The medical and spa industries have become very competitive marketplaces. Many professionals from the traditional medical industry are jumping into the cosmetic procedures game and face a learning curve when it comes to pricing and compensation for services rendered. Having the right compensation structure for a medical spa, spa or salon is critical. The spa industry has some of the highest payroll expenses of any type of business, so when it comes to compensation, there is very little room for mistakes. Many owners are paying compensation that is not profitable for their business, nor does it hold accountability for their team in meeting performance goals. It is important to have a pay structure that is fair and equitable for you as a business owner, as well as for your team.
Compensation is a combination of what you pay your employees plus the benefits you provide. The right benefits program is important because it helps you distinguish yourself from the competition. It can also be used as a tool in staff retention when you factor in vacations, paid education, retail commissions, health insurance, and special employee pricing on products and services. The days of paying a straight 50% commission to spa service providers are coming to an end as business owners are realizing there is not a profit to be made under this structure. There are many types of pay structures out in the market today, and no matter which one you choose, the numbers have to add up to the right percentage in order to maintain profitability. Medical professionals such as RNs and physician's assistants most likely will be used to salaried positions, so they will need to be trained on and transitioned into performing services based on dollar incentives or commissions. Spa professionals, such as estheticians, stylists and massage therapists may be used to commissions, and it is important for you to take into consideration that you are bringing two different types of professionals together, and accountability goals may be new to both of them.
Straight salary positions
This type of compensation structure has become more popular during the last few years. Many business owners who have the desire to have a more professional environment and offer more stability in their workplace have been turning to paying their technicians a salary for their work performance. In this scenario, an owner of a business could look at the performance of a technician during a period of three to six months, and look at their productivity and sales to come up with a weekly or bi-weekly salary structure that would be an average of their sales during that period. For example, if a technician during a period of 12 weeks brought in an average of $2,000 per week an owner may look to offer the employee a guaranteed weekly base of $800 plus some type of benefit options. This salary option would allow for profitability in the business when combined with benefits, and still be attractive to the team member. The technician’s salary could be adjusted anywhere from two to four times a year with this model.
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With salaried positions, it is not uncommon to see compensation also tied into what the department or the entire team does in performance. This means if the group or the entire teams meets their performance goals, there would be an additional bonus in pay for collaboratively working together.
This type of pay structure is a standard for many businesses in the spa industry. This involves the technician being paid a percentage of their gross sales for the work they performed during a certain period of time. The example of a 50/50 split has been a common offering for many years. You may find in some cases it is higher or lower. Many owners are under the impression that they only have to pay their technician for the services performed, and if they are not working, they do not get paid. The federal government requires all employees be guaranteed at least minimum wage when employed. This hourly rate can vary depending on the state the business is operated in. In this scenario, it also common not to see any benefits offered.
Booth rental spa
This practice is quite common in certain regions of the United States. The challenge with rental operations may be economic viability. One reason rental is so prevalent is that the owner of the business is not familiar with structure and does not know about employee operations. They decide that it would be easier just to have renters and not have to learn or deal with the “employee issue”. The reality is whether you have employees or renters, you still have to contend with the “people” issue. You need to have a fair, professional and well-run environment for your working professionals and their clients.
There are strict parameters around how the U.S. Internal Revenue Service (IRS) views booth renters. Renters pay a flat rental fee that can be collected daily, weekly or monthly. They have to have their own business phone line, process their own credit cards, set their own hours of operations, collect their own money and buy their own supplies. In addition, they have to prove and provide their own business insurance. Anything that does not fit into the realm of these parameters within the exception of contracting out reception services would be considered an employee. Make sure to have a contract with your independent professionals.
Common mistakes with owners: "My staff includes renters, and I collect the money on services and products and then I pay them back a commission on sales. (This is not rent)
Fact: The IRS views this as a way of trying to avoid paying payroll taxes.
When owning and operating a business, the owner needs as much leverage as possible to make money. The profit margins are too tight for mistakes. With a rental situation if the owner markets their business and attracts one person or a 1,000 people, the rental amount stays the same. This can make profit very challenging. The contracts for rental agreements are specific and best left to professionals who regularly deal with these types of legal issues.
Team member compensation
All employees should be compensated with a base and/or a commission salary package. This can vary depending on the position and commission percentage due to services performed. An RN may have a higher hourly wage, such as $20-25 plus tiered commissions of 2-5% on services performed. An esthetician may earn $10-15 per hour with 35-45% tiered commissions. You would pay the base draw or the commission—whichever is greater. Also, service providers should be eligible to participate in a retail commission program. The following are four ways to track a service provider's performance and pay them accordingly:
- Prebooked percentage. The prebooking number comes from the number of clients in a pay period who have scheduled their next appointment with the service provider. If the service provider saw 40 clients during the pay period and 20 of them booked their next appointment before leaving, her prebooking percentage would be 50% because half of the scheduled clients are prebooked for their next appointment.
