CONTROLLINGCOMPENSATION

By Lisa Starr

Your Presenter

• Lisa M. Starr– 20+ years experience in

salon & spa industry– Senior Consultant, Wynne

Business– Community Ambassador,

Gramercy One– Consultant, educator,

writer, presenter

Wynne Business provides consulting and education, including live seminars and on-site team trainings for the spa and salon industry

What IS “Compensation”?

• Money• Benefits• Perks• Education• Opportunity• …anything that

creates value for your employee

Good Comp Plans…• Reward employees fairly for their

personal contribution• Use objective measurements for

advancement• Incent behaviors that benefit the

company• Help retain good employees• Contribute to company

profitability

Dysfunctional Comp Plans…• Don’t reward the right

behaviors– “every man for himself”

• Are not objective– play favorites

• Are not consistent• Cause the company to lose

money• Are not communicated clearly• Create too much turnover…or

none at all

Traditional Beauty Compensation• We have a 40+ year

old compensation model

• Forget your peers; listen to your P & L

• What worked in the ‘70s doesn’t work now!

Owner

Overhead

Support Labor, Taxes, Benefits

Service Labor

Current Common Compensation Plans• Straight or Graduated

Commission• Hourly + Commission• Hourly + Incentive or Bonus• Fee for service• Independent contractors• Booth rental (not really a comp

plan)

Straight Hourly Rate

• Creates complacency• Does not reward or

motivate sales• Raises are expected

but not co-created by increased productivity

• Not sales-oriented!

Hourly + Commission

PROS• Provides stability for staff

in spas with heavy volume fluctuations

• Managers can use team members for other functions during slow periods

CONS• Very difficult to budget• Easy to set base or

commission too high• Can encourage

complacency• Creates cash flow

pressures, especially for startups and small businesses

Commission: The Most Common Form of CompensationPROS:• Easy to manage, simple

to understand• You don’t have to pay

people unless there’s a sale

• Encourages higher sales by techs

• Typical range: 40-60% of service, 10% retail

CONS:• Forces clients to pay higher

prices• Only source of pay increases is

higher volume or bigger cut• Prices increases are

automatically shared• Does not reward teamwork• Connects what client pays to

what tech earns

Reality Check: How to lose money on your comp planSERVICE SALE: “BEFORE”$100 Spa LaLa Signature Facial

($50) Commission Cost of Sale

($5) Payroll burden (10% of payroll minimum)

($7) Product Cost (varies with type of service)

$38 GROSS PROFIT (Cost of Sales: 62%, GPM 38%)

$40 Spa Overhead Expense* (40%)

($2) PROFIT/LOSS* typical overhead ratio for upscale spas & salons

Controlling COGS• Labor is your single

biggest cost of doing business

• The wrong compensation plan will enrich your staff and leave you little room for error

The Only Way Out: Reduce Cost of Sales

SERVICE SALE: “AFTER”$100 Spa LaLa Signature Facial

($35) Labor Cost of Sale

($3.50) Payroll burden (10% of payroll minimum)

($7) Product Cost (varies with type of service)

$54.50 GROSS PROFIT (Cost of Sales: 45.5%, GPM 54.5%)

$40 Spa Overhead Expense (40%)

$14.50 PROFIT/LOSS

Increase service gross profit to 50%+

The Prescription• A comp plan that

rewards the right behaviors

• Carefully controlled COGS

• Advancement with accountability

• Clear career path

Start With the Big Picture…• New or established

location

• Owner or technician, or both

• Overhead costs

• Same pay rate for everyone, or levels

• Expected profit

…and Work Backwards

38% - Average day spa

overhead expense 12% - Support staff 5% - Profit

45% left to pay technicians (including taxes & benefits)

100% Minus:

How to Apportion?• 45% total compensation for techs

– Example; tech grosses 40k• Payroll taxes 3-4%• Paid vacation 2%• Contribution to health

insurance 4-5%• Education/401k 1-2%• 33% left for direct pay

Win-Win Compensation:The Treatment Rate Plan• A treatment rate is a flat rate $

that is considered appropriate and fair pay, based on the time, skill, knowledge and effort required to deliver a given service

• Treatment rates are not directly tied to the service price

Sample Treatment Rates60 minute services

  BRONZE LEVEL: 0-1 yr 30% mass, 28% esty

SILVER LEVEL: 1-3 yrs

32% mass, 30% esty

GOLD LEVEL: 3-5 yrs 34% mass, 3

2% esty

PLATINUM LEVEL:5+ yrs

36% mass, 34% esty

Classic Mass

$85 $25.50 $27.20 $28.90 $30.60

Deep Tissue

$95 n/a $30.40 $32.30 $34.20

Classic Facial

$85 $21.00 $24.00 $27.20 $28.90

MicrdrmTrtmt – 45 min

$105

n/a $24.70 $29.40 $31.50

Advancement: Who Moves Ahead, and Why?• Seniority: “Doing time” or building

the company

• Senior staff members must be held to a higher standard

• Knowing what you know, would you enthusiastically rehire this person?

