Have you ever heard the story about the Christmas ham? It goes something like this:
It seems that one while preparing her first Christmas ham, a young bride's husband wanted to know why she cut the end off of the ham before cooking it. "Because that's how my mother cooks it she replied. At his request, she called and asked her mother why she did it that way. "Because that's how my mother did it," her mother answered. Still curious, the couple then called and asked her grand-mother, Grandma's simple explanation? "Because I didn't have a roasting pan large enough for a whole ham."
Many traditions, such as family gatherings at Thanksgiving, are to be relished both for the joy they bring as well as the sense of continuity that comes from their repetition.
However, no traditions should be carried on when it is no longer relevant. And this last point, argue many salon owners, applies to the traditional compensation system of a flat commission that's as high as 65% in some areas.
"The commission rates that people consider standard in this industry are from the '50s, '60s, and '70s," notes Neil Ducoff, founder and publisher of Salon Business Strategies and a proponent of salary - or team-based compensation. "These commissions have no basis in the '90s. New salons open and offer a commission rate that's competitive in their marketplace, and they've blown it. Every commission-based industry has adjusted its commissions to match the cost of doing business, except for ours.
"If you base the largest cost of doing business — payroll — on what your competition is doing and the competition never figured out what its own costs are, you fall into the same mess as everyone else. And they're all scratching their head, saying, 'I'm just not making money.'"
Instead, Ducoff asserts, salon owners must analyze their business expenses in terms of cash flow to determine what they can afford to pay, rather than what the marketplace says they must. (After all, what's the point of being competitive with competition that isn't making any money?)
"Pick a normal month of business for your salon as far as sales and expenses," he advises. "Take your total sales and subtract all expenses, including rent, utilities, product cost, insurance, you name it. But don't subtract any payroll costs for yourself, service providers, support personnel, or anyone else. Then subtract a desired net profit: what you want as a bottom line after everyone is paid, including yourself. Ten percent is barely acceptable; 15% is more reasonable. What is left is what your payroll should look like based on your current sales and expenses. A "perfect" compensation system is like a "perfect" marriage: Both exist, but only within the parameters of each unique situation. In other words, one system, like one partner, does not fit all. Here, we talked to a number of successful salon owners who've adopted something other than the traditional flat commission about how they compensate employees, why they chose that structure, and what it's done for their business and their employees.
Whether any one system is better than another is a question best answered by your salon consultant, financial adviser, or accountant. What we found remarkable in each of the structures de tailed here is that the owners examined the problem — standard commission structures that gave their salon no room to grow — and fashioned a compensation solution that allows them to earn a profit above and beyond their own work behind the chair or behind the nail table, to reward their employees for their work in growing the salon, and to reinvest money back into the salon and its employees to ensure continued growth and income for everyone.
"Spiral" System Adam Broderick Image, Ridgefield, Conn.
"The high commission is stupid," asserts owner Adam Broderick, who consults with other salon owners in addition to running his own highly successful salon and spa. Broderick uses what he calls a "spiral" compensation system. "It's very simple," he says. "All service providers work on a commission base of 40%-45%. The exact percentage is based on their technical and customer service skills and pre-set objectives such as attitude, productivity, client retention, and adherence to dress code."
Every six months, employees are evaluated on those objectives, and if they have a good evaluation they receive a commission increase. "When someone gets a price increase, they go back down in commission, but the lower commission at the higher price is still more than what they previously earned," Broderick explains. Then they're given a whole new set of objectives.
"Our retention of nail technicians is very good because we're able to offer them pay increases and they feel challenged because they have very clear parameters and goals to aspire to," he adds.
Broderick's nail technicians also receive educational support and other compensation perks. "For example, our nail technicians just came back from an educational cruise," he notes. Other benefits include a comprehensive training program, profit sharing, ongoing education, a birthday bonus, health insurance subsidiaries, and paid vacations and holidays.
"There are few neighborhood drugstores, video stores, coffee shops, and hardware stores left because they've been eaten up by big business," Broderick adds. "The salon industry has been trickier for big business to figure out, but it's one of the few left to conquer, and that's being done as we speak. This will force a true restructuring of the industry based on a business model that works."
