The Total Package

07/01/02
By: Matt Morgan, Looking FIt

There are two main reasons why salons should give serious consideration to the compensation packages they offer their employees: 1) It costs the salon money to continually hire and train new employees after old ones leave; and 2) happy, motivated employees who stay will continue to contribute to the salon's financial success.

The problem? Many employers aren't dedicating the time to consider what they offer their employees. "They fail to think through what kind of employees they're really trying to attract, and what will be the most effective way to compensate them," says Morey Villareal, president of Villareal & Associates, a Tulsa, Okla.-based company specializing in compensation consultation, search and selection, and organizational analysis.

Hanging on to a top-notch salesperson is easier said than done. Salon owners try to keep them by offering the "total package," but what exactly is the total package? It can be base salary, benefits, commissions and other incentives, and even working conditions and flexible hours, Villareal says.

"There can be a number of things that will accrue to the employee's benefit that have an effect--not just culture, supervisory style or climate of the company, but tangible things like pay and flexible hours or work weeks," he says. "There are all kinds of things that employers can do to attract, motivate and retain employees."

The total package also should include benefits for all employees, says Paul R. Dorf, managing director of Compensation Resources, Inc., an Upper Saddle River, N.J.-based consulting firm specializing in issues such as sales compensation and performance management.

Sadly, it's the nature of retail sales and service that while employees are happy, they tend not to stay long.

"It's often difficult to keep people for the long-term, and not just because of the nature of the work, but because of the nature of the people you're hiring," Villareal says. "They tend to be students or they're on their way to a career in something else." With those two factors comes a certain amount of turnover, he says, even if salon owners do a good job of attracting, motivating and retaining good employees.

So what is a salon owner to do?

"I think I'd still do the best job I could in making sure to manage it as carefully as I could," Villareal says. Salons increase their chances of keeping employees by keeping a nice working environment and having good people to work with, as well as making sure pay is competitive and that there are built-in advantages in the way compensation and working conditions are structured, he says.

It Pays To Pay

Compensation specialists agree that hourly wages should be competitive, but it begs the question: competitive to what?

First of all, base pay should be in line with other businesses in the salon's area. Villareal points out that the market isn't just other tanning salons, rather all businesses that might be recruiting the same type of employee. Second, the pay should be equitable, which means owners should be paying employees in the salon similarly for the same types of jobs and skills.

"Those are the two key requirements," he says. "Most of the organizations I work with--and I work with a lot of small companies--don't do a very good job with either one. They don't have a very good feel for how the market is or for the types of people they're trying to recruit, and they don't know very much about how to structure pay so that they're treating people in fair, consistent ways."

Since September 1997, the federal minimum wage has been $5.15 per hour. Some states have enacted their own, often higher, rate. In any case, it won't be less than $5.15 because if the state rate is lower than $5.15 or there is no state minimum wage, the federal rate applies. Washington's minimum wage tops out at $6.90, for example, and the rate in California and Massachusetts is $6.75. Connecticut, Delaware, the District of Columbia, Oregon, Rhode Island and Vermont also have rates of more than $6 per hour.

It's been said in the tanning industry that salon owners should pay employees 85 cents to $1 more than minimum wage, and they should pay managers $1.25 more than the other employees. But some say there shouldn't be such a hard-and-fast rule. Instead, companies should do their homework.

Salon owners need to keep their finger on the pulse of their market. If Tanning Salon A is paying its bed cleaners $5.50, but similar jobs in the area are paying $6.50 or more--regardless of what minimum wage is--that might explain why the salon has trouble keeping bed cleaners.

Many companies get hung up on dollars and cents and lose sight of the larger picture, Dorf says. They let employees go simply because they want more money--even if it's 50 cents an hour.

Statistics have shown that it costs businesses as much as two times an employee's annual salary to replace that employee, Dorf explains. This is measured in advertisements for the open position, sales missed, and time spent interviewing and training a new hire, but also in the dissatisfaction of other employees when they have to pick up the slack of a former co-worker.

For example, if an employee wants $1 more per hour, that translates into roughly $2,000 more per year. "Most organizations take it as a personal affront," Dorf says. But if the owner lets that employee go, it could cost the salon an estimated $25,000 to replace the employee. Most companies don't think of that, he says.

