The medical & spa industry has become a very competitive marketplace. Many professionals from the traditional medical industry are jumping into the cosmetic procedure game and a face a learning curve when it comes to pricing and compensating for services rendered. Having the right compensation structure for a medical spa, and or spa is critical. Our industry has some of the highest payroll expenses of any type of business, and therefore, when it comes to compensation, there is very little room for mistakes. Many owners are paying compensation that is not profitable for their business nor holds accountability for their team in meeting performance goals. Another huge factor is being compliant. You cannot pay commissions on services to medical professionals. Commissions can only be paid on retail product sales. It is important to have a pay structure that is fair and equitable for you as a business owner, as well as for your team.
Compensation is a combination of what you pay your employees plus the benefits you provide. The right benefit program is important because it helps you distinguish yourself from the competition. It can also be used as a tool in staff retention when you factor in vacations, paid education, retail commissions, health insurance, and special employee pricing on products and services. The days of paying a straight 50 percent commission to spa service providers are coming to an end as business owners are realizing there is not a profit to be made under this structure. There are many types of pay structures out in the market today, and no matter what type you choose, the numbers have to add up to the right percentage in order to maintain profitability. Medical professionals such as R.N.s and physician’s assistants most likely will be used to salaried positions, so they will need to be trained on and transitioned into performing services based upon dollar incentives. Spa professionals such as estheticians, and massage therapists may be used to commissions and it is important for you to take into consideration that you are bringing two different types of professionals together, and accountability goals may be new to both.
A medical provider must generate 4-6 times what their compensation is for the business to be profitable. If a PA is being paid $75K a year they need to generate $300-$450K in services sales.
A spa practitioner needs to generate 2-3 times what their compensation is. If an aesthetician is paid $40K she should really generate $120K in service sales.
Spa services should be a minimum of $1.50 per minute or more in order to make a profit.
Medical Spa services need to generate $5 or more per minute as a minimum.
Labor costs for medical spa services should not exceed 25% for the provider
Labor costs for the spa practitioner should never exceed 40%.
Straight Salary Positions
This type of compensation structure has become more popular in the last few years. Many owners of businesses in having the desire to have a more professional environment and offer more stability in their workplace have been turning to paying their technicians a salary for their work performance.
In this scenario an owner of a business could look at the performance of a technician over a period of three to six months and look at their productivity and sales and come up with a weekly or bi-weekly salary structure that would be an average of their sales during that period. For example if a technician over a period of 12 weeks brought in an average of $2,000 per week an owner may look to offer the employee a guaranteed weekly base of $800 plus some type of benefit options. This salary option would allow for profitability in the business when combined with benefits, and still be attractive to the team member. The technician’s salary could be adjusted anywhere from two to four times a year with this model.
With salaried positions it is not uncommon to see compensation also tied into what the department or the entire team does in performance. This means if the group or the entire teams meets their performance goals there would be an additional bonus in pay for collaboratively working together.
This type of pay structure is a standard for many businesses in our industry. This is where the technician is paid a percentage of their gross sales for the work they performed in a certain period of time. The example of a 50/50 split has been a common offering for many years. You may find in some cases it is higher or lower. Many owners are under the impression that they only have to pay their technician for the services performed and if they are not working they do not get paid. The federal government requires all employees be guaranteed at least minimum wage when employed. This hourly rate can vary depending on the state the business is operated in. In this scenario it also common not to see any benefits offered.
Suite Rental Spa
This practice is quite common in certain regions of the U.S. The challenge with rental operations may be economic viability. One reason rental is so prevalent is the owner of the business is not familiar with structure and does not know about employee operations. They decide that it would be easier just to have renters and not have to learn or deal with the “employee issue”. The reality is whether you have employees or renters you still have to contend with the “people” issue. You need to have a fair, professional and well run environment for your working professionals and their clients.
When owning and operating a business, the owner needs as much leverage as possible to make money. The profit margins are too tight for mistakes. With a rental situation if the owner markets their business attracts 1 person or a 1,000 people the rental amount stays the same. This can make profit very challenging.
The contracts for rental agreements are specific and best left to professionals who regularly deal with these types of legal issues.
Team Member Compensation All employees should be compensated with a base and/or a commission salary package. This can vary depending on the position and commission percentage due to services performed. An R.N. may have a higher hourly wage such as $20 to $40 plus tiered commissions of 5 to 20 percent on retail sales. An esthetician may earn $15 to $30 per hour or 35 to 45 percent tiered commissions. You would pay the base draw or the commission—whichever is greater. Also, service providers should be eligible to participate in a retail commission program. The following are four ways to track a service provider’s performance and pay them accordingly:
Pre-booked percentage – The pre-booking number comes from the number of clients in a pay period who have scheduled their next appointment with the service provider. If the service provider saw 40 clients during the pay period and 20 of them booked their next appointment before leaving, his or her pre-booking percentage would be 50 percent because half of the scheduled clients are pre-booked for their next appointment.
Retention percentage This refers to the number of clients seen in a pay period who return and request a specific service provider. If the service provider saw 40 clients during the pay period and 20 of them were return requests, the provider’s retention percentage would be 50 percent because half of the scheduled clients were repeat business.
Series – Sell Everything Possible in a Bundle!
