Spa Managment: Reconsidering Compensation

Does your spa’s compensation plan need a remodel? Know your options before you decide.

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We all appreciate the technological advances that help us to market and operate spa businesses more efficiently. But when it comes to providing a true spa experience, not even the most groundbreaking innovations—from self-serve facial bars to automated massage capsules—can replicate the effect of another human being. This is evident in a spa’s complex service-delivery cycle, which features a multitude of touch-points, e.g., finding the spa in a web search; calling for an appointment; successfully booking a treatment; arriving and getting acclimated; enjoying the service; and checking out and leaving.

Moreover, as spas have become mainstream, public expectation has heightened. Clients now take it for granted that you’ll provide a fully appointed changing area and/or locker room, an inviting tranquility lounge, a quality sensory experience that includes the latest in spa equipment, and a well-trained technical and support staff. The problem is, all of this costs money—a lot of money—prompting many spa owners to go over their income statements with a fine-toothed comb, and bringing the issue of technician compensation to the forefront. After all, compensation is the single biggest expense of any spa business.
Therefore, making adjustments in this area carries a much bigger payoff than simply tinkering with the marketing budget.

But how to go about it? Globally, spa technicians are paid monthly salaries that are fairly consistent by country, with small increases for treatments and retail sales, along with many of the benefits of a career-oriented position, from employer contributions to health coverage and paid vacation. In the United States, however, there is no consistent approach, which means that the design of your compensation plan is limited only by your creativity.

Evaluating Your Plan
For the most part, the first American day spas grew out of 1980s-era salon businesses whose owners, in trying to limit their exposure when one of their stylists would move 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 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:

1. 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.

2. 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.)

3. 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 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, Washington-based 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 three-way 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, they’re protected from the effects of discounts and promotions, so in the end it feels fair to everyone.”

Another method, more common in spas attached to hotels, fitness clubs or wellness centers, is to pay the staff an hourly rate, augmented by an extra sum for each service that they perform. Such rates vary based on geography, but generally range from $7.50-$12 per hour. The additional treatment rates or percentages of treatments performed may be 5% to 20% of the service fee, again depending on a variety of factors.

The hourly pay model attracts an employee who is interested in stability and a regular paycheck, and can be very cost-effective for spas, but its benefits are usually not realized until the spa reaches mature treatment utilization rates. As this may not be until the spa has been open for at least several years, this method isn’t always ideal for a new spa that doesn’t have a constant source of operating capital.

Looking Beyond Dollars
One consideration when evaluating your compensation plan is your ability to support your staff’s overall career goals by providing them with benefits or perks in addition to direct compensation. A contribution to healthcare coverage and a paid-time-off benefit are typically the most popular “perks” among spa employees.
Obviously, if you are trapped in a high percentage commission plan, you will likely not have the ability to offer benefits of any kind, but other types of plans will enable you to provide such benefits to your full-time, loyal staff.

In order to provide medical benefits at affordable rates, your spa will need to join an existing group of businesses in a plan, which can be found through insurance brokers or your local Chamber of Commerce. With our consulting clients we usually advise that the spa contributes up to half of the individual premium (current rates put that premium at an average of $5,000 per year), with family members eligible to join at their own cost. For a technician booking $1,500 per week in revenue, that amounts to a monthly contribution by the business of approximately $200, or 3% of the revenue generated by that technician.

Paid-time-off (PTO) benefits of one week after one year of employment, and two weeks after three or more years, are also quite affordable for a business. Using the above scenario of a technician booking $1,500 per week in revenue at a direct compensation rate of 35%, that benefit would cost the business well under 1% of revenue generated by that technician. Of course, now that today’s workweek tends to be more fluid, make sure that your earned PTO policy reflects the regular working schedule. For instance, if the benefit is one week PTO per year, a technician working four days per week earns four days PTO, not five. This is one of the few benefits that can also be extended to part-time staff, if desired.

A Winning Formula
As for support staff, including customer service and spa attendants, hourly pay is the norm, with rates ranging from $8 to $14, depending on your region and the duties performed. As the first and last point-of-contact for clients with your spa, support staff are relied upon to provide top-quality customer service at all times. This creates yet another reason for finely calibrating your technician pay: you’ll want to have enough left to reward these hard-working and important staff members with wages that make it worthwhile to remain in the position for two years or so.

Zwang advises that customer service and support staff’s payroll be targeted at 10% of sales. So, it comes down to math: Add up your service and retail revenue. Extract 10% for support staff, 3% for management, 5% for benefits, 4% for profits and 35% for overhead, and that leaves you with 43% of revenue for total compensation for technicians. Given that payroll taxes are typically about 10% of payroll dollars, if you can provide your technicians with direct compensation in the 35% of revenue range, that will allow you to offer benefits such as healthcare coverage, PTO and a robust education program, and to provide a fair living wage in a well-run and well-marketed spa.

When evaluating new compensation options, don’t forget to consider the ability of your operating software to incorporate your plan. Whichever plan you decide upon, it should be automated to the highest degree possible, to save time and to provide crucial reporting metrics to help you take in the whole compensation picture.“Have a good understanding of your pricing and margins, and really look at creating a plan that’s best for the company and that helps your team to grow,” urges Gorecki. “Remember, it isn’t always money that makes them happy.”