Compensation Equation

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Compensation is the spa's biggest expense. If you get it wrong, your are in big trouble.

Service labor comprises well over 50% of your total revenue; 30-40% for technician labor, followed by support labor, taxes, etc. and finally the owner. Your service comp plan will make or break you. The maximum for labor (payroll, taxes, vacation, health insurance, owner) should be 62%. 58% is better. Rent and utilities should be 6% and supplies 4-7% (ideal rent is $16 - $18/ft). Most spas have a general overhead average of about 40% (includes support labor, but not technical labor).

Traditional spa and salon comp plans

  • Independent Contractors - Not recommended.
  • Booth Rental - No quality control, no teamwork.
  • Commission
    • Most common
    • Typical range 40-65% of service, 10% on branded retail
    • + Easy to manage, simple to understand
    • + You don't have to pay people unless there's a sale
    • + Encourages higher sales by techs
    • - Eats profits
    • - Forces clients to pay higher prices
    • - Only source of pay increases exept higher volume or bigger cut
    • - Price increases are automatically shared
    • - Does not reward teamwork
  • Salary + Commission - Relatively new. Works well. Example - $8-12/hour plus 10-20% commission on services and retail. Good if the spa is busy. Cash intensive at the beginning.
  • Salary + Incentive or Bonus - Mainly for management. Incents managers to control costs and increase volume.

Reality Check Examples

Service Sale: "Before"
$100
  Signature Massage
($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: 68%, GPM 32%
($40)
  Spa Overhead Expense (40%)
($2)
  PROFIT/LOSS

 

Reduce the Cost of Sales
$100
  Signature Massage
($35)
  Commission Cost of Sale
($3.5)
  Payroll Burden (10% of payroll minimum)
($7)
  Product Cost (varies with type of service)
$54.50
  GROSS PROFIT (Cost of Sales: 46%, GPM 54%
($40)
  Spa Overhead Expense (40%)
$14.50
  PROFIT/LOSS

 

Retail Sale: "Before"
$100
  Branded Product Sale
($50)
  50% Product Cost of Goods
($1)
  Cost of Shipping, Stocking
($10)
  10% Sales Commission
($1)
  Commission Payroll Burden
$38
  GROSS PROFIT (COGS 62%)
($40)
  Spa Overhead Expense (40%)
($2)
  PROFIT/LOSS

 

Retail Sale: "After"
$100
  High Margin (Private Label) Product Sale
($30)
  30-40% Product Cost of Goods
($15)
  15% Sales Commission (a 50% raise!)
($4.50)
  Commission Payroll Burden
$50.50
  GROSS PROFIT (COGS 49%)
($40)
  Spa Overhead Expense (40%)
$10.50
  PROFIT/LOSS


For a 4,000 square-foot spa, Lisa suggests 2 skin lines, one nail line, 1 massage line and 1 lifestyle line.

The Compensation Prescription

  • A comp plan that rewards the right behaviors
    • Customer Retention +Spa Retention = TOTAL RETENTION
    • Retail Ratio (define which ratio)
    • Attendance, meeting attendance, on time performance
    • Advance Skill / knowledge / certifications
    • Pay more for performance, make the numbers clear and measure for a period of time
  • Professional Career Management
    • "I will pay part of my potential income to a spa who will take care of my career: educate me, improve my skills, respect me, increase my productivity,; provide a fun workplace; hire great co-workers, trainied managers and outstanding support staff."
    • Appeals to a more mature worker
    • Include paid vacations, health insurance
  • Advancement with Accountability
  • Carefully Controlled Cost of Sales

Reward the Keys to Profit

  • Productivity
  • Retail Sales
  • Customer Retention
    • A customer's willingness to refer is the greatest indicator of a company's profitability.
    • Who's keeping clients is a good KPI
    • Good spa software tracks this (client tracking software does not)
    • A client is "retained" after the third visit
  • "Good Citizenship"
    • on time
    • stays late
    • helpful
    • goes to meetings
    • etc.

    Comprehensive Comp Plans Include

    • Employee perks
      • Monthly Treatments
      • Random bonuses for top performers
    • Variety of earning opportunities
      • Such as team bonuses and contests
      • Top quality training and education
        • Quarterly in each department
      • Employee discount programs
        • Emplyee and family discounts
        • Buying Clubs
      • Benefits (just like a "real" employee)
        • Paid vacations, health insurance (50% for line and 100% for management)

      Win-Win Comp: The Treatment Plan Rate Plan

      • A treatment rate is a flat rate that is considered appropriate and fair pay, based on the time, skill, knowledge and effor required to deliver a given service
      • Treatment rates are not directly tied to the service price
      Sample Treatment Rates
      60 min Services   Bronze Level
      0-1 yr
      30% mass, 28% esty
      Silver Level
      1-3 yr
      32% mass, 30% esty
      Gold Level
      3-5 yr
      34% mass, 32% esty
      Platinum Level
      5+ yr
      36% mass, 34% esty
      Classic Massage $85 $25.20 $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
      Microderm Treatment $105 n/a $24.70 $29.40 $31.50

      Retail Profit Sharing

      • Adjustable commission is based on gross profit of product
      • The higher the gross profit, the higher the commission
      • Begin with the end in mind: PROFIT
      Example: profit increase of 28% after conversion
      Before comp conversion Total Spa Revenue
      $90 1 hour Classic Facial

      50%
      service commission

      a 35% retail ratio a a 10% retail commission Product COGS EE Comp per hour Spa Gross Profit GPM
      a $45.00
      (50% comm)
      a $48 retail sale $138 ticket $4.80 $24.00 $49.80 $64.20 46%
      After comp conversion Total Spa Revenue
      $90 1 hour Classic Facial

      treatment rate $27
      per hour

      a 40% retail ratio a a 20% retail commission Product COGS EE Comp per hour Spa Gross Profit GPM
      basic
      esty
      x rate
      $27.00 treatment rate a $60 retail sale $150 ticket $12.00 $22.00 $39.00 $89.00 59%

      Take the first steps...

      • Get an accurate evaluation of your current financials. Can you ever make money with your pay plan?
      • Are your prices set correctly? You may be able to increase.
      • Determine an acceptable level of profit for YOU. Design a comp plan around a profit goal.
      • Expect turnover. Grandfather key techs. EE's understand that they get a pay cut if you go out of business, too
      • You may have to treat conversion as a "mini startup."
      • Get help if you're doing a major conversion!

      Lisa Starr has more than 25 years experience in the beauty industry and is currently the principal East Coast business consultant for Preston Wynne Success Systems.