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Resources & Development - Pay Systems

Dermascope Nov99 1.jpg (363437 bytes)

How Do We Pay? / How Do We Get Paid?

By Skip Williams

(Owners Point of View) / (Providers Point of View)

With the close of the century upon us, the many changes in the Spa/Salon industry, as well as the changes in the economy, it seems to me it is time to reevaluate how we pay our Providers and it is time to reevaluate how we get paid from our Spa or Salon.

Why should we care? (Some Background)

Through my years of financial analysis of the Spa / Salon business I have found the payroll systems used, to be curious, unique, and usually less than effective. When I do analysis of a facility I break it down into "modules" using a "Financial Model" called "Build-A-Spa " (see article: Are You Planning to Build-A-Spa, Dermascope June/July 1998). This allows for a microscopic view of any single treatment or piece of the facility for a more accurate cost analysis of expenses.

Through this analysis and the use of other cost accounting methods I find it effective to break down the "cost elements" into categories of importance. Because of the labor intensity of this business, Payroll expense is by far largest and most important of these categories.

Pareto’s Principle

Vilfredo Pareto (1848 - 1923) was an Italian economist who formulated this well known principle:

"In any series of elements to be controlled, a selected small fraction in terms of number of elements almost always accounts for a large fraction in terms of effect"

Another name for "Pareto’s Principle" is the 80/20 rule; the 80/20 rule is about diminishing returns to effort. Often times, it takes only 20% of your effort to obtain 80% of your results and we spend the other 80% of our time chasing the small stuff.

If Pareto was to look at this industry, I think he would tell us that if we did nothing but control Payroll costs we would be doing at least 80% of our job. This is why this subject has so consumed me these past 6 years in the Spa / Salon industry. I have known it had to be controlled, but I was not sure how best to do it and treat both the Owner and the Provider fairly. In future articles I hope to discuss other ways of controlling labor costs that do not affect Payroll Systems, but today let us look at the advantages and disadvantages of different pay systems.

Commonly Found Types of Pay in the Spa / Salon Industry

There are three common ways that Providers get paid, Booth Rental, Commissions, and Salary or Hourly. In the following assessment I have tried to outline some of the advantages and disadvantages of each. You may find some of the assessment pertains to you and some does not. You may have many other points that you would add or delete from these lists, I would love to hear from you.

Booth Rental:

Booth Rental comes straight from the salon industry and is not permitted by law in many states. The concept is easy, an owner provides a room or a chair that can be rented on a weekly or monthly basis, and may provide a person to do reservations. The Provider works as hard as he/she wants to and keeps all they make less the rent.

(Owners Point of View)

Advantages

  • Similar to a Landlord-Tenant Arrangement
  • Same income every month
  • Little Risk
  • Very Easy to Manage

Disadvantages

  • Multiple Businesses inside your own
  • Little opportunity to increase business
  • Little Reward
  • No Team Work

(Providers Point of View)

Advantages

  • Own Boss
  • Keep all you make
  • Build your own Clientele

Disadvantages

  • No Control of Facility hours or rules
  • High Risk
  • Competition inside same Facility
  • Income Fluctuation
  • Little organized growth opportunity
  • Doing Your Own Sales and Marketing
  • Little Recognition

Commissions:

Commission based pay is probably the most popular form of remuneration in the industry. Commission rates are usually set by skill level, length of service, or size of client base. In Resort / Destination Spas and Salons there is much competition for the prime spots in the reservations book.

(Owners Point of View)

Advantages

  • Providers Eager to work
  • Easy to Manage
  • Little Risk

Disadvantages

  • Difficult to match pay to service level
  • Difficult to make profit
  • Multiple Agendas under same Roof
  • Little Team Work
  • Pulling Teeth for "In Service"
  • Performance Evaluations almost Meaningless
  • High Provider Turnover

(Providers Point of View)

Advantages

  • High Rate of Pay
  • Little Supervision
  • Build your own Clientele

Disadvantages

  • Few Raises
  • Little opportunity for Growth
  • Competition for work
  • Seasonal Income Fluctuation
  • No Benefits
  • Taking time to help others may cut into income
  • Difficult to get to the "head of the book"

 Salary / Hourly with Profit Sharing:

In the case study of Salary / Hourly I have added Profit Sharing. To alleviate any confusion let me explain how that works. Sometimes these are called team bonuses, but whatever you call them I find they are just the right mix of teamwork and motivation. They allow the whole team (usually front desk, housekeeping, everyone but ownership is included) to split a portion of the net profit, the larger the profits the larger the bonus.

One further point of clarification, we are only talking about pay systems for services, pay systems for retail sales are not being discussed here.

(Owners Point of View)

Advantages

  • Team Work Galore
  • Client Loyalty to Facility Easier to Achieve
  • Quality control much easier
  • Only One Agenda
  • Heavy Rewards

Disadvantages

  • Heavy Risk
  • Paying Providers to wait for Clients
  • More Work to Manage

(Providers Point of View)

Advantages

  • Helping coworkers, no loss of income
  • More Recognition
  • Helping to build overall business rewards self
  • Level income throughout the year
  • Positive Work Environment
  • Possible to get paid for what you know, not just what you do

Disadvantages

  • Change of Mindset may be Difficult
  • Career opportunities may make it difficult to break into own business

Risk = Rewards (Owners Point of View)

As with all businesses Risk = Rewards.

