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The Pros and Cons of Payroll Methods

Edwin-Neill

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.

NT-whiteboard-shot1

Team members checking their progress against set benchmarks in real time (visit salonbizsoftware.com for more details)

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.

Comments



Archived Comments

12 Comments (Comments are closed)

  1. I’m fascinated when you write:

    “So while salary can work, it requires a lot of managerial attention to keep it controlled.”

    In contrast, you imply that a commissioned structure is preferable to a salaried structure because it is “set it and forget it” model.

    But we both know that anyway you slice it or dice running a salon takes a ton of work.

    And for a ton of work, shouldn’t there be a ton of reward…or at least, the possibility of a ton of reward.

    Although they bear most of the risk of going into business the salon owners are not the ones in the industry who reap the rewards.

    Despite the low margins and weak cash flows, new salon owners (most of whom were once commissioned stylists at someone else’s salon) are like lemmings following their predecessors’ commissioned salon model.

    They continue this “failed” tradition, many times not even knowing that better alternative (at least in terms of profitability) was available. And when they came across one – it is usually presented in less than a positive light – or like in this article one that requires a lot more work.

    Bottom line, although I’ve always thought that an owner’s job is to give attention to their business – not to “set it and forget it”…most of the industry does not think the same way.

    While it’s a sad commentary on the majority of the industry it still leaves me with hope that those who “think different” will succeed – big time.

    • Aveda Means Business says:

      Hi Andrew,
      Thanks for your input. We agree that in and of itself, salon ownership means lots of work. The article wasn’t meant to discourage people from salaried payroll option, rather to communicate that it does require a lot of work, reporting, and constant monitoring of the weekly schedule for overtime. As many salon owners start out behind the chair the majority of the week, this kind of maintenance and might be unrealistic for them. If you’re in a place where you have the time to make it work, a salary structure can absolutely be a great option.
      Thanks again for engaging in the conversation. We truly appreciate your feedback.

  2. Corinne says:

    The mysterious sliding scale.. I have never seen one! Can u show a viable sliding scale? Ty

  3. Gareth Broad says:

    I’d like to mention that based on what I’ve read so far from this article and other comments, you can do much better. Our business can afford to pay out 70% on service commission for all our stylists with 10% on retail as standard plus our fees that cover products, color and credit card processing.

    Also – Aveda benchmarks are not too high, we excel past their benchmarks by a rare and wide margin.

    Our profit is still at 30-40% each year and has been for the last 6 years steady.

    How? Our stylists produce more! 45% of your average stylist services at $30,000 is not as good as 70% of our stylists who bring in $130,000. (Yearly)

    The real answer here is learn and train to hit your benchmarks and stop making excuses! If your stylists make more you can pay them more! We do it! You can to!

  4. LM says:

    At first I was a little alarmed at the commission structure described above, but I I misinterpreted it initially. To clarify what is recommended in the FAQ’s above, I presume the pay calculation means you divide an individuals service sales in half, then subtract off $5.00 for each customer served, as well as charges for haircolour products. If so, I agree that this would be quite feasible.

  5. vasile says:

    in your article you mention, service payroll should not exceed 45% of service revenue . how about retail sales ?
    Does 45% include support /desk staff ?

  6. RG says:

    I don’t know where you get your information but in my 40 years of being in the commission industry the most a salon will see in profit (and this is if they are well ran) is 8%. Most of the time it’s closer to 3-4%, if any profit at all. The owners are held hostage by their employees and never see a way to retire from behind the chair or sell their company because their balance sheets are in an unhealthy state. The Aveda benchmarks are too high for any salon or Spa to maintain

    I opened an Employee-based company 11 years ago and sold it for over a 60% gain on my return and didn’t work behind the chair for the last year and a half before the sale. The company always had a 15-20% profit every year. My team was paid well with vacation pay, retirement plan (3% contribution match by the company, paid healthcare, product and education benefits and much more) while I backe away from behind the chair I continued to draw my salary and build the company with competent employees who cared about the company and their team, not just themselves as is typical in most commission salon in my experience. The commission model is antiquated and in dire need of an upgrade. To put this type of an article out and say that commission is the way to go is just irresponsible. Just take a look at the Top 200 salons in salon today magazine. 25% o them are employee based, not commission. why? Because these company’s are profitable with great benefits and highly dynamic teams.

    No where in your article do you talk about exit strategy or benefits, just the same old, same old antiquated junk we have heard for years that doesn’t work.

    • Neill-TSP says:

      Thanks for engaging on this topic! You’re absolutely right that a salary compensation structure can work too, with this caveat: The 2 areas we have seen become downsides that you have to watch super closely are: 1- managing carefully what’s paid out in payroll vs. revenue and 2- overtime, which adds up fast. Successful salons can- and do- make salary work- it just takes extreme diligence around to the numbers to stay healthy. – Edwin Neill

    • Tommy says:

      Surprising to think of something like that

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