The Pros and Cons of Payroll Methods
How to set up payroll— it’s a highly debated topic amongst salon owners, and it’s often the #1 area where we see owners make mistakes that can put them out of business. Smart payroll choices are crucial— not just for growth, but for survival.
There are primarily 2 models: salary or commission-based. Based on our many years of experience, the best payroll model is the commission-based structure. Here’s why.
The % to Watch- Payroll to Service Sales
There’s one expense salon owners need to watch above all the rest, and that’s the % of service payroll to service sales. The threshold you simply cannot exceed is 45%. Start paying out more than 45% in payroll of what you’re doing on services and it becomes extremely difficult for salons to make a solid profit.
That sounds easy enough to watch, but here’s where it goes wrong. For salary-based businesses, there’s one financial word more menacing than all the rest, and that’s overtime. Paying out time-and-a-half on a few hours here and there—per employee— adds up quickly. And in the fast-paced salon world, it usually happens before a manager has time to a) notice and b) rearrange everyone’s schedules (yet again) to compensate. Instead the overtime just racks up.
So while salary can work, it requires a lot of managerial attention to keep it controlled.
The advantage of commission is that with this model, the % of payroll to service sales ratio doesn’t fluctuate. The owner sets this number and leaves it. And when a stylist shows initiative and squeezes in an extra cut before they leave a few days a week, their compensation will automatically be adjusted. You’re happy, they’re happy, and all is planned for in payroll.
FAQs about the Commission Structure:
What’s the recommended pay scale?
The service provider makes 50% on all services performed, minus a $5 product charge and an additional $5 color charge when applicable.
How do I handle senior team members and high performers?
You can set up a sliding scale commission model. This rewards team members at increased percentages as they climb your pre-determined benchmarks.
What about retail?
We recommend keeping retail commission separate. Service providers should be hitting the AVEDA benchmark of 35% of guests buying retail. Once they hit this benchmark, they receive a 10% commission on products sold.
Don’t they make more with booth rental?
No. This is a major misconception amongst service providers, but when you review the salon’s guest retention numbers with them, it clicks. The reality is that when a stylist leaves a salon, we generally see about 30% of their customers come back to us in 3 months. So instead of their predicted 30 clients following them, they’d retain 20. And that’s a 30% smaller paycheck than they anticipated.
How do I present it?
The best thing you can do once you’ve selected a payroll model is to show it as a total package to your team, at time of hire and in reviews. Include, in writing, all the ways they receive compensation, with real dollar amounts: commission earned (show at typical levels for both service and retail), paid vacation, health insurance… put real numbers to these items and they’ll see their earning potential, and you’ll also trump any preconceived notions about booth rental.