Guest Article by Gloria Murray, Accountant and Director of Murray Associates Accountant
Choosing the right business model for your salon or spa can be hard. There are just so many options to choose from! And then you’ve got to navigate your way around deciding if you should pay commission or not. I mean, is there a ‘best way’ of paying staff? If so, what would that look like?
To shed a bit of light on this dense and difficult subject, let’s break it down into four of the main salon pay structures. You will find advantages and disadvantages for each, along with concrete examples and my personal opinion on the matter.
Hourly Pay vs Salary
How Hourly Pay Works
Essentially, employees get paid for each hour they work in the salon. For example, if you’re paying €/£/$ 7.50 per hour, and throughout the month, the employee works 15 hours one week, 25 hours the next, 18 hours, and then 30 hours, that’s a total of 88 hours. This gets multiplied by €/£/$ 7.50 to give their gross monthly wage (before tax and National Insurance contributions) of €/£/$ 660.
- It’s more flexible. You could have employees on a zero hour contract, and use them when you need them. This structure helps with cash flow and resources.
- Staff only get paid for the work they actually do, helping you keep a tighter control of staff costs.
- It’s more difficult to work out their holiday pay as they work different hours every week and you have to keep a note of that while also working out holiday pay when they’re off.
- If you’re using zero hours contracts, you probably won’t see great staff loyalty; as in, they’re much more likely to leave (you in the lurch!).
How Salary Works
Employees get paid a salary for the whole year which includes their holiday pay. For example, if you pay them €/£/$7.50 per hour for 37.5 hours a week, you would multiply this by 52 weeks to get their annual gross salary of €/£/$14,625. Divided by 12 to get their total monthly pay, the employee receives €/£/$ 1218.75 per month.
- Easy to work out and you know what your monthly outlay on wages is.
- Holiday pay is already included so there’s nothing different you need to do when your employees go on holiday; they just get their regular monthly pay.
- You could be paying staff to be sitting around doing nothing if they’re not busy. You need to know your utilisation percentage (tells you what capacity your team and each individual is working to) which you can easily get from Phorest Salon Software.
- Staff might stop making an effort because they know how much they’ll get paid at the end of the month.
In my opinion: Of these two salon pay structures, salary works better as it’s much less hassle for you. You know how much salary goes out each month and you can budget for it. However, you’ve really got to make sure that everyone in the team is working to agreed utilisation figures.
Hourly Pay vs Commission
How Commission Works
Instead of your employees getting paid for the hours they work, they would get paid commission for every treatment they do. For example, if they do a shellac removal and manicure (taking 1 hour) for €/£/$ 30, you might give them 30-50% commission on this. So they would get paid between €/£/$ 9-15 for that hour.
- You only pay for the work they do (as long as it’s more than the minimum wage).
- As they can earn more money per hour, they may be inclined to sell (or upsell) more expensive services.
- You need to make sure, as they are employed, that they are getting at least the minimum wage for the hours they work. So you would need to check this every time they get paid.
- If they are paid purely on commission, and they don’t think it’s high enough, they may go off and rent a chair elsewhere taking their clients with them (or set up in competition).
- If you’re VAT registered, you would need to think about whether you take this off before the commission is calculated.
In my opinion: If you want to go down this route, you may as well rent a chair to them. As long as you have a good contract, you won’t have the hassle of making sure they get paid minimum wage for the work they do.
Hourly Pay/Salary vs Performance Bonus
How Performance Bonus Works
The performance bonus model is a tiered structure, so you would give them a sales target of say €/£/$ 3000 per month (this should be easily achieved if they bring in €/£/$ 30 per hour and have a utilisation rate of 75%.
The structure could look something like this:
- Sales of €/£/$ 0 – 2,999: 0% commission
- Sales of €/£/$ 3,000 – 3,499: 10% commission
- Sales above €/£/$ 4,000: 15% commission
Meaning that if your employee had sales of €/£/$ 4,400, commission would be as follows:
- Sales of €/£/$ 0-2,999 = €/£/$ 0
- Sales of €/£/$ 3,000-3,499 = €/£/$ 499 X 10% = €/£/$4.99
- Sales of €/£/$ 3,500-4,400 = €/£/$ 900 X 20% = €/£/$ 180
Total commission = €/£/$ 184.99
- A performance bonus structure will reward your high performers more.
- It can push employees to perform even better by upselling and selling more products.
- You might find it tricky to work out, but you could ask your accountant to provide you with a spreadsheet that will calculate it for you.
- Some employees might try to sell services or products your clients don’t need, purely to get more commission.
- You must give employees an average of their commission in their holiday pay for their statutory four weeks (so you don’t need to include it in the rest of their holiday entitlement). This means you can’t just pay the basic wage when they’re on holiday but have to take an average.
In my opinion: You have to know your numbers to make sure you get a model that’s right for you. How much does your salon cost to run? By how much are you looking to improve sales and profit? It can be really easy to end up with the opposite effect of what you want to achieve if you don’t think it through properly.
Salon Pay Structures: Final Thoughts
Another recommendation I have for you is to pay your staff monthly. If you pay employees weekly, it will either cost you more (as it has to be processed at least 4 times a month rather than once a month) or, if you’re doing the wages yourself, then it takes up more of your valuable time. Either way, it’s a hassle and you could make your life easier.
Of course, these four options aren’t the only salon pay structures out there, so if you want more tips on your financials, join my Facebook group Knowing Your Numbers.
Thanks for reading,
Gloria Murray is a Glasgow-based triple award-winning accountant who has also been awarded the Most Innovative Business Advisor in the UK in the 2020 Annual Innovation Awards 2017. Director of Murray Associates Accountants, she specialises in helping small business owners grow sustainable and ethical companies that not only provide a better service to their customers, but also contribute to local employment. If you would like to get more business tips from Gloria, you can get a free copy of her printed business magazine by sending an email to email@example.com.