"We found if an employee said he was going to leave, the company--in many cases--would think it over and make a counteroffer, and that person probably worked out to be a better employee," he continues. "There are still articles that people write that say if employees come to you and say they're unhappy and they're going to leave, let them go. Yet, there's a lot of empirical data that says those people will stay and make better employees if you make the effort."

There always will be employees who jump to the salon down the street because it pays 25 cents more per hour. But typically, employees will stay if they are happy with where they are, and they'll only leave if there are greater underlying problems, such as poor management, Dorf says. "Even though we're compensation specialists, compensation is strictly one arrow in the quiver that management has to use to retain people."

Dorf is a firm believer in incentive plans such as profit-sharing programs for all employees. "Not only is it additional money, but if it's constructed properly it also keeps the people informed about what's going on in their company," he says. "They want that communication. Providing them that communication as part of some kind of bonus or group incentive plan has that secondary advantage."

Incentives And Commission

Incentives come in many forms. Commission is the most widely known and used in retail sales. Simply put, it provides a monetary reward for selling a product. The more products an employee sells, the more money goes into his pocket.

According to the U.S. Bureau of Labor Statistics' 2002-03 Occupational Outlook Handbook, commission gives salespeople the opportunity to greatly increase their earning, but it depends on their ability to sell their products as well as the "ups and downs" of the economy.

"Money is a motivator," Dorf says. "People who go into sales roles, in many cases, are motivated by money--just like people who go into the healthcare field have an altruistic bent and are looking to help others." He adds that people do retail sales because they like the personal interaction.

Finding out why employees come to work in a salon is the key to providing solid incentives. Find out what makes them tick and provide them compensation that helps them get to their personal goals.

The basis of a successful sales compensation package can be achieved in three steps, according to Dorf's Compensation Resources:

1) clearly defining sales goals that are realistic but challenging

2) tracking and measuring performance against goals

3) rewarding achievement with competitive and motivational compensation.

Salespeople range from counter clerks selling gum at the register to jumbo-jet reps pitching the benefits of their plane to a major airline. Obviously, the commission involved for each scenario is vastly different. Because tanning salons involve the sale of relatively small-ticket items such as lotions and tanning packages, an incentive system can be quite flexible.

For example, a salon can offer its employees 2 percent for sales over $500 per month and 3 percent for sales over $1,000 in that time. Commission also can be paid per sale, such as 2 percent for each product worth less than $30, and 5 percent for each product more than $30.

When used correctly, motivation can be a powerful incentive. When used incorrectly, it could force an employee to walk. The trick, again, is to know what will work in each situation. When a commission program has been put into place, it is important the owner monitor the employees. In their effort to earn as much commission as possible, employees may revert to high-pressure tactics that could drive off customers, which isn't beneficial for any salon. Make sure customers feel comfortable with their salesperson and enjoy their sales experience while in the salon.

There are two main trains of thought when it comes to motivating employees: They're often described in the carrot-and-stick theory. A carrot is used for reward and positive reinforcement, and a stick (pain) is used to induce cooperation. Both are applied financially in the workplace, with varied results. To illustrate this point, consider a salon employee who asks a customer to try a particular lotion. He may be asking for one of three reasons:

The employee gets a commission for each bottle sold (carrot theory).
The manager simply asked all employees to push that lotion.
The customer gets a special deal for each time the employee fails to mention the lotion, and the deal's value is taken from the employee's pay (stick theory).

The challenge for the salon owner is to determine which of the options will work for each employee, because it's not the same for everyone.

"I think it's very important to know why employees are there," Dorf says. "Are they there because they're just looking for an interim job until they can find something better? Are they there because they're students and they need the money? Are they people who don't care about benefits and they really would like all the money upfront?"

Benefits

Money is important to the retail salesperson, but it isn't everything. Villareal and Dorf agree that a compensation plan should include more than just base pay and incentives.
Group insurance for all levels of employees is becoming more important these days, Villareal says, because medical costs can be very expensive. "Individuals ignoring the need for some kind of protection against those medical costs are taking a real risk, regardless of their age," he says.

Any time an employee goes to work for a company, he's looking for what Villareal calls hooks. Those are advantages that will attract and keep employees at a better rate than the competition.

