What NOT to Pay your Technicians

The most popular post on this blog is "How to Pay your Technicians" and if you read through the comments (there are over 90 comments on that post) you will see owner after owner struggling with the compensation structure they put in place.
It seems to me that most people who open salons are by nature a very generous, caring group. They want to pay people fairly and make a decent profit. But time after time they give the farm away and put themselves, their salon and their technicians in a precarious financial situation. So this post gives some do's and don'ts for owners followed by some for Technicians.

For Owners:

1) DO understand what your overhead costs are. Rent, utilities, phone, internet, insurance, water, receptionist, cleaning, advertising, office supplies, repairs, taxes, licenses. Realize that the revenue that is left after paying your technicians has to cover all these things and your profit. Be realistic.

2) DON'T pay full commission on services with high product costs. Salon supplies (back bar, color, etc.) will usually run about 6% of sales. With some services, however, (like Brazilian Blowouts) the product cost is very high. You should be backing off the product cost before calculating the commission so you are paying the technician commission on the portion of the sale that represents their time and talent.  Example...a $200 blowout service has product cost of $20. If you pay 50% commission on whole sale, stylist gets $100, but you only net $80 because you paid the $20 product cost. Instead, commission on $180 ($200 less $20 product cost) and you each get $90.

3) DO consider having a product charge across the board if your commission rate is 50% or more.

4) DO take into account product cost when setting commissions initially and you won't have to worry about a product charge. If you are paying commission of 42% or 45% instead of 50%+ you can absorb the cost of product without annoying your technicians with a charge. I recommend a product charge when you have already committed to an unrealistic commission - it can be more palatable to technicians than a commission reduction and achieve basically the same thing.

5) DON'T be held hostage by any particular stylist. Sometimes the best thing you can do is let them go and tough it out. Usually a lot of toxic energy leaves with them and you can rebuild the team you want.

6) DO try to keep your cost of services (technician pay, taxes on their pay, salon supplies, retail cost and credit card fees) at 55% or less. Think of it like this:
Sales                        100%
Cost of Services         55%
Gross Profit                45%
Overhead                   35%
Profit                         10%

This should be an absolute worst case. You really want your cost of services closer to 50% and your overhead closer to 30%, then you can profit 20% which is fair and reasonable given the risk involved in running a business. DON'T build a comp plan that can't accomplish at least this.

For Technicians:

1) DON'T be fooled by promises of ridiculously high commissions. You want to work in a secure, stable environment where stained ceiling tiles can be replaced and equipment gets repaired...where you have a capable receptionist and opportunities for training. Salons offering above-market commission cannot offer you these things. They may mean well - they may be very nice (albeit naive) people who truly want to do the right thing. But it's not sustainable and it will not end well.

2) DO understand that it's ok for a salon owner to make a profit. Salon owners invest their own money and take on a great deal of risk to build their business. Business ownership is rewarding in many ways, but financial reward should be a part of it.

Readers, feel free to add your own DO's and DON'TS  in the comments.

Booth Rental - Renter's Perspective

Booth Rental

The most popular post on this blog (by far) and probably the post that brought you here initially is on How to Pay your Technicians. In it I touch briefly on Booth Rental, Commission and Hourly/Salary plans. Because of that post's popularity, I'm going to go into more detail on each of those methods, beginning with Booth Renting.

We'll look at it from both the technician's and the salon owner's, discussing the advantages and disadvantages to each party.

Overview

Booth rental is a very popular salon model in many parts of the country. In my area, about 75% of salons are chair rental. In some states the practice is illegal. With booth rental the technician pays the salon owner an agreed upon amount for a station at the salon. The rent, usually weekly, may include salon supplies, color, receptionist, etc. or may not - it depends on the salon. 

Renter's Perspective

There are several things to consider when deciding whether to booth rent:

• Do you have the clientele to support your rent payment, supplies and your lifestyle?
• Does the salon do any marketing or are you responsible for bringing in your own clients?
• Is there walk-in traffic and if so, how it is allocated among stylists?
• Does the salon provide any education?
• Do you possess the necessary level of technical expertise or do you require additional training to be successful?
• Are you organized and responsible enough to manage your tax liabilities as a self-employed individual?
• Do you have the discipline to work the necessary hours to succeed without a boss setting your hours and requiring your presence?
• Do you prefer working as a part of a team, or as an individual?
• Are you responsible for booking your own appointments or is there support?
• What products and supplies are provided as part of your rent?

If you are just beginning your career, do not expect to build up a large enough clientele for successful booth rental for at least two years, probably more. Regardless how busy you are at your "starter" salon, a much smaller percentage of clients will follow you than you think. 

Also, at the beginning of your career your beauty school has provided you with the basics needed to succeed, but your technical skills are far from developed. They are so under-developed upon graduation that you probably don't even have a concept of how much better you will be in 3 to 5 years, with proper training. Don't rush things. Work in a salon with a good training program or apprenticeship program, or assist for an established stylist and learn all you can. You are not ready to leave the nest yet.