Salary to Commission Hands On, Beverly Hills, Calif.
According to Jim Davis, a managing partner of Hands On, a new salon that's already planning other locations, there are two key elements to a successful salon: teamwork and the opportunity to make a better-than-living-wage. "First, we do a guarantee against what I call productivity per hour" he explains. "We guarantee $10 per hour, which we compute on a weekly average. In other words, if you work six hours today and you generated more than $ 10 per hour but tomorrow you generate less, then it aver ages out over the week."
For nail technicians who average more than $10 an hour, Hands On pays a 50% commission on service dollar hours generated if that amount is higher. Additionally, nail technicians earn a 10% commission on retail sales.
"What we want to do is provide an incentive. As their productivity per hour increases by doing our unique service packages instead of the basic services, it allows them to be well-compensated," Davis explains. While 50% commission is too much according to some, Davis argues that the focus should instead be on pricing.
"We've found that the profitability is there," he says. "We just had a meeting a week ago and the staff wanted to raise the prices. This gives them an opportunity to make more money, and I'm astounded the industry feels prices can't be raised. It puts technicians in a very awkward position because they learn that they have to work harder or faster or work more hours. Why would someone want to come into this industry when they're told, 'Here's how much you're going to make for the next 10 years'?
"In other businesses there is always opportunity to increase your income because a company's prices naturally increase. In our industry, we tend to set a price and never raise it, and then we're stuck when the staff leaves to go somewhere else to make more."
Focusing on teamwork and regular price increases instead, Davis says Hands On has discovered a profitable equation that, so far, works.
In addition to the salary or commission structure, Hands On offers profit sharing, a sliding scale of medical insurance benefits, and vacation time, and Davis says they are working on a 401(k) plan. "We've created an environment where nail technicians can do well," he notes. "We've found that our technicians (and we interviewed more than 100 to choose our final team of 10) want to earn more than $10 an hour."
Guaranteed Salary and Benefits Hidden Oasis, Fairfax Station, Va.
A director focusing on cost management at consulting giant Pricewaterhouse-Coopers, Doug Webster says he initially planned to offer his staff a commission, but after talking to a consultant and many salon owners at The Salon Association's symposium earlier this year, he decided instead to go with a guaranteed salary in his salon that's scheduled to open this month.
"We're hiring people based on their qualifications rather than their clientele, and our basic compensation is salary plus profit sharing," he explains. "To determine the starting wage we consider a combination of what the market offers as well as maintaining an overall wage scale around 40% of the salon's gross sales.
"My wife has been a hairstylist for 18 years, and so many salons seem to operate under the model of 'if you bring in more employees you will automatically get more clients,' he continues. “What she's found, though, is that approach spreads the client base across more employees, and while you may get a 50% or 55% commission, you may not see enough clients in a day to make a wage.”
As owner, Webster says he, not the service provider, is responsible for productivity, and he plans on hiring only enough staff to support the clientele. "We believe we can be competitive in terms of a reasonable wage, and if the business grows and employees contribute to the growth, they'll get a share of the profits," he says. Additionally, Hidden Oasis will pay at least 50% of health insurance premiums and provide five vacation days and four to five paid legal holidays after one year.
"I think the business models the beauty industry is used to operating on are very different from what other industries are doing," Webster concludes. "I think this notion that we don't have to pay as long as someone is not working creates inefficiencies, and someone pays for that," he says. "When you choose salary, the owner takes on the responsibility to pay for it, but that way you can set up a situation that makes you more profitable by using your labor sources more efficiently. A fully-booked nail technician on commission can never make more. But if she's working as part of a team and cross-selling services in the salon, she's contributing to the salon's profitability and can raise her income in a profit-sharing mode."
Productivity-Based Commission California Nails, Miami, Fla.
Co-owner Louis Mattassi's theory on commission is that once you reach the top layer — a whopping 65% in his salon — it's time to graduate into your own salon. Contrary to what many in the industry think, the theory is one that's so far worked well for him.