"Just thinking through those hooks can make a real big difference," Villareal says. "Most employers don't. They spend more time buying equipment than they do thinking how they're going to attract, motivate and retain employees."

According to the employee cost index (ECI), benefits include paid leave such as vacations, holidays and sick leave; premium pay for work in addition to the regular work schedule (such as overtime, weekends and holidays); insurance benefits; retirement and savings benefits; legally required benefits such as Social Security and unemployment insurance; and severance pay. The ECI is a measure of the change in the cost of labor, broken into compensation as well as wages and salaries.

A compensation plan also should include benefits for all employees, Dorf says.

"A lot of companies do not provide benefits to part-time employees," he says. "They may get pro rata vacation or time off, but don't have the ability to get sick leave, life insurance or 401(k)s. We find those companies that treat their full-time employees and their part-time employees the same--on a pro rata basis--generally have a much happier group of people."

Wrapping Up The Package

Salon owners need to take time and think about what they're paying their employees. More than that, they should consider commissions and other incentives, as well as benefits. It's all wrapped up into the total package, and it's as important to the bottom line as any tanning package or tingle product.

Productive, qualified workers will come and go. It's just the nature of the retail sales business. But by giving them what they need--good salaries or wages--and what they want--competitive commissions, incentives and benefits--salon owners increase the chances their employees will be happy and stay to work as hard as ever for their company.

"Clearly, if we want to maximize the capabilities of the people who are working for us," Dorf says, "we'd like to have the right people, we'd like to have them motivated, train them in how to do things better, and to recognize and reward them."

Minimum Wage: By State
Alaska	$5.65
California	$6.75
Connecticut	$6.70
Delaware	$6.15
District of Columbia	$6.15
Hawaii	$5.75
Maine	$5.75
Massachusetts	$6.75
Oregon	$6.50
Rhode Island	$6.15
Vermont	$6.25
Washington	$6.90
All others	$5.15
Source: U.S. Department of Labor. Note: Rates for Hawaii and Maine are set to increase to $6.25 on Jan. 1, 2003.

Pay Rates And Pay Increases

Creating a pay structure is not the final step in the creation of a compensation plan. An organization also must decide how to administer this compensation plan. This means deciding how to pay new employees, how and when to give employees increases including how to move existing employees from the minimum to the maximum of their assigned pay grades, how to determine the pay increase for an employee being promoted from one job to another, and what influence, if any, cost-of-labor increases will have on the determination of pay increases for employees. In addition, an organization must develop policies and procedures that will implement the results of these decisions in a consistent manner.

Starting Pay For New Employees

In order to avoid paying new employees the same as more experienced employees, most employers choose to start new employees closer to the minimum of the pay range. In general, an employee with minimum qualifications should be paid the minimum of the range. This general rule is not true when a new hire has skills that are in great demand or has skills or other expertise substantially above the minimum.

Employee Increases there are several different types of base-pay increases: general (across-the-board) increases, cost-of-living/labor increases, promotion increases, step increases (based on longevity) and merit increases.

General increases are diminishing in popularity because they are not consistent with the idea of pay for performance. With a general increase, employees in a certain group based on established requirements are eligible for a certain monetary or percent increase to their base pay.

Cost-of-living increases are types of general increases given to all eligible employees. This type of increase may happen as a result of union contract negotiation. Some companies choose to track benchmark positions over a period of time and modify other positions based on changes in the ranges of benchmark positions.

Promotion increases are given when an employee is moved from one job to another with a higher pay grade and range. The size of the increase will be influenced by the difference between the old and new pay ranges, and the pay of the newly promoted person's peers, superiors and subordinates, if any.

Step increases can be based solely on longevity or some combination of longevity and performance. Step increases alone are inconsistent with pay for performance.

Merit increases also are known as pay for performance. To be successful, an organization must be able to measure differences in job performance, and these differences must be significant enough to merit the time and effort required to measure them and pay accordingly. Merit increases also affect other components of the compensation plan in that the pay range must be wide enough to allow for significant differences based on performance, supervisors and managers require training in performance planning and appraisal, and control mechanisms must be in place to successfully administer a merit increase program.