Booth Rental requires less risk (and work) and will yield a fairly static income for the Owner and a very dynamic income for the provider. There is no "payroll" to speak of, only the overhead.

Similarly Commissions risk is low, and I continually hear from owners that have spent a lot of time and money, that their profits seem to be low or nonexistent even as they fill the book. The payroll expense is a very variable expense, and with this system you will usually find that the most expensive providers in the facility are doing MOST of the treatments. With this system we have asked the Providers to take the risk, why then should we be surprised when they take the reward also?

Salary / Hourly risk is high, providers must be paid whether a client comes through the front door or not. The expense becomes a less variable expense, a locked in cost of doing business. Benefits are usually paid and training must be an on going process. If we are doing our job as Owners or Managers (which is now admittedly, more challenging) the rewards now become property of the house.

 Risk = Rewards (Providers Point of View)

As with all jobs Risk = Rewards.

As a Provider Booth Rental has the greatest risk, you are the equivalent of being self-employed. If you are a risk taker and/or eventually want to open your own practice, Booth Rental makes a lot of sense. Booth Rental requires a lot of work in the sales and marketing area, has the most risk and probably the most reward.

If you don't mind taking risks, but prefer to let someone else do all the marketing, organizing, sales, and have all the product expenses, then Commissions may be your best bet. Commissions downside may be the up and down income and getting to the "front of the book". Medium risk with medium reward.

If your goal is to make a good wage week in and week out, have the time to do the best job possible, learn more and help others to learn more too, then consider the Salary / Hourly concept. Your wages are secure, with team bonuses you can make more money than by yourself, by helping others to achieve their best level of expertise. This choice would also be the most likely to have benefits and holidays. Salary / Hourly has the most security.

How Archaic (Owners Point of View)

When you visit a Hospital are the Nurses paid on commission? If you were an Electrical Contractor would you consider paying Electricians by commission? Are Grocery Clerks paid a percent of what passes through their cash register? Of course not! In the real world workers, technicians even engineers get paid a salary or an hourly wage. Even "Piece Work" for factory workers is an old idea. It is primarily "Sales People" that get paid by commission and Owners get to pay all the bills and keep what's left over.

Why then do we pay in this archaic fashion? Is it a throwback to the ye old barber shop days? Is it that we don't have confidence in ourselves to fill the appointment book? Is the lack of teamwork worth it? Are we spending good marketing dollars to build up a Providers clientele, and worried that it might walk out the door with the Provider? Are we avoiding training because we are afraid that the Provider might take those skills elsewhere?

How Archaic (Providers Point of View)

Very few businesses and industries that I have examined ask the worker to share the risk along with the Owner. As Providers it is our job to do the very best possible for our client, not only so that he/she comes back but also because we are care givers and that is our nature. It should be the Owners job to figure out how to make a profit, and when we become instrumental in the making of that profit for the Owner, we should be duly recognized, rewarded, compensated and more secure in our position.

Why then do we accept being paid in such an archaic way? Are we reaching for the short term dollar and sacrificing career and security? Aren't we tired of fighting over just whose client it is anyway? Where is the teamwork? Are we missing out on training?

The decisions we make as Owners in the way we pay will dictate our future

(Owners Point of View)

If we went into this business to become a landlord, then Booth Rental was made for you.

If we went into this business to build a lovely facility for our Clients, are willing to work but willing to let go of some profit for the sake a smooth operation then Commissions will do the job.

If we went into this business to serve our Clients, make a safe secure work environment, and maximize efficiency then consider Salary / Hourly wages with Profit Sharing.

As owners we want to reward Providers for the behavior we desire, without a loyal employer and the security that most "employees" enjoy, a client base is all a Provider has and they will use it as a weapon whenever they feel threatened.

Will Clients follow Providers?

If a Spa or Salon is building its business on the backs of a Providers Client list, it is just asking for the inevitable blackmail that will follow. The reason a Client comes through the door should have more to do with the facility NOT the Provider.

If I asked you for what reason the Client originally came to your Spa or Salon your answers should be (and usually are) our location, our marketing, community reputation, promotion, and ambiance of the facility. Why then would you spend all the money on these things and then call that Client "Susan's" or "Jane's". That's like the New York Times building a customer list and then subscribing them to the New York Post, or Pepsi putting Coke in their cans.

If we hire people because of their Client list why are we so surprised when someone hires them away from us for the same reason? Instead we should hire people for their Talent always, for their Skills often, for their Client list never

How Will Paying Differently Make More Money?