- Premium service percentage. This percentage is determined by identifying service categories, such as medical-grade peels, eyelash tinting, tanning and microdermabrasion that have a higher ticket price and require clients to come in with frequency in order to maintain the service, making them more likely to be loyal to a service provider or business. Suppose a service provider had $4,000 in gross service sales for the two-week pay period and $2,000 of that total came from chemical peels and microdermabrasion. Divide $4,000 gross service totals by $2,000 chemical totals, and your chemical percentage would be 50%.
- Retail percentage This percentage is derived by dividing the service provider's retail product sales during the pay period by their service sales. For example, if a service provider generates $2,000 in service sales during the pay period and, in addition, sells $300 worth of retail product to her client, divide $2,000 by $300 and you would get a 15% retail percentage to service-dollar sales.
Paying commissions and holding people accountable are well-established methods in other industries and work very effectively in medical spas when training is provided. Employees naturally perform better with incentives. The harder they work, the more they can earn, based on productivity. It's a win-win situation for everyone involved.
A benefits package is desirable for every company to have. In this economy attracting and keeping exceptional team members can be challenging and offering a benefits package can make a difference in the quality of a staff’s productivity. Benefit packages distinguish a business from others and lets team members know they are cared about because you are willing to make an investment in them.
Remember that all benefits are budget-dependent. When determining benefits, evaluate different options, add up what it costs and whittle it down to a percentage of the business revenue that is reasonable. You can have a total wish list of benefits you would like to offer, and it may not fit into your initial financial package. The goal is to start with what you can afford and move your way toward the ultimate goal through financial profitability over time. With employee retention in mind, there are a number of programs available to employers that are both tax-favored and financially effective as means of maintaining employee morale, and minimizing employee turnover, thereby reducing overall employer recruitment and training expenses, and improving overall productivity. The examples provided would be generally applicable to full-time employees. A few of these programs include the following.
- Can be provided by the employer with total cost being paid by the employee. Net effect is no cost to employer while still providing access to group plans for the employee at usually more favorable premiums. These plans are usually better than those available to individuals.
- Costs can be shared by employer and employee, with the employee share being taken out of salary on a pretax basis. The employer share is tax deductible as a business expense.
- Costs can be owned entirely by employer, sometimes in lieu of salary increases.
A. Like the health plan concept, a retirement plan is a means of providing a valuable benefit to employees as a way of improving employee morale and their connection to the business. There are a number of factors why an employer might choose one type of plan over another, including cost, total number of employees, age difference between employer and key employee vs. remainder of staff, specific goals of the business owner, such as her own retirement needs, consistency of profits, desire to favor certain employees over others Specific types of plans include 401(k), profit-sharing plans and employee contribution. These plans are designed for businesses of at least 25 employees, because there are administration costs (approximately $1,000-1,800 per year); this is a deductible cost. There are IRS tax-form filings required. There is a need for an outside administrator who will monitor IRS-compliance and do coordinated accounting for the plan. There is a legal obligation to periodically inform employees about the plan and to provide adequate plan documentation to afford them the opportunity to make prudent investment decisions. This education should normally be offered by the plan sponsor, such as a mutual fund company. Variations on the 401(k) plan include: plans such as age-weighted plans, which provide an opportunity if the employer is contributing to the plan to skew a higher percentage of those contributions to themselves, if they are older than their employees. New Comparability plans also offer ways to favor key employees and the owner. Generally, these more structured plans cost slightly more than an ordinary 401(k) plan due to increased administration, but they offer significantly greater proportional benefits to the business owner, under certain circumstances. Although there are administrative costs in 401(k) plans, employer contributions do not have to be made, or can be made on an inconsistent basis (depending both on profits and employer desire). The employee can contribute up to $10,500 or 15% of salary and the employer up to 15% of salary up to max salary of $170,000 Vesting. The employer can put a vesting schedule on employer contributions to favor employee retention--usually seven years.
Very important consideration in this type of plan include:
- No administrative costs
- No complicated IRS filings
- Allows employee to contribute up to $8,000+ from salary per year.
- Mandatory employer-matching contribution of up to 3% of employee salary if employee contributes $1,500 (out of a possible $8,000) and 3% of the employee salary is greater than $1,500, the employer is only obligated to match the $1,500.
- This plan would not be suitable for a large organization because the mandatory 3% could end up being far more costly than the administrative costs of a 401(k) plan.
