Friday, October 26, 2007

Team Bonus

As a Team-Based Pay salon, we work together toward team goals. We hit the goal, we pay a bonus to everyone who qualifies. There are as many ways to design a bonus plan as there are salons. Here are a few options:
  1. 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.
  2. 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.
  3. 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.
  4. 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!


  1. any chance you can provide an update on this? Lessons learned etc.

  2. David,
    Thanks for your question. That year we reached our 7th bucket. While i have no regrets about doing our first year of bonuses this way, we did switch after the first year.

    We now pay bonus monthly if we meet goal. If we exceed our sales goal, we pay the regular bonus amount, plus 15% of the amount sales exceeded bonus. The primary we reason we switched is because paying with the bucket system takes away a lot of the sense of urgency that you need in your business. If you are going to pay bonus every time you reach $100,000 in sales they know you will pay bonus EVENTUALLY. They don't necessarily work harder so you hit bonus this week instead of two weeks from now.

    Since bonus is now monthly, we have to be on our game all the time. If we let up, even for a couple of days, we could fall behind on our goals.

  3. So, if bonuses are paid at the end of the month, how are stylists paid? commission and monthly bonus? how does this Team Based Pay work? can you explain?

  4. Our stylists are paid hourly and monthly bonus. Team-Based Pay is more than a pay's a whole way of thinking. If you pay people hourly, but don't have a culture of working together to bring in more revenue, treat every client well, maintain a clean salon, working towards a common goal etc. it's not TBP, it's just an hourly compensation plan.

    Commission goes against the philosophy of TBP because it requires everyone to think of themselves first. They only get paid based on butts in seats so there is no incentive to grow revenue for other technicians or work together toward salon goals.

    Neil Ducoff's white paper on TBP does an excellent job of explaining this. You can find it at