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Team-Based Pay: What It Is — Why It Works
May 13, 2019 | By Neil Ducoff | 1 Comment
The pay method you choose for your salon, spa, medspa or barbershop is one of the most important decisions you can make for your business, as it has a HUGE impact on everyone’s financial well-being, your culture and more.
In this blog post, we’re going to breakdown one of the powerful (yet occasionally misunderstood) salon/spa compensation systems: Team-Based Pay.
And who better to explain it to you than the person who literally invented Team-Based Pay for the beauty industry, Strategies Founder & CEO, Neil Ducoff.
Let’s dig in!
Team-Based Pay (TBP) is not just a pay method
To understand the true power of Team-Based Pay, it’s important to understand that it is much more than just a pay method. It’s a comprehensive business model based on proven systems, best business practices and applied leadership. The Team-Based Pay method creates the foundation that supports all the systems that make Team-Based Pay such an effective business model.
The Team-Based Business Model is designed to create a profitable, sustainable business for the owner(s), while providing career growth opportunities for employees, and delivering consistent quality service experiences for its customers.
What is Team-Based Pay??
In its simplest form, Team-Based Pay is an Hourly Rate + Team Bonus compensation method. It is pay based on an employee’s overall performance that extends far beyond “individual revenue” to include skill level, behaviors and strengths.
What truly differentiates Team-Based Pay from any other compensation method, especially commission and piece work, are the systems, culture and leadership that drive it. For this reason, we call it the Team-Based Business Model.
What Team-Based Pay is not
Just paying an hourly rate does not equate to being on Team-Based Pay. Without the Team-Based Pay systems, hourly rate pay is simply being on “not commission.”
There are four key areas that drive Team-Based Pay
- Team-Based Culture
- Financial Disciplines
- Operational Systems
- Employee Growth Paths
Let’s dive into each in a little more detail…
1. The Cultural Shift to Team-Based Pay is dramatic
Where the majority of salons and spas focus on growing “columns of the appointment” (individual request rates), The Team-Based Pay Business Model is about all team members driving the company’s productivity rate — not just their own.
This is a major shift from the inefficiency of growing columns on the appointment. And, it is creates a fundamental culture shift away from appointment book “column vision” and “I/me/mine” thinking.
The inherent challenge of commission is that its primary focus is for individuals to build their own clientele. Once a service provider has a “full book” of requests, the salon/spa is vulnerable to significant lost revenue should one or more busy service providers leave.
In stark contrast to the dangers of individual clientele building (lost revenue from turnover and walkouts), Strategies Team-Based Business Model creates an impressive team-based culture. The following statements are embedded into the performance and culture of every Team-Based Pay salon/spa:
- Everyone is responsible for every hour available for sale, in every column, on the company’s appointment book.
- The skills of the entire company are available to each and every client.
At first glance, these two statements may not appear profound, but think what your salon/spa business would look like if every one of your employees took ownership in filling the hours that are still available on your appointment book. Think about smaller or no waiting lists because clients are excited to experience other service providers.
KEY: The Team-Based Business Model objective is fewer, busier, service providers functioning at an ideal productivity rate of +/- 80%.
2. FINANCIAL Disciplines and Control Over Payroll
If you pay commission, straight or sliding scale, you are committing a fixed percentage of service to your service payroll. Increases in revenue automatically increase service payroll. Once commission rates are set, it is massively difficult to adjust for increases in operating expenses. If you increase prices to cover increased operating costs — all commission employees get an immediate raise. That’s the reality of commission pay.
NOTE: Product cost deductions from service revenue before commission is nothing more than a “smoke and mirrors” tactic to lower commission a few points. In reality, implementing a product cost deduction is a form of a pay conversion.
On Team-Based Pay, service payroll costs are fixed and do not increase in tandem with increases in revenue. This factor alone gives salon/spa owners and leaders significant control over payroll costs. Payroll costs will not change without leadership approval. This also allows for adjustments to increases in operating costs.
KEY: Rather than the automatic payroll increases on commission, pay raises and new hires are planned and budgeted.
Building and living a Cash-Flow Plan and financial oversight is are part of the Team-Based Business Model. On Team-Based Pay, profit and cash reserves are planned outcomes.
3. Operational Systems
It is the operational systems that drive Team-Based Pay that truly sets it apart from other pay methods.
For example, at first exposure to the Team-Based Business Model, many owners assume that service providers being paid an hourly rate will be unmotivated to produce at the same level as on commission. The thinking is, “I’m getting paid whether I produce or not.” For that to occur on Team-Based Pay, systems would have to be ignored and leadership not paying attention.
Team-Based Pay is systems-driven. Critical numbers including, productivity rate, new and existing client retention rates, prebook rates, frequency of visit and others are constantly monitored. Daily huddles, monthly company service + retail goals and scoreboards are dialed in.
KEY: Team-Based Pay pays for individual and team performance — not hanging out in the back room.
When monthly goals are achieved, all employees, including front desk/guest services, earn a fair share of a budgeted team bonus. Unlike the “I/me/mine” commission culture, on Team-Based Pay, the entire team pushes in the same direction.
