feel comfortable and then you have bonus that is somewhere between 10 and 20% of that base pay that occurs either on a quarterly or an annual basis. I find that annual for some people might be the best compensation trigger. And for some people it’s quarterly. I don’t think anything faster than a quarter is actually that measurable. I think even in hygiene productions and example where people bonus often more frequently than quarterly.
Ryan Isaac: And when you say deliver it, you’re saying it’s clearly tied to a metric and that metric has to be controlled by the person being incentivize, have them control over it.
Reese Harper: You have to have, that’s what the data would say. The data says that if people have clear understanding of the things they control and those metrics, then it’s highly motivating. And I find that in some roles that’s actually quite relevant. And hygienists might be an example where that might actually be very relevant, but in my own personal experience.
Ryan Isaac: Lets here this now.
Reese Harper: I haven’t found that people behave much differently. Certain roles it doesn’t really change behavior enough. And honestly sometimes I think it can take your culture to a place where you don’t want your culture to go. So, for example, I’ve always compensated fairly and felt the right compensation plan is a generous compensation plan. Not Excessive, but not cheap. But I feel my board always gives me pushback on salaries for example. So it’s like, why are you giving them a raise? Why don’t you just have it be a bonus metric? Or why don’t you-
Ryan Isaac: And you were saying generational because that was a more of an academic or thought process from 20, 30 years ago.
Reese Harper: I’m not saying it’s wrong, I just might be naive and young and they still have to convince me that I’m wrong.
Ryan Isaac: Freaking millennial.
Reese Harper: But my experience has been that, if I continue to have the conversation… If someone is comfortable and you’re giving them an increase in compensation that’s steady. Is that much different than bonusing?
Ryan Isaac: Where they can have a much bigger pop if they did X, Y and Z tied to that? Or smaller or nothing.
Reese Harper: I mean, what’s better for your culture. I don’t know. But in my experience if someone doesn’t have very direct control over a metric then it makes no sense to compensate them.
Ryan Isaac: And that happens a lot, don’t you think?
Reese Harper: Oh, Yeah.
Ryan Isaac: Don’t you think kind of throw out a general kind of bonus plan and it’ll apply to one. I mean, in a dental practice you have multiple different team members and it’ll work for one, because they have a lot of control over that. But then the other people be like, I have no control over that.
Reese Harper: Like in our company right now we have like four different types of compensation that are going on. We have very revenue driven compensation. We have bonus compensation based on KPIs. We have fixed salaries and triggers of equity compensation. We have a lot of different types compensation matrix.
Ryan Isaac: And then you have that one where it’s just depending on how you feel that day.
Reese Harper: And we assess them hourly and we have hourly.
Ryan Isaac: Yeah, that’s true, hourly contract work.
Reese Harper: In my experience it really needs to be customized to the role and to the person. And some roles need bonus compensation, some are going to respond better to just regular salary increases. I would put the regular salary increase and kind of compensation of it. Let’s say you have an annual conversation with an office manager once a year around the value they’ve added. You always have to have metrics that you’re using to measure what success looks like.
Ryan Isaac: And the metric of the, we went around the sun. Isn’t the metric of but it’s time for a raise because we… I had a client tell me that once, it’s time for the annual, we went around the sun rays talk, what changed? What are we doing differently? What are we working on?
Reese Harper: You are right. I mean foundationally you have to be able to say. We haven’t always had this, but I do have pretty concrete ways to measure success at most, I would say most of our roles at this point, not all of them and I just think it’s really important to at least have those criteria. If you sit down, you have no objective way of measuring what success looks like. Then whether you do a raise with bonus or whatever your structure is…
Ryan Isaac: It’s not based on anything and it’s not measurable and it’s not tied to actual things that are in control of.
Reese Harper: My big point of this, the thing I’ve been taken away is, I used to be like a super strong believer in bonus metrics on a frequent basis based on KPIs. And I’m just not leaning that direction as much anymore because I think that many roles don’t change their behavior and it actually cheapens your culture when you do that in some roles. And I’m specifically talking about management level and people who are looking at a bigger picture view.
Ryan Isaac: Interesting.
Reese Harper: The better form of compensation for that type of person I do think is equity compensation. I think it triggers a better collective collaborative focus.
Ryan Isaac: So that would really apply to an associate dentist, partners?
Reese Harper: I’d way rather have my… I’ve done this a few times and I know this is getting into potentially too much advice for a podcast, but I’ve had a lot of conversations and helped structure compensation arrangements with associates that in lieu of getting paid a percentage of production. So it’s just start earning a small amount of equity in the overall practice. And man the behavior is very different. I mean, when they’re earning equity in the business, they’re also getting profits from that equity and they’re getting bonused from those profits that kick off. Even if it’s a small amount of equity, the psychological difference between I’m an owner and I’m an employee, it changes things a lot. And I don’t think dentists don’t use their equity very wisely sometimes.