The key item to remember is that as a booth renter, you are self-employed. You may share space with other independent business owners, but you will not receive the support and training provided at employment based salons. Booth renting is for the very established, very disciplined and very independent-minded stylist.

To read more on this topic, Jon Gonzales of Hairdresser Career Development Systems has a great blog post at http://hcds4you.com/blog/booth-rental-is-it-right-for-you/

Booth Rental - Owner's Perspective

Booth Rental

The most popular post on this blog (by far) and probably the post that brought you here initially is on How to Pay your Technicians. In it I touch briefly on Booth Rental, Commission and Hourly/Salary plans. Because of that post's popularity, I'm going to go into more detail on each of those methods, beginning with Booth Renting.

We'll look at it from both the technician's and the salon owner's, discussing the advantages and disadvantages to each party.

Overview

Booth rental is a very popular salon model in many parts of the country. In my area, about 75% of salons are chair rental. In some states the practice is illegal. With booth rental the technician pays the salon owner an agreed upon amount for a station at the salon. The rent, usually weekly, may include salon supplies, color, receptionist, etc. or may not - it depends on the salon. 

Salon Owner's Perspective

As an owner you will give up a lot of control in a rental model compared to a commission or salary model. You should assess how important it is to you that you have the ability to control:

• The quality of the work leaving your salon
• The hours stylists area available to see clients
• Which products / lines are used in the salon
• A training or apprenticeship program
• The level of consistency of services provided in the salon

If you cannot accept limited control over these items, operating a booth rental salon will result in endless frustration.

What is the vision you have for your salon? Are you looking primarily for a place to hang your shingle and practice your craft, but want some other people around? Or is it important to you to build a name and reputation for your salon. If it is the latter, booth rental would not be a good choice because your ability to build a brand is limited by your lack of control over key drivers of excellence. Do you endeavor to build a profitable business that could be sold at some time in the future? It will be difficult to exceed lackluster growth in a booth rental model because competition from other salons will make it difficult for you to increase rents to increase profitability. If the growth portion of the business is coming just from your sales behind the chair, not only are you limiting growth, but you have become the business...where is the value without you? What is there for a buyer to purchase?

But what if you are just looking for a place to work yourself while bringing in some rent money on the side? Is rental a good model for you? Well, it depends. Can you afford the salon without the rents of others? Booth rental salons are very susceptible to walk-outs and you could easily find yourself in a financial bind if you lose your renters. If you can't handle that risk, perhaps you should rent in someone else's salon.

Do you enjoy the business side of the business? This includes everything that must be done in addition to your duties behind the chair and include:

• Staffing the front desk
• Making sure the salon is clean
• Handling client complaints
• Paying bills
• Ordering salon supplies and retail inventory
• Mediating squabbles between renters

Running a booth rental salon does not eliminate the need for these items, so while you do have the simplicity of not worrying about technician payroll, taxes and worker's compensation insurance, salon management will require a significant amount of time away from client work.

To bring this discussion full circle, the most important thing to consider in deciding if you want your salon to be booth rental is the the control issue. With booth rental you are a landlord. You do not control many of the factors necessary to create a successful salon. Make sure the business model you choose is consistent with your vision for the salon.

Owner Compensation - paying yourself

What's Your Time Worth?

Most salon owners are also technicians working behind the chair. This post is for you - I'll deal with comp for non-service providers later.

Time and time again I've seen salons where the employees are paid commission and the owner takes whatever is left after bills are paid. Often there's not much left. I understand that as an owner you need to take care of your employees and take care of the business - you can't drain all the cash from the business and you can't pay yourself if it leaves nothing for rent. But you are running a business - this is not a hobby; not a charity. The business needs to be able to pay you as a technician, otherwise your hard work behind the chair is just subsidizing the pay of your team. This practice can also fool you into thinking you have a profitable business when you really don't.

Here's an example of how you can fool yourself. A salon pays a 40% commission. Our salon owner has sales of $8,000 per month as does one of her stylists. The stylist is getting paid $3,200 per month (40% of her sales). Our poor owner, however, is taking the leftovers. After she pays the rent, keeps retail shelves stocked, buys backbar supplies, pays the front desk staff she's only comfortable taking $1,500 a month out to pay herself. Not only has she not paid herself market rate as a service provider, she also got paid absolutely nothing for her time spent managing employees, inventory, insurance, payroll...

Let's say at the end of the year, when tax time rolls around her books show a profit of $12,000. But over the course of a year, she paid herself $20,400 LESS than she would have paid an employee. Her taxable income may be $12,000, but the truth of the matter is the business lost $8,400 for the year ($12,000 less $20,400).

OK, I accept that if you are just starting a business, you may need to suck it up and take a smaller salary while things get going. But this should be a temporary situation. Going forward the business needs to support you, or it's not worth the headache. Why work for $20,000 less than you could working for someone else? For the privilege of owing the bank a bunch of money and worrying about making payroll?

