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Team Based Pay in the Hair Salon Industry – A Critique

Team based pay in the hair salon industry is the newest solution for compensating employees and increasing the overall performance of a salon.  IT WILL NOT WORK.  This article is a critique of this program and provides several reasons why this management style is ineffective for a salon.  If you are an owner of a salon and considering transitioning to this form of management and compensation, I encourage you to read this article to learn why this form of compensation and operations will ultimately cost you more money and reduce your profits.

Before I provide my reasoning I first want to explain this type of compensation program and why it is effective in certain service based organizations.  Then I’ll justify my position by explaining the following reasons:

  1. Environment
  2. Economy of Scale
  3. Lack of Control over Variables
  4. Motivation via Compensation and Maturity

In general the inherent forces of this industry related to the environment, culture and cost model make it nearly impossible for the team based pay model to be an effective tool for managing a salon.

Naturally I don’t want to be a pure naysayer without providing some alternatives.  So in summation I will present to you some other ideas to point you towards a better solution to your problem.  So let’s get started.

Team Based Compensation Model

Team based compensation is a management tool used to achieve distinct easily quantifiable goals when more than one employee is required.  It is extremely effective in project driven environments.  In general the compensation augments the individual compensation plans for the team members.  In effect, each team member has their own personal compensation and then if joined into a team, the team has an additional compensation incentive. 

The model has a higher rate of success when certain characteristics exist, these include:

  • A higher level of education and skill involved with the team members
  • Optimum number of team members; generally no more than 10
  • Uniform skillsets among the team members
  • Highly defined focus
  • Measurable outcomes

Examples of industries where this compensation model is effective include:

  1. Engineering – in engineering projects are common and require the efforts of similarly educated and driven employees to complete one of many tasks. Notice how the task is well defined (engineering specifications and planning), has a measurable outcome, the skillsets of the members are uniform and the team members are degreed.
  2. Software Development – very similar to engineering except the group is creating code and debugging via testing their respective goals.
  3. Research and Development – again, well educated individuals tasked with a highly defined goal and generally the outcome must be completed prior to a certain deadline.

Some industries use the team concept but not the compensation aspect of the model.  In these industries the goals are generally more altruistic in nature and the members are more driven by the ‘Doing Good’ than the financial rewards.  Examples include the medical profession, non-profit fundraising, religious missions, animal shelters and so on. 

The following is a more in-depth example of how this model works:

FUN-N-SUN Travel Agency has over 20 offices nationwide with over 85 employees.  Most of the employees are sales representatives with several years of experience.  They are engaged by Happy Cruise Lines to sell a particular week on one of the ships.  This particular week requires 2300 passengers in 1500 rooms.  The contract requires 92% occupancy and if 96% occupancy is achieved, the agency will receive an additional $25,000 bonus.

FUN-N-SUN uses the team compensation model to achieve the designated goals.  Each sales member is given latitude in booking price to get the rooms filled.  The time frame is exactly seven months in duration and the team agrees to meet weekly via a video room on the internet to discuss progress and plans of action.  In addition to the team member’s sales commission, the agency offers a team bonus contingent on each team member achieving a minimum of 100 passengers.  In effect only those sales reps with more than 100 filled slots are considered for the bonus program.  At each meeting, the team discusses the number of units sold to date, existing sales programs, estimated achievements and the effective tools used by the leading team members.

Notice that the compensation model has a particular project and measurable outcomes.  Without this information it is difficult for the team members to appreciate other team members or gain confidence of success.  As stated above, team based compensation is additional compensation in addition to the team member’s individual pay plan.  Also, team based compensation is used when there is a well defined goal and measurable performance.

Now that you understand the model and its characteristics let’s see why it will not work in the salon industry.

Environment

In the team based compensation model the program is generally more effective in highly controlled environments.  In general all the team members are of similar backgrounds and education creating a high level of standardization and quality control. 

This does not exist to the same degree in the salon industry.  The industry use to focus specifically on hair 30 years ago.  Since then the industry has evolved in order to generate profitability and to serve the consumer.  Now many salons have not only hair technicians but manicurists, pedicurists, masseuses, dieticians and estheticians.  The entire field of cosmetology changes quickly and creates an unstable environment in which to apply this method of management.

Notice that there are different skillsets, educational requirements and certifications for each of these different services provided at modern salons.  One of the characteristics needed from the employees is a similar set of skillsets and education in order for team based pay to be effective. 