• “She has 10 years of experience”: Is it the same year repeated 10 times?

Reward the Keys to Profit• Average ticket

• Retailing ratios

• Customer retention– Studies show: customer’s willingness

to refer is greatest indicator of a company’s profitability

• “Good citizenship” – Good communications skills = lower

tech turnover, less refereeing by manager

ESTHETICIANSara Smith

Retail to Service %

Repeat Retention Productivity Average Ticket Report Dates2/1/10-2/1/11

Weighted score 3.5 3.5 1.5 1.5 OBJECTIVE: SCORE 10 POINTS OR

MORE TO ADVANCEGoal at Level 2 52% 20% 60% $105

Actual 46.62% 25% 62% $106.98

3.14

90% of goal

90% of 3.5 pts.

4.38

125% of goal

125% of 3.5 pts.

1.55

103% of goal

103% of 1.5 pts.

1.53

93% of goal

93% of 1.5 pts

10.59 points

An example of advancement scoring in action

Sara needs 10 points to move up a level. She has attended 80% of staff meetings and has a positive Time Away bank. Sara moves up to Level 3

Example: Profit Increase of 39% After Conversion

$92 Facial 50% svc comm

35% retail ratio

10% ret comm

Product COGS

Esty comp Spa Gross Profit

GPM

$46 $49 sale $141 tkt $4.90 $24.50 $50.90 $65.60 46%

$92 Facial Tx Rate 40% retail ratio

20% ret comm

$27.60 $61 sale $153 tkt $12.20 $22.00 $39.80 $91.20 60%

BEFORE

AFTER

Service Charges• Where did they

come from?• Two types

– Deduction from revenues

• Back bar charge, amenity charge

– Added to clients bill• Automatic

gratuity• Often shared with

support

Comprehensive Compensation Plans Include:• Employee perks• Variety of earning

opportunities• Top quality training and

education• Employee discount programs• Benefits (just like a “real”

employer!)

Creative Rewards• 1% of retail sales per quarter allocated for

continuing education• Resource partners asked to participate in

rewarding top performers• Paid days off or wellness days for no call-

outs in 3 months• Gift cards or spa swap with other spas• Pay for licensing• Motivational speakers• Friends and family service vouchers

Recruiting• Focus on

annual earnings• Highlight benefits• Establish career

path• Biggest source is

happy staff members

Testing the Waters

• Job Fair• Craigslist• Local community

paper• Local beauty

schools• Coffee shops,

bookstores

Your Company Culture: Valued or Worthless?• If your culture stinks,

no one will pay you for it

• Mutual respect between functional teams is key

• Excellent leadership skills required

Take the First Step…• Get an accurate evaluation of

your current financials. Can you ever make money with your pay plan?

• New spas; create detailed, realistic projections

• Determine an acceptable level of profit for you. Design a compensation plan around a profit goal.

Considerations• Software

– Payroll should not be complicated

– Review your options• Service Menu

– Pricing strategies– Updates

• Cost of upheaval• Cost of doing nothing

Communication Plan• No surprises• Frank & honest• Group meeting• Individual meetings• Time frame• Clear behavioral

guidelines

Don’t Try This Alone!• Expect turnover; grandfather

key technicians• Technicians understand that

they get a pay cut if you go out of business, too!

• Are your prices set correctly? You may be able to increase

• You may have to treat conversion as a “mini startup”

Industry Hourly Wages

YearAnnual Hourly Year

Annual Hourly Year

Annual Hourly

2007 13.94$ 2007 14.01$ 2007 13.74$ 2008 14.77$ 2008 14.79$ 2008 14.49$ 2009 15.46$ 2009 15.85$ 2009 15.42$ 2010 15.57$ 2010 16.15$ 2010 15.64$

Personal Care Hair, Nail and Skin Care Services

Beauty Salons & Barber Shops

*Source, Bureau of Labor Statistics

Comparison of Professionally Licensed Occupations

Occupation Average Years

Education

Required

Educational $

Investment

% of revenue

generated paid to

license holder

Cosmetologist 1 $6-8K 40-60%

Dental Hygienist 2 $20-30K 33%

CPA 4-5 $40-60K 33-40%

Attorney 7 $100-150K 25-30%

Medical Doctor 8+ $300K 40-45%

ControllingCompensation Thanks for your attention!

Questions? Lisa Starr at gotalkone@gmail.com

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