Commission is based solely on an individual brings in with his or her two hands. Because it’s not based on overall performance, essential performance behaviors, such as lateness, low productivity, low client retention, low retail sales and more, have no bearing commission earned. Simply put, commission often pays for the wrong performance and behaviors —Team-Based Pay does not.
4. Employee Growth Paths
Team-Based Pay is designed to create growth opportunities for employees. To communicate these growth paths, Team-Based Pay utilizes a Strategies’ tool called a Broadband to communicated expectations by pay rate.
Broadbands do not focus on how much a service provider should be bringing in to earn more pay. That’s commission thinking. Broadbands focus on and communicate the Skill Requirements, Team Behaviors and Individual Strengths and Behaviors to advance their earning potential and responsibilities.
- Broadbands are about maintaining transparency and trust.
- Broadbands show the starting and top end pay in both hourly rate and annual value.
- Broadband includes the specific company performance and growth targets that all team members strive to achieve.
KEY: Broadbands are an essential tool used in Performance Reviews.
Conversion to Team-Based Pay Facts:
- The conversion process to Team-Based Pay does not, in any way, cut a service provider’s pay. In fact, the new hourly rate, depending on the individual and financial reality of the company, is typically slightly better than the “hourly rate on commission” it was based on.
- On Team-Based Pay, service providers are not all paid the same hourly rate.
- It can take four to six months to prepare for a Team-Based Pay conversion. Systems must be implemented and functioning prior to conversion. Changing pay methods is a process that cannot be rushed.
- If all that changes is “the pay,” you didn’t convert to Team-Based Pay, the “I/me/mine” commission mentality will persist, and the financial condition of the company will not improve.
- The higher the trust factor and the more structured the company is at the time of the Team-Based Pay Conversion, the smoother the conversion.
- Each service provider’s new hourly rate on Team-Based Pay is based on the average gross pay earned over the previous six months, then divided by schedule hours per pay period. A minor increase (based on a number of factors) is added to arrive at the new Team-Based Pay hourly rate. That rate is then multiplied by that employee’s scheduled hours to arrive at a projected new paycheck.
- Retail commissions are not typically part of the Team-Based Business Model. Retail commissions earned are included in the calculation of the employee’s new hourly rate. If the employee did well selling retail, it gave them a higher hourly rate. If the employee avoided retail sales, their new hourly rate will reflect it. Consistent retail recommendations become an expectation on Team-Based Pay.
- Monthly Team Bonus is budgeted into the Cash-Flow Plan based on service and retail revenue goals. When goal is achieved, Team Bonus is paid. Strategies provides a Team-Bonus Calculator to determine what full- and part-time employee share of the bonus pool.
- Higher Productivity Rates have a profound impact on controlling Service Payroll percentage of Total Revenues. Higher Productivity Rates mean efficient use of service time and payroll dollars.
- Depending on the company’s commission rates and service payroll percent at the time of conversion, it is possible to achieve a 10% or more reduction in total service payroll percent in one to six months. This reduction is based on increasing revenues and controlling payroll costs. It does not represent a reduction in actual service payroll dollars.
- Converting to Team-Based Pay will not trigger a walkout. It is possible that one or more employees may decide to leave. These are typically employees that were not onboard prior to the conversion. KEY: Departures typically increase the company’s productivity rate while reducing service payroll dollars and payroll percent.
- As revenues increase, raises can be budgeted and rewarded based on the employee’s overall performance. For example: For every $100,000 gain in revenues, there will be approximately $30,000 to $35,000 available for pay increases and possible new hires.
- Top producing, fully booked, service providers gain most. When fully booked, commission service providers can hit a pay ceiling. (Yes, individual price increases can help, but ceiling still exists.) KEY: On Team-Based Pay, the increased income potential of fully booked service providers is in the hours available for sale on other columns on the appointment book.
Today, growing an employee-based service business is more complex than ever. Suites, booth rental and the “independent” factor feed on employee-based salons.
To succeed, employee-based service businesses must become everything that booth rental and suites are not, and by design, cannot be.
The industry needs to recognize that commission is what drives individual clientele building, because it rewards “I/me/mine” thinking and behavior.
The brand and reputation of the company is what attracts and retains clients, not the popularity of specific individuals. This in no way means paying hard working employees less. It means paying for the right overall performance and to stop paying for the wrong performance and behaviors commission automatically rewards.
- It’s about building a company and brand.
- It’s about growing a company that grows in value.
- It’s about creating that “team-based” culture all owners dream about.
- It’s about building careers.
- It’s about creating profit and reinvesting in your business and employees.
- It’s about creating income security for your and your employees.
- It’s about “our client” thinking replacing “my client” thinking.
Our industry is rapidly changing. Employee-based salons and spas must be leading change — not reacting to it.
What you just read is an ultra-condensed overview of Team-Based Pay.
Want hands-on help implementing Team-Based Pay in your salon, spa or medspa? There’s no better way than working one-on-one with a Certified Strategies Coach as part of a Strategies Membership.