As a salon, clinic, or spa owner, you may have lost sleep over one burning question: “How should I pay my team?” It’s a topic that’s sparked endless debate in the hair and beauty industry, and for good reason. Your compensation plan isn’t just about numbers—it’s a major driver in your business, influencing everything from team morale to client satisfaction.
Here’s the truth: there’s no one-size-fits-all answer. The best compensation philosophy aligns your company’s vision with your team’s goals. It’s about creating a win-win situation that keeps your business thriving and your employees motivated.
But one important caveat must not be overlooked: How does the compensation model fit into the financial health of the company?
Let’s dive deeper into some popular compensation models, each with its own unique flavor:
The Classic Commission Model
Picture this: your stylists’ earnings are directly tied to their sales. It sounds like a recipe for success, right? Well, it’s not that simple.
Pros of The Classic Commission Model:
Commission can be a powerful motivator for sales-driven individuals, and its potential for high earnings can help you attract top talent. It’s the most widely recognized compensation in the industry, making it easy to explain to current and potential employees. Further, employees have a direct correlation between the work they do and their income and know that the harder they work, the more they can earn.
Cons of The Classic Commission Model:
Inconsistent income can stress out your team and can make simple elements of everyday life more difficult. For example, did you know that commission-based employees may face different requirements to get a mortgage? Yep, the bank probably wants extra proof your team member can make those mortgage payments even when business is slow. That can be stressful for the individual it affects.
Because commission-only drives individual performance, it can inhibit a culture of teamwork. When each employee is incentivized to build “their books”, service providers compete with their coworkers for clients. Income growth is also limited as an individual simply can’t out-earn their production ability. To earn more they must do more, which can lead to overbooking, burnout, and even injury.
As the owner, you may find yourself in the precarious negotiation of “the place next door pays X% higher”, constantly engaging in a battle to adjust commissions as your team sees fit. You run the risk of high turnover if employees feel your commissions aren’t up to snuff. It’s not uncommon to hear commission-based employees refer to the “cut” of pay they are giving to the business, without consideration to the costs and benefits provided by the company. There is never a winner in an “I give, you take” battle.
In a compensation system that only rewards sales, it’s difficult to address overall behavior or compensate for any necessary non-sales activities. We all know of salons or spas with highly productive employees whose behavior and drama continuously erode culture, and yet they can consistently out-earn some of the best overall employees in the company. That’s not going to nurture a healthy salon environment and will be detrimental in the long run.
Commission-Based Pay: The Dollars and Cents:
Commission pay is often considered easy to manage, but financially, this is far from true. Commission is difficult to control. In a non-commission based business, when sales go up, additional free cash flow should be available for the company. But with a commission-based structure, when sales go up, payroll goes up too, along with sales often devouring any extra cash flow.
Owners might think raising service prices will help, but that doesn’t solve the problem either, because payroll will go up with it. If your company needs to control high payroll expenses you’re left with undesirable options; reduce commission rates, create new commission tiers, or charge your team “service fees”. None of these will create a happy employee.
Exploring Tiered Commission:
Some companies utilize a tiered commission system, offering increasing commissions as certain targets are hit. While these tiers may provide better payroll control, they come with all the above challenges- plus a few of their own.
Tiered structures often frustrate staff as they often include a commission cap, and targets on the higher tiers may be difficult to achieve or are changed frequently. And, even with the best explanation, tiered structures can be difficult for employees to understand. This inadvertently creates a lack of trust toward management. Finally, tiered systems require significantly more administration, making accurate budgeting and cash flow planning difficult.
The Base Pay Plus Commission Model:
This hybrid model aims to blend stability with incentives, offering a fixed base salary plus a percentage of sales.
Pros of Base Pay Plus Commission:
This option provides a steady base income with the opportunity for more, offering financial security while maintaining sales motivation, thereby driving revenue for the business.
With this model you can reward overall performance, not just sales. With a base pay, employees are compensated for all aspects of their job, including non-sales activities. This addresses the common commission-only complaint; “I don’t get paid for that”. With this payment model, those critical business operations like: doing towels, stocking shelves, helping a coworker who is running behind … (all the stuff employees could be doing instead checking their phone in the back room!), are rewarded and compensated. Additionally, a team member with behavioral or performance issues can be coached and incentivized to change, as when their overall performance improves, a raise in base pay is warranted.
Cons of Base Pay Plus Commission:
This structure requires a leader with strong communication abilities. Team members must understand how to earn raises and must receive continuous feedback on their progress. Without this high level of communication, they’ll feel stagnated. Since this pay structure is not the industry norm, attracting and retaining talent it can be more difficult.
Also, because an element of individual commission remains, some level of competition among staff likely stays, too. Administration of the system can be much more complex than a 100%commission or 100% salary model.
Base Pay plus Commission: the dollars and cents:
While this model does allow for more payroll control, it also requires constant financial management. The base pay is a fixed expense, which does require strong cash management to support payroll during slow periods. Additionally, continual management of commission levels is critical to ensure payroll stays within budget. As your business grows, you might need to shift the balance between base pay and commission to keep your compensation competitive and motivating.
The Hourly Wage or Salary Structure
For those who prefer predictability, this model might be the answer. It provides a fixed hourly rate or annual salary regardless of sales performance.