"I hire assistants while they're still in school and pay them an hourly salary," he explains. "While they're still in school, I train them by having them do the prep work, including the cleansing, polish removal, massage, etc. Then I overlay the product and finish with polish. This is a way to get more clients on my floor and for them to become accustomed to my two assistants and me. When they are ready, the assistants get all the new clients that came in during their apprenticeship and go on to commission."
Nail techs at California Nails have a choice between a straight 45% commission or a 40% commission with a guaranteed base wage. If they're ready, after 90 days they can earn a higher commission. "They can work all the way up to a 65% commission, but that's where price enters. A full set of nails is $95, fills range from $40-$65, a spa manicure is $45," he explains.
Too, their commission is based on productivity. Initially Mattassi limits the number of hours technicians can work, essentially forcing them to book their appointments tightly and maximize the salon's overall productivity. "When someone maxes out I will let them open another day if I have the space to offer," he says. More often, though, the space isn't available and he instead bumps them up to the next percentage level. This decision is also based on how full their book is, seniority, and skills, among other factors.
He limits the number of technicians at the top level to two, and he has high expectations in exchange for the 65% commission. "These senior technicians do training, run staff meetings, do continuing education, offer leadership, and anything else that I can't do as a busy salon owner," he says. From there, Mattassi encourages them to use the management skills to open their own salon. So far, he says, he's had two technicians leave to do just that with his full support.
At any one time, California Nails has 12 technicians spread over the six "growth steps" Mattassi and his partner have developed. Additionally, as a group they set performance goals and name leaders to oversee meeting those goals. Often, Mattassi says he chooses lower- performing nail technicians as leaders, which he has found almost always inspires them to improve. In addition to its generous commission, California Nails offers access to group health insurance and paid education.
Commission Ladder Mad Hatter, 12 locations in Va.
"I've been in business 27 years and I've seen it come full circle," says Peggy Hatter. "Today, employees need benefits just to survive, and how do you pay benefits with a 60% commission?" She notes that her salon has gone from mostly full-time employees to mostly part-timers.
Mad Hatter begins all employees with a 50% commission until the individual reaches a predetermined point based on what a station needs to produce for the salon to break even. "Our break-even point includes all of our overhead, including receptionists and assistants," she notes. For each additional break point reached, the employee earns another 2% commission. For example, if the first break point is $500 a week and the second break point is $750, a nail technician who generated $800 in services would receive a 50% commission on the first $500, 52% on the next $250, and 54% on the last $50.
Also, nail technicians can advance to master and then senior pricing structures. "Our fills start at $ 15 and can go up to $30," Hatter notes. "Advancement depends on meeting certain criteria, which includes education, customer service, and generating certain service dollar amounts." All full-time employees (32 hours/week) are eligible for Mad Hatter to pay half the medical insurance premiums in addition to vacation and retirement benefits.
Mad Hatter's philosophy is partly based in efficient space utilization. "We're shooting to utilize station space all the time," Hatter explains. "With space rents and lifestyles the way they are today, there's no other option. We've had to set it up where the work fits the lifestyle. A woman with children can't work three to four nights a week and be gone on Saturdays, so part of the incentive we offer is that once you have built a clientele, you can choose the hours that suit your family and your clients." Mad Hatter benefits in that a station then opens for an up-and-comer on evenings and Saturdays, which is when the salon chain enjoys a high volume of walk-in traffic.
"I think in the old days people reached for higher commission," Hatter says. "Now, we focus on trying to open more doors for our staff, be it a flexible schedule, bonuses for production, and benefits. We don't automatically increase our prices each year because we know where we need to be positioned in our market, so we've had to find other ways like these to make everyone happy."
Profitability-based Salary Shear Success, Bloomington, Minn.
Up until almost three years ago, owner Jenifer Prince paid her salon professionals a commission much like other salons in her areas, but increasingly had the sense she was working very hard for nothing. "It wasn't the way I envisioned," she says. "I didn't like the salon atmosphere, and I didn't like the attitudes of some of the people I was attracting."
