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The Dirty Truth About Salon & Spa Service Payroll Costs

June 6, 2016 | By Neil Ducoff | 2 Comments

Warning: The following may be a tough pill for many salon and spa owners to swallow… but it’s one that needs to be swallowed nonetheless.

Ready? Let’s talk salon and spa service payroll costs:

The Strategies benchmark for service payroll (not commission rate) is 30 to 35 percent of total revenue (Service Sales + Retail Sales = Total Revenue) … as it appears on a Profit and Loss Statement.

Each and every time we post this benchmark on the Strategies Salon/Spa Idea Exchange Facebook discussion group, owners say, “No one will work for that commission rate.”

And of course, stylists and other service providers post high attitude comments like, “I would NEVER give 65 percent of what I bring in to the owner.” Others say, “Based on my skill and experience, I would be insulted to be offered such a low commission rate.”

Disconnect on Service Payroll Percent

No matter how many times we clarify that our benchmark of 30 to 35 percent of total revenue has nothing to do with commission rates … it is clear that many owners and service providers are have difficulty understanding that we are referring to the total payroll cost for all service providers to the business.

QUESTION #1: Is the salon/spa industry so hung up on individual commission percentages that it cannot understand the difference between commission rates and service payroll costs?

QUESTION #2: Why do service providers harbor such resentment for any piece of the service revenue they generate to cover product cost, operating costs, debt repayment and a fair net profit?

FACT #1: The Balance Sheet and Profit and Loss Statement tell the truth about the health and performance of a salon or spa. There is a limit to how much service payroll a salon/spa can afford and sustain … and, like it or not, that limit must live between 30 to 35 percent of total revenue. It doesn’t matter if you have 3 employees or 300, or if you have one location or one thousand.

FACT #2: Based on the Strategies benchmark, for every $100,000 a salon/spa generates in total service and retail sales, there is $30,000 to $35,000 available for service payroll. So … no matter what pay method your business uses (Team-Based Pay, commission, sliding scale commission, hourly, piece rate, etc.) that’s all you can afford for service payroll.

Example: A salon/spa generating $1 million in total revenues will have a service payroll budget of $300,000 to $350,000. That’s it. If you spend $400,000 in service payroll without cutting $100,000 to $150,000 in expenses elsewhere … there will be NO profit and most likely a loss.

  • This is the number one reason so many salons and spas struggle financially.

The dirty truth about salon/spa service payroll is that there is a very specific limit to what you can afford to pay. Service payroll will always be your largest expense. It is an expense all salons and spas must monitor and control.

Here are four No-Compromise Leadership insights to reveal the dirty truth about service payroll:

  1. Can’t control payroll on commission: “Half for you and half for me” is a worn out relic that just doesn’t fit today’s cost of doing business. Yet, many owners have difficulty understanding the impact of escalating commission rates on service payroll and profitability. When pay is based on a percentage of a service provider’s service sales, the employee’s expectation is for that percentage, and their personal prices, to continue to increase. That’s how raises are done on commission. As service providers move up the commission rate ladder, the company’s service payroll dollars and percent become bloated, devouring net profit. Once set, commission rates are hard to change without inciting the wrath of employees.
    • No matter how valid the reason, no one ever gets excited about a commission rate cut. Service charges and product cost deductions are nothing more than a slight of hand to lower commission rates.
  2. Living the service payroll benchmark: Get outside of the commission box for a moment and focus on your service payroll dollars and its percent of total revenues. Look at your Profit and Loss Statement; is your service payroll (hands that do the work) within the benchmark of 30 to 35 percent of total revenue? If it is … that’s awesome. If it’s higher than 35 percent … you have a service payroll problem. Now, look at the actual dollars you’re spending on service payroll a year. Let’s say your service payroll is 40 percent on total annual revenues of $1 million. That means you’re five percent over the benchmark and currently spending $400,000 on service payroll – including your booked-solid top performers.
    • If you locked in your service payroll at $400,000 by converting to Team-Based Pay (TBP) … without cutting anyone’s pay … you would only have to increase total service and retail sales an additional $150,000 to get payroll under 35 percent and within benchmark. How do you do this? Read insight #3.
  3. Dynamic service payroll and productivity rate: By eliminating commission and going Team Based, attention shifts to improving overall productivity rate. Incremental increases in productivity rate has immediate impact on lifting revenue while lowering the overall service payroll percent. That’s why so many owners that convert to Team-Based Pay are amazed at how quickly their service payroll percentage drops.
    • All that white space on your appointment book is costing you money. And just because you pay commission doesn’t mean that white space doesn’t have service payroll costs. FACT: Divide each service provider’s gross pay for one pay period by their scheduled hours. The result is each service provider’s hourly rate on commission. YES, that white space is costing you plenty.
    • On commission, your booked solid top performers hit the income ceiling unless they squeeze more clients or raise “their” prices. On TBP, they understand that their income potential resides in the unsold hours in other columns on the appointment book. This is the essence of the Team-Based Business Model.
  4. It’s the Service Payroll Percent – Not the Commission Rate: Of course, commission rewards experience, skill and hard work. But commission also rewards a lot of performance and behavior you don’t want … such as lateness, poor client retention, low pre-book, no retail, bad attitude and a host of other issues. What if you could stop paying for all that behavior and performance that holds your salon/spa back and direct it to your top performers that can’t work any harder or squeeze in another client? You absolutely can, as long as you keep your service payroll percent of total revenue within the 30 to 35 percent of total revenue benchmark.
    • It’s no longer about an employee’s commission rate on “his or her” individual service sales … it’s about rewarding excellent overall performance while keeping total service payroll costs within benchmark.

Here’s my challenge to you: You owe it to yourself, your business and your employees to think beyond the limitations of commission rate pay and understand how to keep your service payroll percent within the benchmark of 30 to 35 percent of total revenue. It’s not about believing in commission or Team-Based Pay … it’s about controlling your largest single expense while having the ability to compensate employees based on skill, experience, overall performance and teamwork.

Next steps…

Learn more about Team-Based Pay at the four-day Strategies Incubator Seminar.

Categories: Compensation , Leadership , Monday Morning Wake-Up , No-Compromise Leadership , Team-Based Pay

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Comments

  1. I’m wondering if “tips paid” on the Income statement as an expense should be added to salaries/wages and that total compared to total revenue? Or is it just wages/salaries?

    Thank you!

    1. Hi Heidi. Tips should not appear on your Profit & Statement at all. Tips are not income or an expense to the business … other than the business’s share of FICA tax. Tips should be accounted for just like Sales Tax.
      Employee should be reporting tips to the employer. Most major salon/spa software also tract tips. Tips should be added to employee paychecks and taxed exactly like regular pay.

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