Friday, July 30, 2010

Compensation Conundrums:
Can you really afford percentage-based compensation plans?

In a recent Tuesday Tip to our partners, we highlighted the need to accurately reward staff as it is highly motivational, but can also have consequences if not structured correctly. Here at SpaBooker, we were fortunate recently to have one of the industry’s most prominent consultants, Lisa Starr of Wynne Business, come and talk to us about that most crucial of business decisions – how to structure compensation for technical staff?

Years ago, with the advent of salons morphing into spas, percentage-based compensation plans became the norm; and the rates can vary wildly by region as well as by individual. So, how do you plan and manage your overhead when the variables are so significant? Well, unfortunately the answer to that for many spa and salon businesses is that they can’t. Often, paying staff too much of every dollar of income, and tying that income to the price charged to clients, has led to businesses being unable to make a profit and the long term impact of this is terminal for the business and therefore for the staff’s employment – not good for anyone.

Lisa suggests that salons and spas willing to buck the trend and pay a fixed dollar amount per service can reach a win-win situation; fair rates of pay for technical staff based on their skill set and knowledge, and the ability to charge what you need to for services without forever sharing a disproportionate amount. Owners who structure their business this way can afford to hire excellent customer service staff and employ multi-faceted marketing plans, ultimately leading to longevity and growth for both the business and the employees.

If businesses take the time to calculate their operational overheads and deduct them from gross profit, the resulting amount should not be more than they are paying employees. Sounds relatively basic , but it’s a practice that is not necessarily followed in every circumstance and Lisa’s mission is to help businesses in the industry become sustainable, profit-making enterprises where everyone flourishes.

Once you’ve done this, you can hire a new employee with confidence and present him or her with a more specific compensation plan that is built around weekly or annual earnings, like most other jobs in the world. We know there is a trend for a trained professional to walk into an interview with a proposed commission percentage, which can even exceed 50%. However, now you can know exactly what you can afford to pay employees regardless of their proposal. Ideally, these programs have tiers or levels that will allow technical staff to move up upon meeting specific performance criteria that are within their control, thus providing a career path where increases in compensation are self-generated.

The wrong compensation plan may enrich your staff but can put you in the poorhouse. Using advice directly from Lisa Starr, we have some questions for you that you can use to make sure your compensation plan is on the right track:
  • Does your compensation plan drive the right employee behaviors?
  • Does your menu reflect the ability to up sell and increase average ticket?
  • Are your performance appraisals tied to financial results?
  • Are you in control of your labor costs?
If you answered no to any of these, you may benefit from taking it back to basics and calculating exactly how much you can afford to pay your employees moving forward.

About Lisa Starr:
Lisa M. Starr has almost 30 years of experience in the beauty industry, and is currently the senior East Coast business consultant to new and existing spas and salons for Wynne Business, a leading spa consulting company in the US. Her knowledge and experience include business operations and finances, marketing and advertising, inventory management, human resource development, and business process improvement.

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