4 compensation plans that can make or break you
How do I pay my staff!!!???
Compensation is a HUGE concern for owners and staff alike. Choosing the wrong one can literally put you out of business in no time. With so many different systems out there and payroll often being your number one expense, how do you find the one right for you? These 4 types below should give you a clear picture on which one you should use to get profitable.
This, as well as salaried, is how most of the nation is paid. If someone is at work they get paid for it. The benefit is your staff will always know what to expect, as well as yourself. By offering an hourly pay you’re offering security (people work for more than just money). You can keep your pay rate lower than a typical commission scenario since it’s guaranteed. Just make sure you have enough clients so that you aren’t paying your staff to sit around all day. This not only is a very successful model for spas that are very established and busy (many resort spas pay hourly since they don’t rely on their staff to get their business) but is common in many hair franchises as well.
Additional benefits of hourly pay are that you can focus (and afford) on other types of benefits/compensation as well. Insurance, perks, training, bonuses, paid vacation, sick days, etc. are now all within the realm of something affordable. Items such as these offer better employee satisfaction. Take away all these other benefits of compensation and all your staff is left with is money. Supply these benefits (as well as praise, education, etc.) and money becomes less and less of an issue.
Salesmen are often commission based. It can be a percentage OR a flat fee per service, but the point is that you only pay your staff when they are actually performing a service. We’ve found many salons work this way. Since a stylist often has their own client list and following, they can demand a higher amount. The typical salon percentage was 50% for years. Many spas took this example and implemented it into their spa. That may not have been the best idea. With spa staff, they often do NOT have a following. They are relying on you to supply the clients. So if you’re paying a high commission AND have to do all the advertising to get clients, you’ll find yourself in hot water quick! Expenses alone are often well beyond 60% in a spa BEFORE staff, so anything near 40% leaves you with practically nothing as an owner. Copying the salon model in a spa is where most spa owners doom themselves before they even open their doors.
If you’re paying a smaller percentage (20-30%) or flat fee/service (an even better setup for commissions since price increases don’t automatically create pay raises) it’s will keep you much more liquid. However, your staff will be very nervous when the books are slim. They’ll want to be on call (this has never worked out well for us), show up late and leave early. They feel that they aren’t being compensated for their down time. You can try to negate this feeling with paying min. wage OR commission, WHICHEVER IS GREATER, but they don’t relate too well to that either. Since they’re used to $X/service, the idea of making that OR minimum wage isn’t appealing to them.
Commission PLUS hourly, your staffs dream
A commission for each service AND an hourly rate for the down time is what every employee dreams of. It would most likely be your worst nightmare though. They get the best of both worlds, a high salon style percentage and hourly down time pay. For an owner, you are not only offering a decent pay hourly for nothing, but also higher commission pay when they’re busy. Some med-spas have taken this but reversed the typical roles of it. Instead of a higher commission and lower hourly, they offer a very small commission (let’s say 5%) and a higher hourly (let’s say $15/hour). So in this case the commission is more of a sales-bonus. Med-spas are a new and different breed though and their model is yet to stand the test of time.
This is a very popular salon model. Renting space is the cosmo’s end dream. Just out of school when they have no clients, they want paid hourly. Once they get busier they’ll want to be paid commission. Once your split of the commission is the same as booth rent, they’ll want to switch to that. Simply put, that’s all renters should be doing, renting space. They should get a key and that’s it. However there’s a lot of grey area. Mainly with who’s the boss? If someone is renting from you they should be running their own business. All phone lines, credit card transactions, business cards, signage, booking, ringing up, advertising, etc. should all be the renter’s obligation. As a landlord your obligation is to give them a key and collect rent. But the lines have been blurred here and the owner is supplying EVERYTHING the renter should be and are still getting very little for their efforts, just a meager rent check.
There’s also the issue of creating your dream spa experience. When someone else is the boss of themselves (they are just renting after all) they can perform and act however they like. For you to be in charge of your place, you can’t let someone else open up shop within it.
So what’s best?
Naturally, it depends on your situation. Do you want to create a dream spa experience and need everyone to follow your rules as an employee? If so, booth rental is out. Here’s what we’ve observed:
Many new spas start out commission based, since they can only afford to pay out when there’s money coming in. This is why many fail, they forgot to build in working capital and end up with not enough operational funds, or money for themselves. So you’ll see spas offering a higher and higher percentage commission to lure in staff that has a following. What it means for staff is a higher pay/service but fewer clients.
Hourly we see at spas that are packed with clients and don’t rely upon their staff to supply them. Since they have the clients coming in to cover expenses, they can guarantee an hourly rate that would translate to a very small commission. But since they’re paying less, they can offer security along with other benefits that staff find attractive.
Commission plus hourly would get very expensive unless you reverse the typical roles and go the med-spa way of a higher hourly with a smaller bonus commission, but then that is similar to hourly with a commission benefit. Booth rental will provide very little income and we feel is still best when offering a small space to someone with a large following, which means pretty much salons only.
Here’s a funny side-note we observed. Regardless of the pay, a higher commission salon with few clients, or lower commission fee/service with a more clients, or a decent hourly with many clients it all comes out to about the same HOURLY pay. When you factor in all of your staffs types of pay, the service/hourly pay, their retail sales and tips, most average about $20-$30 something per hour. And that’s what it’s all really about for them anyway. Try to get them beyond the “setup” of pay and into the reality of “this is what your paycheck is going to be.” More on that in another article though…