Implementing a Flat Treatment Rate Compensation System

A flat "treatment rate" system is the best way to make services more profitable. A treatment rate uncouples the direct link between the service prices and the rate an employee is paid. The concept is simple: For the amount of effort, skill, and knowledge required to do this specific service, the employee is paid X dollars. There may be several treatment rate levels, usually no more than four within a department. For example, deep tissue massage carries a higher rate as well as a higher price. It may even carry a premium rate over other specialty massages, due to "wear and tear" on the therapist. Chemical peels yield a higher treatment rate for estheticians than classic spa facials. Nail technicians can receive a higher treatment rate for their spa style treatments, while standard manicures and pedicures carry a lower rate. The price point of a service is indeed reflected in the treatment rate, but it is not a direct relationship. 

"Commission culture" has misled a generation of spa employees with the notion that their value is determined by the size of the "cut" they get. But we know that 50% of "a little" may be less than 30% of "a lot"! Treatment rates increase with seniority for employees who meet the spa's blend of performance measures, which can include home care retail sales, customer retention, and guest satisfaction ratings. Gross profit diminishes modestly as compensation moves into these higher seniority levels. But net profit actually improves; successful senior employees are inherently more profitable—fully trained, highly productive, adept at retaining new customers and winning referrals.

How do you determine treatment rates? In this example, let's set a gross profit target of 63%. Labor cost is the "X Factor" we are working toward in the formula below.

Price of 60 minute Fabu Facial      $100.00

Supplies, plus Fabu-Serum $10.00

Use of Fabu-Tron machine $1.00

Total Direct Costs Before Labor     ($11.00)

Gross Profit (target)               ($63.00)

Labor cost/treatment rate       =    $26.00

This produces a treatment rate of about $26.00 for an hour of service, plus the opportunity to earn retail commission through home care sales. (Depending on the type of spa, retail should account for 30 to 50% of an esthetician's revenue.)

To improve gross profit to 68%, the service price of our Fabu Facial can be increased. In a treatment rate system, a $5.00 price increase drops directly to the bottom line.

Finally, managing service profit requires the right spa management software. A treatment rate option has been added to HARMS new release, Millenium 2005,  and is currently available in the compensation module in FTA Gold, by Software Creations. While treatment rate systems have higher administrative costs than simple commission plans, the investment of time yields an ample return on the bottom line.