The Dirty Truth About Salon & Spa Service Payroll Costs

August 5, 2022 | By Neil Ducoff | 4 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.

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.”

AGAIN … we’re talking about the service payroll % on your Profit & Loss Statement — not commission rate.

The 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 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? 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…

To learn more about what Team-Based Pay is, and how it could benefit your company, download our free White Paper here.

If you’re ready to learn how to incorporate the entire Team-Based Business Model into your company, we highly-suggest you attend a the four-day Strategies Incubator Seminar.

Want to network with hundreds of owners and their team member who live the Team-Based Business Model every day? The Team-Based Conference is where you want to be!

Categories: Compensation , Leadership , Team-Based Pay

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  1. Is this 30-35% including FICA tax or just what you pay out in commissions? Also how do you treat apprentices…. Is their hourly rate included or are they classified as support staff? I guess I always assumed as long as total payroll and taxes ( including owner salary) was under 50-55%, we were doing okay.

    1. Hi Christina,
      The 30%-35% of total revenue is just service provider payroll Gross Pay — including employee withholding tax. It does not include what the company pays in taxes. Front desk/guest services should be 8%-12%. Owner’s salary should be around 10% of total revenue. (Owner pay can vary if a service provider.) Depending on what your other expenses look like, a total payroll over 50% can be a challenge.
      Hope this helps to clarify.
      — Neil

  2. Neill, I always look forward to your Monday Morning Wakeup Calls as well as all other information that you share. However, I’m confused with your latest recommendation of 30% – 35% for payroll % of total revenue. I have attended several of your Strategies workshops over the past 15 years and as I remember, your recommendation was always 40% – 43% payroll to total revenue. Am I missing something here?

    1. Hi Ginger,
      Strategies benchmark for “service payroll” has been 30%-35% of Total Revenue since I started the company 29 years ago. Again, this SERVICE PAYROLL … not including front desk, management or owner pay.
      I emailed you an old PDF from our 2010 Incubator manual that shows the 30%-35% service payroll benchmark.

      If service payroll was 40%, you’d have to add 10% for admin and another 10% for owner pay. That’s a 60% payroll. G&A expenses average 40%. Then add retail and professional product cost. 40%-43% service payroll simply doesn’t work.

      Hope this clarifies.



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