One last comment related to the different skillsets for a salon.  The most likely individual that can make or break a salon doesn’t even render any of the services.  The receptionist plays the most important role in generating efficiency and profitability.  This position usually is the first to hear from a potential customer and with proper coordination can ensure that every position in the business is kept busy.  She plays a pivotal role in the marketing and getting that customer to come back to the salon.  She hears the complaints and the frustrations of the customers and if well trained can alleviate a lot of inherent issues that exist in this industry. 

Even something as simple as the use of the word ‘Professional’ is difficult to embrace as a consumer when thinking of a salon.  Although the profession is now licensed and monitored this is relatively new in comparison to your long standing licensed and credential industries that are synonymous with the word ‘Professional’.  A good example of the lack of professionalism relates to ‘walk-ins’.  In any of the professional environments walk-ins are frowned upon and actually turned away.  If you don’t have an appointment with the lawyer or accountant, they are not going to see you; whereas, just about every salon out there has a sign on the front door that says ‘Walk-Ins Welcomed’. 

In my opinion the environmental reason alone will pretty much eliminate considering the team based pay model for the salon.  But the next reason will quantify in the form of dollars why this form of compensation will not work in the salon industry.  You can’t achieve the necessary economy of scale.

Economy of Scale

One of the essential requirements of the team based compensation model is the need to communicate results on a regular basis.  Without some form of initial goals and quantifiable outcomes there is no feedback to the team members.  So for the salon the first issue relates to identifying goals.  What should be your goals?  Well as an owner there are really only three goals in businessI explain these in detail in other articles but for the sake of this article I’ll keep it short.

  1. Maximize profitability
  2. Provide employment security to staff
  3. Generate a high level of satisfaction for the customer

In the salon industry generating maximum profits is usually a direct correlation with maximizing the utility of all existing chairs and stations.  Basically all the stations should have uptimes of more than 90%.  With this level of operations, the salon can generate the maximum revenues and create the greatest amount of margin to cover overhead expenses and ultimately greater profitability. 

As I stated above, the front desk person is absolutely the single most important individual in keeping the stations busy.  As the uptime increases the staff gets plenty of customers to earn a decent income and when there is a lot of activity going on, the staff feels more secure in their employment.  The final goal is of course customer satisfaction.  This is usually measured in customer retention.  If retention drops then management should question why there is a decrease.  Often this is done via customer surveys and monitoring by management.

Notice the different measurement points involved above.  It usually takes a well designed system to record the various data points involved.  In addition the one or two people responsible to record the information and input the data into the respective spreadsheets have to have backgrounds that are not necessarily in the salon industry.  In addition this person must generate reports that are easy to understand and convey the results consistently to all the team members.  THIS COSTS MONEY AND USUALLY A LARGE SUM. 

Based on my experience doing this for a living I can tell you that this will cost around $15,000 to $20,000 more per year for a salon with 10 to 14 staff members.  So think about this for a minute, it is going to cost around $100 per month per team member to monitor performance and convey the overall performance to the group.  To earn the necessary contribution to pay this $15,000 to $20,000 per year sales would have to increase at least $80,000 per year for the salon.  For a staff of 12 stylists you are talking about increasing the sales per stylist around $6,600 per year.  This is close to a 10% increase in volume per team member.

WOW, this isn’t going to happen.  And this is at the optimum economy of scale.  Imagine if you only have 8 stylists on the staff?  Now you are talking about $10,000 more per year per stylist.  So to make this program work, you must have an economy of scale of at least a dozen stylists. 

Most salons have less than 7 employees altogether.  In general there may be one or two salons in each city where it may be financial feasible to implement this type of management program.  But still it takes away from the primary goal for the owner which is to generate maximum profitability for the salon.

So to me, the shear cost to implement and maintain this form of management style is economically impracticable for the average salon.

A third reason this form of compensation will not work focuses on the lack of control over the variables involved.

Lack of Control

One of the best attributes of team based compensation is the fact that the team members control the entire project assigned.  So each member has an equal say in the inputs and outcomes of the goal.  In the salon industry many of the team members have no ability to control several of the variables.  The following is a short list of these variables and why the stylists have little to no control or say with the variable:

  • Marketing/Advertising – at the end of the day who controls the budget for marketing and advertising? Better yet, who controls the venue involved in advertising?  In most salons the owner decides how this is managed.  Sometimes management gets input from the stylists but overall they stylists have no control over this decision process.
  • Hours of Operation – in the ideal situation the salon would be open seven days a week about 12 to 14 hours per day. But stylists can’t work that many hours per week.  So who gets the primetime hours and who ends up working on Sunday afternoons?  Management controls this timing and in most salons the stylists just say what time they will be there and it is what it is.
  • Quality of Backbar Products – one thing I have learned over the years is that each stylist has their own preferred product line to use. Also when it comes to color, some stylists like to mix large batches and others are more conservative in volume they prepare.  So how is this resolved?  If you have 10 stylists, you can’t have 10 different lines of products on the backbar. 
  • Retail Sales – one of the latest trends in the salon industry is to sell hair products and other cosmetics. In general most salons make the product available out front for the consumer to purview while they wait for their appointment or afterwards once they are done.   Who controls this setup?  Volume of products on the shelf?  Variety and Selection?