Why not carve out of the practice asset itself? I mean let’s say it’s a single or up to three location operation and the practice asset is worth several million dollars. If you carve out five to 10% of your total equity for your employee compensation and you said one day instead of netting a couple of million dollars on the sale, I’m going to net 10% less, so am going to net, 200,000 less. But I’m going to give people the feeling of my commitment level to them. They’re going to get, instead of getting bonus based on production, they’re going to get bonus based on profitability. I mean, how would that economically change turnover? How would that economically change incentives?
And are we too protective of the equity? Sometimes I think so. Sometimes I think we’re holding onto this thing that we just don’t understand that well as founders. And the more you understand about it and the more you go, you know what that is, it’s an important tool I have to use. I need to use that tool instead of leaving it vacant on the shelf and just being one day maybe I’ll bring on a partner and that’s like we have one option. It’s kamikaze, 50, 50 or nothing. And that’s the only tool in our tool belt. It’s like, well it’s either 50, 50 or nothing. Or 51, 49 or nothing. Well, why don’t we just use it.
Ryan Isaac: Peel off a little tenor.
Reese Harper: Well use it a little bit more like cash. I mean, if somebody’s got some liquidity and they want to come in and partner, why don’t you let them have a little bit of equity and you’re not paying them for a year or don’t pay him for six months and let them earn that stock and you can keep the cash in your pocket. Or why don’t you just let them instead of having bonus on their production.
Ryan Isaac: Now is the reason though, that just seems really complicated.
Reese Harper: I know that’s my point.
Ryan Isaac: It seems it takes a lot of time and you probably need an attorney and other people to help you think that.
Reese Harper: You do. But we don’t talk about it enough. And we kind of feel it’s either I’ve got two or three options, I can sell it all. I can partner 50, 50 or I can sell to a DSO. Right. Or I hone on until I’m ready to be done. And none of those options are actually that effective. We’re not taking advantage of the entrepreneurial assets we have to…
Ryan Isaac: Incentivize and motivate and include and get buy in from other people in a different level.
Reese Harper: And sometimes its not even the economics. It’s just the fact that you’ve committed to someone in a way that you were unwilling to commit to anyone else. That feels tangible.
Ryan Isaac: So on that, I read a book a couple of years ago by Daniel Pink, it’s called drive, is an excellent book about what motivates people. And he argues that, and I’m just curious what you think about this. He argues that there’s three main aspects of human motivation and it’s divided into autonomy, mastery, and purpose. So what you were just saying kind of reminded me of that. Sometimes you’re carving off pieces of equity for shareholders. And it’s not about the economics of it, it’s about one of those things. It could be purpose. Right now they have a different purpose because they’re more involved, they’re more trusted, they’re a part of a team that they weren’t a part of before. And I’m just curious what you think, what you’ve seen about those things too, autonomy, mastery and purpose and how do those, I mean, those play into, right, with money incentives.
Reese Harper: Yeah. I mean, people and each of those people are motivated differently by each one of those. And for me autonomy is not my strongest motivator. I’m much more motivated by purpose and mastery much deeper. And I think some people are motivated by autonomy in a significant way. And that person effectively-
Ryan Isaac: In fact I’m walking out right now, I’m done. It’s all I got.
Reese Harper: The thing is though, autonomy is not someone that is not willing to work to work or own a business. Many people who are unwilling to share equity are also highly autonomous people. So you’ll see people that want, they don’t want the dependencies that sharing equity creates. And so someone who values autonomy a lot, we’ll be like, no…
Ryan Isaac: They can feel tied down to something.
Reese Harper: Yeah. Or a person or another person. It’s more, people depend.
Ryan Isaac: Oh, crap. Yeah. It was easier before.
Reese Harper: Yeah. And I just think that autonomy is probably the thing that keeps, If you’re someone who really, really desire’s autonomy, you need to kind of work a little bit on feeling like, Hey, I can let go of that just a little bit to gain maybe something better for myself. You don’t have to give it up completely. I mean, if that’s a driver you can’t fight against it. But pushing against yourself a little bit it’s be really healthy. And that’s usually the reason why a highly autonomous founder will even be willing to share any equity. I mean, giving up those 5% of your stock.
I’ve seen that, just be the heart wrenching for some people, and I’m like, come on man. It’s like they’ll write a $50,000 check, but they won’t give a $50,000 sleeve of equity to anybody. It’s impossible.
Ryan Isaac: That’s an interesting, okay. I’ll remember that.
Reese Harper: And again, you don’t want to be just frivolous with your equity. I think it’s really important to have.
