Money Matters

Lower Your Commissions or Go Out of Business

If you are paying your salon employees a commission of more than 50%, chances are you are losing money. Learn how to modify your commission structure to motivate employees and ensure a profitable business.

• Minimum wage. Every state has a minimum wage law. That means for every hour an employee works in your salon you must guarantee her at least minimum wage for that time period. But many in the industry believe that because we pay our employees a commission, we do not have to comply with the minimum wage law. This is not true. As owners, we must make up the difference between what an employee makes in commission and the minimum wage applicable to the hours that employee works. If an employee makes more in commission than the minimum wage for the hours she works, you do not have to give her any more income. You have complied with the law.

 

• Structuring commission. Whether it’s minimum wage or higher, each employee must receive a compensation guarantee. Then, before she becomes eligible to receive any commission at all, she must double that guaranteed amount in service sales. Then you should create an incentive system to reward that employee so the better she does, the greater the rewards she receives throughout her career at your salon.

 

To institute the program, first you must set a starting guarantee for each employee. In other words, a masseuse or esthetician could receive a guarantee of, say, $18 an hour and a nail tech might get an $8 an hour guarantee. You would double that dollar amount to determine how much a technician must produce before she begins to receive any commission.

 

Here is an example. Mary worked 40 hours during your weekly payroll period. She received an $8 per hour guarantee. So $8 an hour x 40 hours = $320 for that pay period. In order for Mary to receive any commission she must double that guarantee and generate at least $641 before she is eligible for a commission of, say, 40%. This means Mary would make 40% commission on any dollars she generated over $641 up to, say, $950.

 

You always want your staff, meaning Mary in this instance, to make more money, so you should create another scale from $951 to $1,250. If Mary generated those kinds of service dollars you should give her a 3% bonus up to $1,250.

 

These examples of levels are only to show you how to build a foundation to reward your staff differently. Whatever compensation and commission numbers you agree to must be clearly spelled out in writing. Be advised that new techs will cost you more in the beginning than any other time in their career. You cannot afford to start them off in their careers at a top rate of pay.

 

• Written agreements. In today’s business world you must have a legal document such as a Pay Incentive Compensation Agreement or an Employee Agreement in place to guide and direct your employees to a successful career within your salon. [Editor’s note: These agreements can be purchased at www.kassidys.com.] This way they will always know what they have to do to get their next pay increase. These legal documents should also, among other things, place a dollar amount of different levels of educational training your company may provide. If a staff member leaves your company before a specified amount of time, she will have to repay you for the training you have provided her.

 

These legal documents should also create a new structure in terms of how you compensate each staff member for any retail service sales they produce within a designated period of time, usually at least monthly. One of the most important issues within these agreements is the ability to protect yourself from an employee who is leaving the salon and taking the salon’s valuable client information with her — information you have spent a lot of time and dollars to create.

 

• Financial statements. The last part of establishing a successful foundation for success is getting a financial statement at least twice a year, if not more often. Among other things, these financial statements will contain a profit and loss statement. You must learn how to read them so if you do not like the bottom line of your salon’s income or expenses you can make a change. You can create new or different categories to track your company’s income and expenses in detail so you can see exactly what is going on and figure out where to make the changes to create a better and healthier investment for you future. You will also have the information on hand to communicate better with your tax preparer to get the maximum benefit of their services.

 

Ken Cassidy is president of Kassidy’s Management Consulting Company in Long Beach, Calif. He is also a salon owner and hairdresser with a full clientele. You can reach him at (562) 432-4462, e-mail kassidy122@earthlink.net, or visit www.kassidys.com.

 

 
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Keywords:   commissions     employee issues     independent contractors     salon finances  

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