For team based pay to be effective the team members have to be in control.  Honestly this is almost impossible in cosmetology and actually it is counterproductive and counter intuitive.  Imagine how much more time has to be invested by the team members in order for the group to agree to the respective marketing formats, the hours of operation, quality of products and how retail is managed.  You take time away from the real goal of the salon, TIME IN THE CHAIR WITH PAYING CUSTOMERS!

Motivation

In almost every salon I’ve have had the privilege of performing accounting services for I’ve been able to get a lot of information from the owners and managers.  Many of the staff members have expressed to me their concerns and problems.  I have noticed a common theme.  As a stylist matures they want the best commissions and the better customers to work with.  In addition, they want more time off and to work the best hours in order to have a higher quality of life at home. 

For owners they desire to retain the better stylists to keep the better customers coming back consistently.  It isn’t always about compensation it tends more towards a higher quality of life relationship between the stylist and the salon management.

The team based compensation model for the hair salon industry is modelled after how professional organizations operate.  The more senior personnel take on the more complicated issues and mentor the younger team members.  In the hair salon industry, most of your senior stylists are not really interested in teaching the newbies about how to deliver quality service.  Often this is driven by the commission model but even if everyone were salaried many stylists would still be hesitant to help the rookies.  As far as they are concerned, this is the owner’s responsibility after all, the owner interviewed and selected the potential candidate and therefore the mentoring and training falls on the owner’s shoulders.

I’m not saying that every senior stylist thinks like this, but I am convinced that most have no interest in educating the new generation of stylists.  So if you have one you may want to consider a different compensation plan for this stylist in order to get them to mentor the new entries into this industry.

My final comment related to motivation relates to the industry’s historical approach to compensation.  It is ingrained in the students that a commission is paid to the stylist and as you gain experience your commission rate increases and you generally get the higher fee types of services for customers.  The industry’s compensation method has one positive outcome and that is retention of the better stylists because they generally make more money because of what they know and how they interact with the customer.  Once a stylist starts to make more money they become reluctant to change location venues.  If you relocate the risk of earning less money increases as you gain seniority at your current location.

Summary

Overall the team based compensation model in the hair salon industry will not work.  There are four primary reasons and each on their own makes it almost impossible for this management tool to work in this industry.  First off the salon industry environment has too many varied skillsets and has yet to develop a true professional image for this model requirements.  Secondly most salons cannot achieve the economy of scale to cover the costs to implement the program.  Third and one not to be ignored is the lack of control by the stylists over advertising, hours of operation, quality of backbar products and also the retail sales.  The final death stroke to considering this model relates to what truly motivates the stylist.  Stylists want to increase their quality of life with shorter hours and have access to the best paying customers in order to stay at a salon.

Given all this, are there any options that can work?  Yes there are.  Allow me to give you alternatives.

Alternatives to Team Based Compensation in the Hair Salon Industry

The following are some alternatives to the team based compensation model:

  1. Use the multitier compensation model to pay your stylists. This increases their commissions as they mature and gives them high incentives to stay with your salon.  If you desire more information I’ve written this article to help you:  Hair Stylist Compensation Model.
  2. Implement partnership agreements or access to ownership for the better stylists or the best employees via profit sharing or employment agreements.
  3. Focus on up time as the primary indicator of success instead of sales or profits. Ultimately as uptime increases profits will follow, it generally takes about one to two years to notice the difference but it will happen.

In general no single program or model is going to suddenly increase your profits.  It will take time and some devotion to implement any system to work effectively for you.  But the real solution is to read as much as you can and learn about the various options.  To me if you want real results and dedication by your employees than ultimately deliver what they really want.  Every one of them wants either a higher quality of life at home which means more time at home with a decent compensation model at work or they want a piece of the action.  To give them a piece of the action I strongly encourage partnership agreements and I write extensively about how partnerships work and how you can get taxed in a similar fashion as an S-Corporation.  Go to my business principles section and read the articles in the legal section or in the start-up section.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol) businessecon.org.  I would love to hear from you.   

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About David J Hoare (387 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns