Profit Center: How to Transition to an Hourly Pay Model

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For as long as spas have been operating in the U.S., the predominant method of compensation for therapists and technicians has been commission, in its various iterations. However, an increase in state and federal wage regulations—as well as an influx into the industry of folks from the corporate world, which typically pays by the hour—has seen the rise of the hourly pay model. As a business owner, you may wonder if you should consider switching to this method too. What are the pros and cons, and what will it cost you? Before you make a decision, read on for feedback from business owners and staffers who are happy to have made the move.

As the American spa industry started booming in the late 1980s, most spas grew out of existing salon businesses. And because salons were in the habit of paying stylists a straight commission, spa owners tended to do the same as they hired estheticians and massage therapists. Over the ensuing decades, the commission method wasn’t always kind to the spa industry, often resulting in labor costs that were off the charts, not to mention inconsistencies in pay levels. High labor costs have also made it difficult for day spas to offer benefits to their staff members; contributions to health care, paid vacation and educational support have largely been the province of hotel spas or large chains. Another consideration is that the competition for qualified labor has never been greater; according to the Bureau of Labor Statistics (BLS), by 2024, the esthetics job market will grow by 12% and the massage therapy market by 22%. And yet, it’s hard to find a single spa owner who has as many staff members as they’d like. Add to these factors the increased regulation on wages, especially in California, and it becomes obvious why hourly pay has been gaining in popularity, especially for spa owners who are trying to stand out in a crowded marketplace.

So, what exactly does an hourly compensation method entail? Typically, therapists receive a set fee per hour, plus an additional commission or treatment rate when they perform a service. At first glance, it seems like a win-win: The spa owner avoids paying guaranteed wages that are too high to sustain, and the therapists still have an incentive to perform a greater number of services or focus on raising their average ticket through upsells.

Yet for owners and operators accustomed to commission-based environments, moving to an hourly wage model can be daunting. A key concern: One slow day, with lots of therapists standing around doing nothing, is all it takes to start eating into your gross profi ts. That’s why it’s crucial to carefully weigh all your options.

AvantGard Spa in San Carlos, California, switched to an hourly plus commission model when state laws regarding piece-rate pay recently changed. All therapists receive the same hourly rate, and there are five commission percentage levels, which top out at 34%. AvantGard’s owner and CEO Blanca Caballero details how this newly implemented pay plan has benefited her spa. “If the staff is being paid to attend meetings and trainings, they’re more likely to participate,” she explains. “When they’re not busy with clients, they can assist with laundry, inventory or prep work, and they can’t grumble that they’re not getting paid to do so.” The staff works on specific shifts, and they’re expected to show up each day for that shift, regardless of the number of appointments scheduled. “Knowing you have staff available gives you more opportunities to fill your books,” adds Caballero. “Today, clients often make appointments at the very last minute, and we’re unable to sell a spot if we don’t have a staff member on hand to fulfill that treatment.” This plan has enabled AvantGard to provide a generous contribution to medical and dental coverage for full-time employees, Caballero reports.

In Rock Springs, Wyoming, Escape Day Spa & Boutique owner Misty Hay has paid hourly wages since she opened her spa in 2001. She chose this model because she was asking employees to arrive 15 minutes early for their shift, and to stay between services to change over rooms and help with laundry. As a small business in a town that’s mostly oriented to mining and agricultural industries, Hay needed something solid to offer prospective hires. “Because my staff members are getting paid for their time, they’re more willing to take on extra duties as needed; plus it helps me to better project my payroll expenses,” she says.

“Getting paid by the hour gives you an incentive to stay on the premises,” shares Escape Day Spa massage therapist Amanda Potts. “It’s also helpful during slow seasons—you don’t have to be stressed about the amount of bookings, and you know your pay will be pretty consistent from week to week.” Coworker Lexi Revelli, an esthetician, concurs: “It helps me budget, and think of my position as a full-time job.”

As always, you must perform careful projections before making any changes. Even if your staff will end up earning the same amount in the end, they’re rarely comfortable with the idea of a change in payment methods. Plus, you’ll want to make sure that you plan for all eventualities, whether slower or busier than current levels. Ideally, for a day spa to make a profit, the direct labor costs of the technical staff need to be 35% or less of the amount that they book in treatments. That 35% can be divided into any combination of hourly plus treatment rate or commission, but once you add on the payroll taxes and support staff payroll, you’ll be much closer to 50% of revenue booked, and that’s before offering any benefits or education.

At the end of the day, the goal is to have a compensation plan in place that’s fair and motivating to your staff members, while allowing the business to maintain profitability and a career oriented employment environment. As with straight commission plans, it’s essential to offer tiers in the service bonus that staff can progress through by reaching preset performance benchmarks. After all, if you’re paying them all the same flat rate plan, no one will have the desire to improve performance or modify their behavior without further incentives.

– By Lisa Starr