The reason many Spas and Salons have trouble "maximizing their book" is because they are asking Providers to compete with each other for business. Think for a moment of how to get the following result: "gee Mrs. Smith I'm all booked up for the next couple of days, but Jane gives a great facial, I had one from her last week and she is one of the best Estheticians here". If it will affect Susan's paycheck negatively, then never expect to hear it; on the other hand if Susan's "Team Bonus" will go up she will very likely say it. If we ever hope to fill our capacity we must do it as a team. You would never see a restaurant stop serving customers simply because Paul's tables are full.

In addition, many appointment books are set up to book the most expensive Providers first, or when we depend on the Provider to bring in the Clients no doubt the most expensive Providers have the best Client lists. When Susan gets paid the same each week she's not upset when Jane gets the new Client, or when Susan starts referring Clients to Jane, this highest paid scenario starts to change. Now the Susan's of the shop can help you raise the quality throughout the Spa or Salon and not just worry about how many facials that she has given today.

When we pay in the form of Commissions, maximizing the appointment book doesn't add that much to our bottom line, however, when our payroll is already paid, the total cost of treatment (less product cost) drops straight to the bottom line.

The decisions we make as Providers in the way we get paid will dictate our future

(Providers Point of View) 

If we went into this business to eventually have our own business, Client loyalty is imperative and Booth Rental is the best way to accomplish this.

If we might someday want to open our own business (or Booth Rental is illegal in your area), Commissions might be a good option. These facilities are often a more pleasant place to work than a Booth Rental facility, we must remember however that Clients do belong to the house and while a "non-compete" may or may not be enforceable, opening up across the street is not looked upon favorably.

If we want a safe secure work environment, often with benefits - holidays and opportunity to make a long-term career within a solid operation, then Salary / Hourly with Profit Sharing is made for you.

As Providers we all want to be rewarded for our efforts. Respect, status, security, enterprise, has different levels of importance to us depending who we are and what we want out of life. Some of us have experienced just how cut throat this business can be and suddenly the priority of the Health and Beauty of our Clients may have taken second place to survival. Some of us enjoy the survival part of the business and some play it because they think they have no choice. Owners have a lot more invested than simply their job, and profit is usually why they got into business in the first place, if they aren't getting that profit or they could have made more in the stock market we should NOT be surprised when their survival instincts take over. The Owner - Provider relationship doesn't have to be a win - lose, in fact more can be made when both sides of the fence win.

If you don't think you will be happy building a career within someone else's operation then don't take the Salary / Hourly route. Remember, however, that when you open your shop you don't want people like yourself working for you, you will want the type that wants to work within your operation. So pay according to the behavior you want, not as you would like to be paid.

If, however, you are the care giver type and you want to make a great living, security and benefits are important, but you don't want to deal with marketing, finance, managing or bureaucracy then you must have a win - win situation for both you and your employer. Career opportunities are often available at these facilities for the long-term growth minded. Look for places that respect your talents and offer you real employment instead of getting paid for each Client and then nothing when you are waiting for Clients. It is not your fault when the book is not full, that is sales and marketing's job, it's not your fault when Mrs. Smith was not treated right by someone else at the Spa or Salon. It is the Owners job to take the risk, why then should you have to pay? .

How can I Build a Career in this industry and make more Money?

Switching from Commission based pay to a Salary or Hourly rate should not affect your weekly pay by much, it should just level it out and make you eligible for performance reviews and raises. Add to that Tips and Retail Commission and again nothing much has changed but a fine career can be made this way.

When Profit Sharing or Team Bonus is added to the mix however, it's like gasoline on the fire. Now every time the Spa or Salon is busier, you get a higher bonus, everyone does! It gets busier by working as a team, referring clients to other Providers makes the whole operation busier. Better yet, by referring Clients to the newer (less expensive) help, the shop makes more and the bonus gets bigger. Everyone shares in the bonus; the Receptionist now has an incentive to treat the client as nicely as you do. We all start looking for ways to do things more efficiently, and not just in our own job, we are all looking throughout the whole operation and making suggestions. The team experience makes the Spa / Salon a very nice environment to work in and a very nice environment for our Clients also.

Conclusion (My Point of View)

When I am asked to perform a business analysis of new or existing Spas and Salons in order to help Owners maximize profitability. I have found that unconventional thinking or thinking "outside the box", as I have tried to do in this article, to be important. You may agree and disagree with my conclusions, but it is important to look at your operation from many different angles (not just your own), justifying the way you have always done things or changing to new completely unconventional methods. I believe this exercise will help you accomplish your objectives and keep you on the cutting edge of your profession.

Most of all when it comes to payroll

(Owners Point of View)

  • Incorporate Pay System that produces the Behavior you are looking for.
  • Control of overall payroll costs = Survival

(Providers Point of View)

  • Find a Spa or Salon that Pay Type matches your Goals
  • For Long Term Employer / Employee relationships both must win.

Now that we have discussed why we should evaluate our pay system, the question may be "How do we go about changing to a new system?" I have a million ideas on that subject but let us save that for another day.

Is it time to reevaluate the way we pay and the way we get paid in the Spa and Salon Business? I would love to hear what you think. I would also love to hear from you if you have made the transition from one pay system to another, what was the experience like, are you glad you did it, would you do it again?

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