One final note - for tax purposes your accountant will say you need to take a "draw," not pay yourself commission. That's fine - treat it like a draw for tax purposes - but calculate the amount of your draw based on the rate you would pay someone else for the services you provide. That's the only way to truly know if your business is supporting itself or if you are supporting your business.

Reply for Poor Stylist

Poor Stylist wants to know if her pay is fair. With 6 mos experience she makes 40% commission but is not making minimum wage. Meanwhile she works the front desk and cleans while an assistant makes more money being paid hourly.

Poor Stylist, this is a loaded question and I can't really answer it, but I can offer some advice.

I would definitely like to see you earning significantly more than minimum wage even this early in your career. Your salon owner probably established this pay method because she sees it as low risk for her (no revenue, no pay) and she doesn't risk overextending herself. Of course she does risk losing an employee that she trained.

My recommendation is that you set up a meeting with your employer. It needs to be a time when you won't be interrupted by phones or appointments, so after work or before the salon opens may be best. You might want to meet on neutral territory like a coffee house. Tell your boss you want to discuss your future and career with her salon. Before you meet, spend some time thinking about what YOU really want out of your career. Of course you want money, but look beyond that. You don't want this conversation with your boss to focus only on money. It should focus on what the two of you can do together to make the salon busier, therefore making you busier. It's ok for money to come up - but my guess is she can't afford to pay your more, which is why you are making so little. (I can't help but wonder why she is paying an assistant when you are there idle - perhaps you should be assisting in your down time).

You need to determine if you are on the same page with the owner. Maybe her understanding was that she would train you but after that you would find your own clients and build your own book. It sounds like you are expecting the salon to bring clients to you. Neither way is wrong - you just need to be in agreement.

Remember that this is a business meeting, so do your best to be professional and try not to get emotional. The two of you have a problem that you need to solve together. Pointing fingers, blaming others and acting defensive is counter-productive.

The tone of the meeting will probably be a good indication of whether you have a future with this salon. If your owner genuinely wants to get you busy I think that will be evident. On the other hand, if she really doesn't care about growing the salon and helping you succeed, I think you will know. If that's the case, be grateful for what she taught you, but move on.

How to Pay your Technicians

There are 3 primary ways to compensate hairdressers:

1. Booth Rental
2. Commission
3. Hourly/Salary

Booth Rental

If you own a booth rental salon you are really a landlord not a salon owner. Each technician pays for their station at an agreed upon rate (daily, weekly, etc.). Often they are responsible for booking their own appointments and marketing their services. They may pay a fee for backbar supplies, provide their own, or it may be included in their rent. The trouble with owning a booth rental salon is you get all the headaches of salon ownership without the rewards. Each technician is actually their own business and that is where their loyalty lies. You have no ability to control pricing, quality, hours worked, customer service...basically you have no control! The only bright spot would be that since renters are not employees they are responsible for their own taxes.

Commission

Commissioned stylists are generally employees of the salon. Since they are employees you do gain a good deal of control over your business. You can implement policies and procedures that need to be followed, you can disclipline when necessary. You are making the work schedule, managing the appointment book, determining services offered and pricing, etc. Of course you also are running a payroll, accounting for tips, hiring, firing, mediating squabbles. Commission rates vary greatly, but usually what I hear is in the 42% to 60% range (but at 60% the salon cannot be profitable). In some ways commission is a hybrid of booth rental and salary salons. While the technicians are employees, they are also paid entirely on the sales they bring to the business so they act like little one-person businesses. This creates huge obstacles to salon growth and profitability because there is no incentive for teamwork.

Hourly/Salary

In a salon where the technicians are paid hourly or on salary the salon owner has the ability to reward the employees who most deserve it. How many of us have experienced the situation where a stylist is rude to co-workers and other stylists' clients, and never picks up a broom or folds towels but still gets a big raise just because her prices went up! Talk about rewarding bad behavior! On the flip side, we all know great stylists whose earnings are capped out because they are at the highest commission tier. In an hourly/salary based salon you can still reward these people!

When we bought our salon it was a combination of Hourly and Commission. When we hired a new stylist she would be hourly. After she met certain criteria (retail % at a certain level and request rate at a certain level) she would convert to a 45% commission. Our commission scale topped out at 50% and we had two awesome stylists who were capped out. One of them is also our salon manager and since she was paid on commission she couldn't afford to spend less time behind the chair to manage. The other was getting burned out after years in the business and wanted to spend more time training others, but she also couldn't afford to give up the time behind the chair because we were only paying them for one thing --sales.

Earlier this month (after much thought and analysis!) we converted to Team-Based Pay (TBP). Every commissioned employee was converted to an hourly rate that is higher than what they were making on commission. It's a huge deal when you change someone's comp. And it's scary for me as a salon owner because I know I'm committing to pay them for every hour they are in the salon whether we're busy or not. There's a lot more to TBP than just converting your payroll - it's a way of life! I'll talk about our Team-Based Pay journey a lot on this blog!