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MANAGEMENT WORKSHOP to a new salon and take their book with them, began offering facials and/or massage services to help keep current clients engaged. However, lacking a reference point, these salon owners paid their newly hired estheticians and therapists the same way they did their stylists: with outsized commissions. Flash-forward to today and, in spite of the exponentially increased expenses inherent in running a business, many U.S. spas are still operating under this 30+-year-old plan. Determining whether your compensation plan is working for you is a matter of evaluating a variety of factors: • Does your plan enable technicians to work toward performance metrics that will drive your business forward? • Does your plan provide for competitive wages and benefits, and allow you to attract and retain the best candidates? • Is your business able to predictably and consistently reach and maintain profitability? If you can answer yes to all of these points, then you're probably in good shape with your current compensation plan. If not, then you might consider refining of as much as 65% of revenue. Given that most spas' overhead expenses already total 35% to 40% of revenue, high labor costs obviously make it very difficult to reach profitability. Monte Zwang is president of Bellevue, Washingtonbased Wellness Capital Management, a company that manages the books for a variety of businesses, including medical and day spas, wellness facilities, medical practices and fitness centers. With regard to compensation costs, Zwang offers a bit of perspective: "In our network of spa and salon clients, Direct Labor as a percentage of Total Sales (Service + Retail Sales) is 43.5% year to date; for medical spas it's as low as 22.8%." SHOPPING FOR A MODEL A technician compensation plan that's based on service commissions as a percentage of generated revenue is easy to understand and calculate—but it doesn't generally allow management enough control over margins. For instance, a standard facial incurs product costs in the 6% range, but a microdermabrasion or advanced peel treatment generates higher costs, both in product and equipment. Conversely, you may want to have the ability to reward technicians who have received advanced certifications or training with a higher rate of pay for performing that service. One of the modern methods for addressing this issue is the treatment rate, or fee for service, compensation model. In this model, technicians are paid a specific dollar amount for each service they perform, rather than an overall percentage of the revenue generated. Although this is a more sophisticated approach that can be difficult to explain, the treatment rate method allows management the option of adjusting rates to more accurately reflect both the costs of delivering the service and the skills required to perform it. Further, such plans can be developed with tier-levels, which include clearly defined benchmarks for advancement that are related to sales and client retention, thus rewarding the technicians who are contributing most to growing the business. Amanda Gorecki, president and founder of Healing Waters Beauty, currently operating medical day spas in Durham, North Carolina, and in Wichita, Kansas, recently converted to a treatment rate compensation plan. "I was looking for a plan that would provide a fair wage to help my staff to grow, but would also avoid the threeway relationship—between myself, my clients and the service providers—that existed under the commission plan," Gorecki explains. "With a treatment rate plan, every price increase that I make on the menu doesn't automatically increase the staff's wages. At the same time, "You may want to reward technicians who have advanced certifications or training with a higher rate of pay." your plan. But first, you must make sure you know exactly what that plan is costing you. Many spa owners who pay technicians in service commissions assume that this is the cost of their payroll, i.e., "I pay my technicians 40% commission so my labor costs are 40%." But this is only a part of the equation. To evaluate total labor costs: Add up all of the expenses that contribute to labor. This includes direct wages for technicians and support staff as well as payroll taxes, retail commissions, and benefits such as contributions to paid time off, health insurance and retirement programs, if applicable. A properly set-up income statement should allow you to easily extract these items and total them. Measure this total against your revenue for the sales of services and retail products. (Gift card and series sales would not be included in this total, since they aren't recognized as income for your business until they are redeemed.) Divide the total of labor costs by the total of retail + service revenue, and you'll have your labor cost percentage. Ideally this number will be in the 45% to 50% range, although some spas experience labor costs 1 2 3 90 DAYSPA | DECEMBER 2013