Ryan Isaac: Now you’ve seen that. I mean, we’ve seen that happen in businesses too, especially when they’re young, they’re like I don’t know, it’s like Oprah, you get 20% and you get 20% and everybody gets 20% and then all of a sudden it’s like, oh crap, I didn’t, we should’ve have done it.
Reese Harper: It happens a lot. And especially the bigger you get, the more problematic that can become because you can’t change standardized compensation plans across. If you’ve got a $10 million in revenue practice, a $20 million revenue, a huge practice and you’ve got all your associates compensated in a certain way, rolling that back is near impossible.
Even if you get to three or four associates, it’s difficult. I’ve seen that kind of be a big challenge. You know that compensation is a problem but you can’t unwind it. And so you’re kind of stuck going, what do I do? And then you just don’t do anything. And you just run really low profitability for a long time. The way you can solve that is just not, even if you are over compensating on an individual level, you can force more production across those individuals and don’t have as many people. Sometimes it just means you have to have one last associate and if they’re all going to get paid that way then everyone’s got to start producing way more. They got to get busier, they got to take on more volume If they want to have that same comp plan in place.
So, I found that that’s a better way to go than changing the comp plan is saying, look, you can get paid this way. We just have to do more production.
Ryan Isaac: Here are the metrics, here’s what you have control over.
Reese Harper: And the inflation’s gone up, supply costs are changing. I can’t continue to compensate that same level unless we’re hitting these metrics and that these metrics we compensate this way and we don’t unless we hit these.
Ryan Isaac: And I think this is a hard issue for those who buy practices, where they knew inherit the staff half and it’s, I hear that all the time and you can’t back out of those things like what you’re saying. It’s really tough to do.
Reese Harper: I would never trust one person to give me my compensation metrics because even me with a master’s degree in finance, I don’t feel like the advice I’ve been given from third parties who I trusted immensely has been right for my practice.
Ryan Isaac: A 100% of the time.
Reese Harper: No, It’s never right 100% of time. I have to take what multiple people say and just do something. Okay. Just do something. Don’t just avoid, no, don’t be inactive and do nothing about it. Now would I ask my CPA, yes. Would I ask an attorney who’s had experience, dental attorneys are very experienced in crafting partnership agreements, contracts.
Ryan Isaac: Please don’t make partnership decisions without an attorney. How often have you seen that?
Reese Harper: Without an experienced dental attorney too.
Ryan Isaac: Please don’t do that. Involve one, pay one.
Reese Harper: I do think business consultants have a lot of experience in this area and I would consult one or two. It’s a quick phone call, free advice in most cases to get a tip. And I wouldn’t be afraid to engage somebody. I like consultants who are willing to gauge me all a cart in a small way. So find someone you can pay for some time and get some advice. But I wouldn’t be hesitant to, I do. This is a very important factor. I’ve spent a ton of money with other founders. I’ve paid consultants, I’ve paid attorneys, I’ve paid my tax advisers. I’ve had a lot of back and forth. It’s an important area to invest in.
Just start small and start with one person. Yeah. I would make sure that your key person that’s running your operation, your office manager, whoever that is, you start and nail that down for first. That is probably really important and your key producers. So your associates, your hygienists. Those are your most critical factors I think in the practice outside of that, I don’t know that there’s levers to pull quite as significant in a small average practice.
Ryan Isaac: Okay. Alright. Thanks Reese. Thanks for the input.
Reese Harper: Man Thank you.
Ryan Isaac: We started on a snowy note, we talked a little bit of momentum, snowy clothing or you want to end us on a snowy note?
Reese Harper: Well I am wearing my Christmas pants. They’re green flannels and it is still winter in my heart.
Ryan Isaac: You have a cold heart is what you’re saying.
Reese Harper: A frozen heart.
Ryan Isaac: You do have a frozen heart.
Reese Harper: That’s a frozen song. My kids sang it last night at the Karaoke, this is the ice pick guys. It was like they sang it out loud for two hours.
Ryan Isaac: The last line of that song. It’s something frozen.
Reese Harper: Frozen heart.
Ryan Isaac: That’s it. On that. Thanks for listening everybody. We’ll invite you to do two things. Give us some questions for a future Q and A. Go to dentists, advisors.com/group that’ll get you into our free Facebook group full of tons of great dentists and good questions and polls. And that’s where we pull Q and A questions. So dentistadvisors.com/group for the Facebook group. And if you want to chat with us, schedule a call on one of our advisers calendars at your convenience. We’ve got Saturday hours, lunchtime hours a day off hours. Go to dentistadvisors.com click the button that says book free consultation. We’d love to hear from you and we’ll see you around. Carry on.Practice Management