- Sales-Based - Set a sales target for the month (for the whole salon). If the goal is met, pay a certain percentage out (ie. 1%) in bonus. Advantage - easy to explain, easy to monitor. Disadvantage - just because you have sales doesn't mean you had a profit.
- Gross Profit Based - Gross profit is what's left after you pay to provide the service itself. If you take your sales and subtract your technician pay, backbar expense and cost of retail products you're left with your gross profit. Set a Gross Profit Goal for the salon for the month. If it's hit, pay a certain percentage out in bonus. Since you're dealing with a smaller number than sales, you would pay out a larger percentage (ie. 3% or 5%). Advantage - "safer" than sales since it accounts for some expenses. Disadvantage - more difficult to explain to staff, requires good record-keeping, still doesn't necessarily mean you had a profit.
- Profit-Based - Same as above except you set your target on profit - sales less all expenses. Advantage - This is the safest because if you are not profitable you don't pay bonus. Disadvantage - If your team (or you) don't have a good understanding of the bookkeeping side of things, this would be difficult. Also, there needs to be a certain amount of trust between the team and the owner for this to work or the employees may think the owner is "cooking the books" to avoid paying bonus.
- Buckets - any of the above methods can be used in a bucket bonus system instead of using monthly goals. With a monthly goal, at the end of the month the team has either earned a bonus or they haven't. With the bucket system, you set a bonus target and as soon as it hits (no matter how long it takes) the bonus pays. We decided to start with a Bucket system for our first bonus plan.
Here's how our plan works (sales amts are hypothetical, bonus %'s are real):
In spite of the draw-backs explained above, we decided to use Sales for our Bonus Buckets. We chose sales because we are new to Team-Based Pay and my employees aren't used to thinking about Gross Profit or Profit, but they are familiar with sales. Eventually we will switch to a Gross Profit based bonus and ultimately we will pay on Profit. But for now we are going with the most simple - Sales. Fortunately we are in a position of profitability, so I am confident that we can afford to pay the bonus.
Each of our bonus buckets holds $100,000 of sales. When we hit the $100,000 mark, we will pay a 1% bonus to the team. The bonus % gets progressively larger as we fill more buckets in a year, as follows:
Buckets 1 and 2 - 1%
Buckets 3 and 4 - 1.5%
Buckets 5 and 6 - 2%
Buckets 7 and 8 - 4%
Buckets 9 and beyond - 6%
A bonus plan like this offers a lot of incentive to team members. Pre-booking, upselling and retail sales all take on more importance as we try to fill the buckets quickly so we make it to the big-bonus buckets 9 and beyond. Our sales goals are set aggressively enough that in order to make it to the top buckets we need to grow the business. That's the only way I could afford to pay 6% of sales! Those are sales that would not take place without everyone working together.
Since we just converted to Team-Based Pay in October 2007 we are currently filling our first bucket. I'll keep you posted!
Watch for a later post on how the bonus gets distributed!