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Spa and Salon Compensation

Analysis: Commission-Based to Hourly/Salary Compensation

A) Overview

A major premise in the documentation is to prove to people that an "hourly system" will provide very similar results as a commission-based system. Sometimes spa/salon industry personnel will pursue commissions believing that this will maximize their income. In this analysis, data from an esthetician's performance was taken. This is a real person with real data. In most instances, the data has been masked with "X"s. However, the forms, charts, and trends show the power of the analysis. These are tools that are found within world-class systems such as Six Sigma and other highly consistent, predictable management programs. Importantly, these tools are tremendous in explaining things to your staff and building a dialog with them. They can be used to better understand the conversion system. Since service commission makes up the vast majority of your pay structure, that is the only piece presented. The service commission and associate staff behavior is killing you; not the commission on retail sales. Once the hourly piece is determined, then the important pay-for-performance factor(s) can be determined. For instance, a major factor is client retention ­ new client as well as recurring client ratios. An analysis would determine numerically the impact of client retention and the equitable payout to staff. First, however, it is important to understand and convert "commission pay" to "hourly pay".

B) Specifics

In the analysis, there was a comparison of her actual commission pay against her calculated "hourly pay system". The results were within 4.6% - commission was slightly higher over the determined "hourly system". This is small in light she worked over 7,300 hours over this period. The time period was from July 2004 through October 2008. A statistical smoothing effect occurred since we used fifty-two data points. (TABLE 1). Over this time period, this provided us with a creditable amount of data from which to make conclusions and judgments. During this period, there were the "normal" business factors playing a part on her income (commissions): · · · · · Client turnover Seasonality Staff Turnover Differing schedules Business Promotions

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Spa and Salon Compensation

Additionally, the business experienced some extraordinary external events that most likely impacted her income (commissions). For instance, a year-long major road construction project, increased gas prices, and other major economic upheaval. Unfortunately, she had major, tragic personal events over the past two years. These played an impact on her schedule, ability to perform services, and earnings.

C) Analysis - Example

This is her actual Monthly Performance from July 2004 to October 2008. It was created from a Harms Millennium software report (DE42). In Table 1, you can see some fluctuations in the amount of monthly hours. That variation was also in her commissions. As you would think, this had an impact on her take-home pay since she was on commission.

Table 1

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Spa and Salon Compensation

A side-by-side analysis compared the actual commission paid per hour against the calculated pay on an hourly basis.

Value

Earned Commission "Guaranteed" Wages

Formula

Month's Actual Commission Paid Month's Actual Work Hours Month's Actual Work Hours Times Calculated Hourly Wage

On Chart Blue Dots & Line Green Dots & Line

The chart displays key values month-by-month over the July 2004 to October 2008 period. (This is a Pre-Control Chart. Each colored zone and line has important meaning that we can discuss later.)

Service Provider - Pay Comparison By Month

July 2004 - October 2008

+ 1 St. Dev. = $XX.XX

Pay Per Hour

Mean. = $XX.XX

Comm. Earned/Hour Guaranteed Wages Linear (Comm. Earned/Hour)

Pay Projection Line Slope of y = $XX.XX - $X,XXX R = 0.754

2

Apr-08

Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Apr-05

Apr-06

Apr-07

Oct-07

Nov-07

Dec-07

Sep-07

Nov-06

Nov-05

Nov-04

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52

There are swings and cycles on the chart and this is typical of our industry. The closer the points to the black (regression line), the more consistent and predictable the compensation process. The strong increase in her service commission growth (averaging about 33% per year increase) is very good for the service provider. It will, however, stress the business if the business does not grow at a higher rate. In order words, the business will not be able to afford paying the service provider the higher and higher earnings earned with the commission plan.

May-05

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May-08

Dec-06

Dec-05

Dec-04

Sep-04

Sep-05

Sep-06

Sep-08

Jan-08

Feb-08

Mar-08

Feb-07

Feb-06

Feb-05

Jun-05

Jun-06

Jun-07

Jun-08

Oct-06

Jan-07

Jan-06

Jan-05

Mar-05

Mar-06

Mar-07

Oct-04

Oct-05

Oct-08

Jul-04

Jul-05

Jul-06

Jul-07

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Spa and Salon Compensation

This above chart shows that the commission plan (blue dots) is more volatile for the service provider. It is also more variation for the business. Also, the business finds it difficult to manage cash flow. The hourly plan (green dots) is more consistent and predictable. This is true for both the business and service provider(s). Below is a chart showing the difference in the plans' monthly "pay-outs" from July 2004 to October 2004. In some months, the service providers' earnings will be higher in the hourly method than the commission plan. In those situations, the data point will be in the chart's yellow area. In a sense, the business is "overpaying" the service provider. On the other hand, there will be months that the service provider would be paid less in the calculated hourly plan than the commission plan. Those instances will result in the data point being in the blue area. Here, the business will be "underpaying" the service provider. Importantly, over the long term, they then to balance out. Please remember that the long-term results are extremely close to one another. They were only different by 4.6% over four years!

Comparing Commission Earned Vs. "Calculated Hourly Rate"

Staffer Paid More Wages Than Earned Commission

Jan-05

Jan-06

Jan-07

Jan-08

Jul-05

Jul-06

Jul-07

May-05

May-06

May-07

Nov-04

Nov-05

Nov-06

Nov-07

May-08

Sep-05

Sep-06

Sep-07

Jul-08

Staffer Paid LESS Wages Than Earned Commission Monthly Difference - Dollars $

D) Conclusion

This gives you a sample of the analytical tools available to prove that non-commission systems will give you greater benefits. There are more techniques that I could show you in your quest to improve your business. So, the question you have to ask yourself: "Why do I want the commission system? It is more volatile, erodes profitability, makes me a hostage to my service providers, and constantly threatens the success of my business?" Contact me at [email protected] or 513-530-0122. We need to talk further.

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