- The employer cannot use a vesting schedule. All employees are immediately vested.
- Overall ability to put large amounts of money into the plan is more limited than in a 401(k).
Life insurance and disability plans
Life insurance can be either group term insurance (usually 1 or 2 times salary), and/or voluntary employee-paid permanent life insurance, paid for through payroll deductions. Group disability covers up to 60% of salary and can be paid either by employer or by employee. Who pays the premium affects the taxability of the benefits if received. These plans are relatively inexpensive, but can potentially be extremely valuable to the employees and overall morale.
When an employee has reached one year of employment, they would receive one week of paid vacation based on an average week of their service earnings less retail sales. You would divide their yearly service earnings by 52 weeks in order to get their weekly average. For example, an employee generates $52,000 in service sales during the period of one year. Dividing the gross total by 52 weeks gives a weekly average of $1,000. Then pay the appropriate percentage of commission based on the average dollar amount. After an employee has reached three years employment, the vacation pay can increase to a two-week time period.
With a small business, it is recommended that vacation be used in the period earned and not roll over. If an employee did not choose to use their time during the allotted year, they would be compensated and not accumulate the time. If an employee wants to take more time off than their paid vacation allows, the additional time would not be compensated and would have to be negotiated with the business owner.
Offering sick days can be optional. Standard offerings range from 3-5 days per calendar year. The days can be taken with or without compensation, based upon benefits budget. If compensation is offered, use an average of their daily commission to determine pay. If the employee were compensated for sick time and exceeded their leave time, there would be no compensation.
One incentive an owner can provide to ensure consistent productivity is to offer wellness days for people who do not miss any scheduled work time in a calendar year due to sickness. If the employee did not call in sick or miss their scheduled shift, they could receive 2-3 days average pay in a bonus form at the end of the employee’s calendar year. If the employee missed any time, the incentive would become void.
Each full-time employee receives $500 per calendar year for advanced education. The education has to be approved by management in advance. Any expenses over the education limit would be the responsibility of the employee.
Profit sharing is an excellent benefit because it also motivates the staff to be more productive and reduces waste. It encourages team members to take an ownership attitude toward the business since they have a direct stake in the bottom line. An example of a profit sharing plan is 10% of the net profits after all expenses are paid. This could be distributed monthly or as a year-end bonus. This would apply to team members who have completed a year of employment or more. The profit sharing bonus would only be eligible to employees who are currently working for the organization. If a staff member were to leave during the course of the year, they would not be eligible. Staff receive a percentage of net profits based on hours worked. Total net monthly profit after expenses example: $10,260 for one month of sales. Team members receive 10% total of net profits=$1,026. The commission is split between team members based upon hours worked. Suppose 437 work hours are divided between three team members: one at 160 hours, one at 150 hours and one at 127 hours. Divide total hours into the commission; 437 hours divided into $1,026=2.35
Multiply each team member’s hours by the divided amount
Example: 160 hours x 2.35 = $376
150 hours x 2.35 = $352.50
127 hours x 2.35 = $298.45
This is a rounded numbe; you may be slightly off by a fraction with rounding the numbers
Compensation structure changes
Having the wrong compensation package is one of the leading reasons why spas are not profitable. Hands down, one of the scariest moves for any business owner to make would be to change their compensation package. Some common barriers owners face are lack of understanding about how to pay or the more important fear of a walk out.
It is important to walk through these uncharted waters safely and securely at a pace that is comfortable for you and does not throw you into overwhelm. Many times you will see that compensation is an issue and yet they may not be prepared to do anything with it right away. The important thing to do is educate your team members on the appropriate profitable structures and come up with a game plan for when and where the change can be implemented. You may find that they want to focus on other areas first to build your confidence and move toward this change in time. Another option is you may not change the compensation right away with your current staff and will implement a new structure for new hires. Eventually a structure will have to be implemented across the board to reach profitability. It is a numbers game for the business if it is going to make any money.
If a business owner is paying more than 50% commission or is offering some type of benefits in conjunction with a commission structure greater than 50% they are losing money. This means every client who lays on thier esthetician's table is costing them money instead of making them some. It does not matter how much money a tech brings in. Costs go up exponentially. Typical payroll burden is about 10% above the commission paid out. This includes costs of matching FICA, Medicare, and workman’s comp insurance.
The important factor when making compensation changes is coming up with a step-by-step plan that outlines the process of what the change needs to be and how it is going to be implemented. There has to be a focus on what the win is going to be for the owner and the people who work for them. Typically, strong marketing pieces, referral programs, a coaching program, business-building tools and creative incentives are not in place. These are all definite wins for the team in regards to what new benefits they will be receiving when a change has to be made.