So she decided to go back to a system she had tried 10 years before but had dropped due to employee resistance. "I've implemented a profitability-based salary system," she explains. "We look at our growth, take out all our expenses, and we divide the dollar amount that's left over by the number of hours everyone worked in that period. So if we had personnel for 210 hours in that period, we divide the dollar amount by 210. Then we know our profit per hour. Whatever percentage of those 210 hours someone worked is the percentage they get."
Additionally, employees can earn a monthly bonus based on the dollar amount by which the salon exceeds the goals it set for the month. "Say our goal is $ 1,000," Prince says. "Of anything we earn above that, one-third goes to me, one-third goes to the salon, and one- third is divided among the employees."
Additionally, employees are eligible for an individual bonus each quarter based on the difference between the service dollars generated per hour last year vs. this year. "If they were producing $20 an hour last year and are producing $30 an hour this year, then they're eligible for a bonus based on the difference. The amount of the bonus is based on a team review," she explains. "The team writes the questions and then scores each other on them."
If, an employee, say, worked 400 hours in the quarter and generated $10 more per hour than projected, then her total available bonus would be $4,000. If, after team review, she is scored at 75%, then she would receive 75% ($3,000) as a bonus.
"The team bonus recognizes that some people are never going to be great revenue producers, but they are support people so you have to reward them also," Prince notes. "Then you have the superstars, who need to be rewarded as well."
"The old system said 'I'll pay you 5o%-60% and then see if I can make a living,” Prince says. "I see all the time nail technicians who waste product, leave their stations a mess, etc. In our salon, it's tight because everyone is watching and helping everyone. My supply costs have gone down incredibly because they start thinking like an owner."
The only thing that hasn't come down is salaries. "They're making more because the salon is making more," she says. "I will be proud when I have no one who makes less than $30,000 a year. My starting salary, with benefits, now is just under $20,000 a year." Those benefits include medical and dental insurance (Shear Success pays 60% of the premiums), disability insurance, life insurance, an education fund, and a 401 (k) plan.
The new system has worked so well and Prince received so many calls about it, she's written a booklet that she now sells for $50. (For more information, contact her at email@example.com.)
Team-Based Salary — What Everyone Should Be Doing?
"People think there are only two deals out there—commission or independent contractor," Ducoff asserts. "I've seen sliding scales with break points, higher commissions on anything over a base amount, straight commission, commission with a base guarantee ... the point is that it's always based on a percentage. Commission has been sliced and diced and copied and tweaked as much as one can imagine.
"But what if everyone's pay was tied to the performance of the salon? Think back to the day you opened your salon, when you felt an urgency to get all your people busy. I call that 'thinking wide.' In a commission environment, where is the employee's head? Thinking wide or thinking narrow?"
In Ducoff's scenario, which he teaches in-depth in his popular seminars, everyone in the salon would be focused on filling every chair. "What if everyone's pay was tied to the performance of the salon? What if everyone thinks wide?" he questions. "This is not just about pay — it's about individual and salon growth, customer satisfaction, and overall performance."
With team-based salary, Ducoff advocates making payroll a fixed percentage of the salon's current gross sales, and then creating an environment whereby employees are rewarded for increasing the salon's sales, not just their own. "On this program, payroll is a percentage of sales, so a 5% increase per average ticket could add 15%-20% to sales," he continues. "There's a new focus on what has to happen, and you point your team toward using cash flow projections and scoreboards [that show where you currently are and where you want to be]. It creates a whole different level of energy. Then you create team bonuses to allocate a share of the profit as a reward for the staff hitting specific goals.
"The magic of this whole conversion is making a commitment to your people," he continues. "We're saying we're going to guarantee your pay, but we expect certain performance levels in return. You're removing all the toxic waste in the environment that commission creates because now employees have a reason to get clients into other chairs."
The success measurements Ducoff uses are quite simple: increased visit frequencies, higher ticket averages, and improved client retention rates all demonstrate that the system is working. "If we can do those then we can get sales in a salon with $100,000 annual sales to $120, 000," he says.
For information on Ducoff's upcoming seminars on team-based compensation, visit Salon Business Strategies' website at www.strategiespub.com/ stratweb/home.html. There you can also access free tools to help analyze your business including a cash flow projection template, a scoreboard, and a PowerPoint forecast to predict future sales figures.
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