Hourly Wage/Salary Structure Pros:
This model provides stable, predictable income for employees and easier budgeting for the business. Plus, it can foster a more collaborative environment since there’s no direct competition for sales. Eliminating commissions allows you to compensate employees for all their contributions to the company and allows different opportunities to grow revenue.
For example: imagine you have an employee who would be an exceptional educator. If you only pay commission, how can you fairly compensate them to train other employees? How quickly would your company grow if this employee focused solely on creating more employees with incredible skills who could all generate more sales. Now imagine if you could pay them more to train others than they could make on commission! Alternate roles can provide great career paths and help you retain valued employees who desire more in their career than providing services.
Cons of Hourly Wage/Salary Structure:
An hourly wage or set salary may not provide enough incentive for sales-motivated employees to put forth the extra effort. Employees may also feel they have little control in earning ability, leading to complacency if not paired with performance incentives.
As with the base plus commission model, leadership and communication is critical. If you cannot explain your pay structure, it may not attract top performers who are looking for higher earning potential. Further, when an employee doesn’t understand how to grow their income, it will be difficult to retain them.
Hourly Wages and Salaries: The Dollars and Cents:
This model requires precision cash management, as higher fixed costs require diligent planning. Without a system to handle the ebbs and flows of cash, the company could wind up in a payroll crunch. However, the high level of budgetary control can help you build a financially sound business. When you know your expenses, cash management is easier to implement, budgets are easier to follow, and growth is easier to project.
Hot Tip: Keeping Your Salaried Team Engaged: Consider adding performance-based bonuses to keep the motivation high!
These bonuses could be tied to client retention rates, retail sales, or other key performance indicators and can easily shift with the changing needs of the business.
If you want to foster a sense of ownership in the team, profit-sharing bonuses can be an excellent option. Your employees’ earnings are directly tied to the financial success of your business. Since profit is based on earnings and expenses, you’ll need to be transparent about calculations and manage expectations.
Team-Based Pay Structure
This might be the most misunderstood model in the industry. To be clear, team-based pay is not about everyone getting paid the same — It’s about rewarding both individual contributions and collective effort.
Team-Based Pay Structure Pros:
Team-based pay rewards collaboration and aligns employees’ work with business goals. It can encourage shared responsibility and purpose, creating a strong sense of unity.
At its core, team-based pay is an hourly or salary-plus-bonus structure. Base pay is determined by a combination of individual skill levels, behaviors, alignment with company culture, and performance metrics. Each employee is evaluated on individual performance and defined within roadmap to growth called a Broadband. Bonuses, however, are paid based on team metrics where every team member is responsible for every hour available for sale. It’s all about maximizing the company’s overall performance.
Under team-based pay, your team is collectively pulling the company toward its goals with a strong sense of urgency. Everyone is incentivized to perform to their highest level via the Broadband and individual pay. Additionally, they’re incentivized to create a culture of inclusive excellence by helping all teammates perform well, thereby driving the business to its goals. Because the pay structure does not reward individual sales, team members are not only willing, but they’re also financially rewarded for recommending their clients to see other service providers within the business. Even for services they typically provide the client!
Team-based pay is a great way to reduce internal competition and promote a sense of unity, which can lead to improved customer service as team members support each other. In many cases, it’s a win/win for the business, the team, and the clients!
Team-Based Pay Structure Cons:
This structure requires strong leadership and business systems to implement effectively. Goals must be carefully set to ensure they’re fair and achievable. Regular team meetings to discuss goals, progress, and strategies help keep everyone aligned and motivated. This constant communication is a requirement and creates extra effort from the leaders.
Since team-based pay differs greatly from the individual “build your book” model, it can be challenging for employees used to traditional commission structures to adapt. Owners and managers must have the ability to lead a culture fit to support the pay structure. When leadership does not have the focus, drive, or ability to lead the team, employees will quickly disengage. Additionally, since team-based pay is frequently misunderstood, recruiting talent can be more difficult.
Team-Based Pay: The Dollars and Cents:
Like the hourly/salary model, team-based pay requires laser-focused cash management and must be built on strong financial principles. Payroll is a fixed cost, and the bonus can be variable but must align with the overall financials of the company. When done correctly, team-based pay can provide great financial growth opportunities for both the business and the team. However, when mismanaged it can be difficult for everyone involved.
Salon, Clinic & Spa Pay Structures: The Bottom Line
Choosing the right compensation plan is like finding the perfect style for a client—it needs to suit your business’s unique personality and goals. In the end, the bottom line is the bottom line … any compensation structure that doesn’t fit your company’s financial realities is doomed to fail. But there’s good news … you’re not locked into one model forever. Many successful salons and spas evolve their compensation strategies as they grow. The key is to find a system that motivates your team, satisfies your clients, and supports your business objectives.
Whatever model you choose, remember that communication and transparency are key; the team must understand how they’re doing, how they can improve, and what it will take to achieve their own personal goals. Keep your team in the loop, listen to their feedback, and be ready to adjust as needed … After all, a happy, motivated team is the secret ingredient to a thriving beauty business!
So, take a deep breath, consider your options, and get ready to create a compensation plan that makes your business shine!
Kristin Stutz is a Financial Adviser offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. Registered Representative offering securities through NYLIFE (member FINRA/SIPC), A Licensed Insurance Agency. illume Financial Strategies LLC is not owned or operated by NYLIFE Securities LLC or its affiliates.
Neither illume Financial Strategies, LLC, [NYLIFE Securities LLC and its affiliates], nor its representatives, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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