Identifying services sold in packages such as luxury facials, body treatments, medical grade peels, and massage services is a great way stock up the dollars in the business coffers. Selling a series has a client come in with frequency to maintain the service and are more likely to be loyal to a service provider or business because of the consistent service and results. You have collected the money up front so they are committed to your business. In addition, they will tend to spend more on products and other services in subsequent visits as they are not paying for the service after the first time. Do not discount series as it takes away all service profits. Instead use retail as the incentive for a series purchase. It keeps the client loyal, maintaining their service results and again has no labor cost associated with it. Example purchase a series package for $1,000 and receive a retail gift package worth $100 at the time of purchase
Retail percentage This percentage is derived by dividing the service provider’s retail product sales during the pay period by their service sales. For example, if a service provider generates $2,000 in service sales during the pay period and in addition sells $300 worth of retail product to his or her client, divide $2,000 by $300 and you would get a 15 percent retail percentage to service dollar sales.
Paying commissions and holding people accountable are well-established methods in other industries and work very effectively in a medical spa when training is provided. Employees naturally perform better with incentives. The harder they work, the more they can earn, based upon productivity. It’s a win-win situation for everyone involved.
A benefits package is desirable for every company to have. In this economy attracting and keeping exceptional team members can be challenging and offering a benefits package can make a difference in the quality of a staff’s productivity. Benefit packages distinguish a business from others and lets team members know they are cared about because you are willing to make an investment in them.
Remember that all benefits are budget dependent. When determining benefits, evaluate different options, add up what it costs and whittle it down to a percentage of the business revenue that is reasonable. You can have a total “wish list” of benefits you would like to offer and it may not fit into your initial financial package. The goal is to start with what you can afford and move their way towards the ultimate goal through financial profitability over time.
With employee retention in mind, there are a number of programs available to employers which are both tax-favored and financially effective as means of maintaining employee morale, and minimizing employee turnover, thereby reducing overall employer recruitment and training expenses, and improving overall productivity. The examples provided would be generally applicable to full time employees.
A few of these programs are as follows:
When an employee has reached one year employment they would receive one weeks paid vacation based on an average week of their service earnings less retail sales. You would divide their yearly service earnings by 52 weeks in order to get their weekly average.
Example: An employee generates $52,000 in service sales over a period of one year. Dividing the gross total by 52 weeks gives a weekly average of $1,000. Then pay the appropriate percentage of commission based on the average dollar amount.
After an employee has reached three years employment the vacation pay can increase to a two week time period.
With a small business it is recommended that vacation be used in the period earned and not roll over. If an employee did not choose to use their time during the allotted year they would be compensated and not accumulate the time.
If an employee wants to take more time off than their paid vacation allows, the additional time would not be compensated and would have to be negotiated with the business owner.
Each full-time spa employee receives $500 per calendar year for advanced education. The education has to be approved by management in advance. Any expenses over the education limit would be the responsibility of the employee. In a medical spa setting it can be typical to allocate 1% of a provider’s sales towards ongoing education.
Profit sharing is an excellent benefit because it also motivates the staff to be more productive and reduces waste. It encourages team members to take an ownership attitude towards the business since they have a direct stake in the bottom line. An example of a profit sharing plan is 10% of the net profits after all expenses are paid. This could be distributed monthly or as a year end bonus. This would apply to team members who have completed a year of employment or more. The profit sharing bonus would only be eligible to employees who are currently working for the organization. If a staff member were to leave during the course of the year they would not be eligible. Staff receive a percentage of net profits based on hours worked.
Total net monthly profit after expenses example: $10,260 for one month of sales
Team Members receive 10% total of net profits =$1,026
The commission is split between team members based upon hours worked
437 work hours are divided between three team members
1 at 160 hours
1 at 150 hours
1 at 127 hours
Divide total hours into the commission – example: 437 hours divided into $1,026 = 2.35
Multiply each team member’s hours by the divided amount
Example: 160 hours x 2.35 = $376
150 hours x 2.35 = $352.50
127 hours x 2.35 = $298.45
This is a rounded number – you may be slightly off by a fraction with rounding the numbers
Compensation Structure Changes
Having the wrong compensation package is one of the leading reasons why medical spas and traditional spas are not profitable. Hands down, one of the scariest moves for any business owner to make would be to change their compensation package. Some common barriers owners face are lack of understanding about how to pay or the more important fear of a “walk out”.
It is important to walk through these uncharted waters safely and securely at a pace that is comfortable for you and does not throw you into overwhelm. Many times you will see that compensation is an issue and yet they may not be prepared to do anything with it right away.
The important thing to do is educate your team members on the appropriate profitable structures and come up with a game plan for when and where the change can be implemented. You may find that they want to focus on other areas first to build your confidence and move towards this change in time. Another option is you may not change the compensation right away with your current staff and will implement a new structure for new hires. Eventually a structure will have to be implemented across the board to reach profitability. It is a numbers game for the business if it is going to make any money.
If a business owner is paying more than 50% commission and or is offering some type of benefits in conjunction with a commission structure greater than 50% they are losing money. This means every client who sits in their techs chair is costing them money instead of making them some. It does not matter how much money a tech brings in. Costs go up exponentially. Typical payroll burden is about 10% above the commission paid out. This includes costs of matching FICA, Medicare, and workman’s comp insurance.
The important factor when making compensation changes is coming up with a step by step plan that outlines the process of what the change needs to be and how it is going to be implemented. There has to be a focus on what the win is going to be for the owner and the people who work for them. Typically, strong marketing pieces, referral programs, a coaching program, business building tools and creative incentives are not in place. These are all definite wins for the team in regards to what new benefits they will be receiving when a change has to be made.
Additional tools that can help are listed below by business type.
Durocher Enterprises Inc.