Is profit-sharing the future for successful salons?

Distributing profits as a percentage of annual pay is common practice in many industries but not in the professional hairdressing sector. Here Penny Etheridge talks about how salons could benefit from the a profit-sharing scheme. We all recognise that today’s landscape is dramatically different to the one faced by the hair industry five years ago. The rise in ‘rent a chair’ or self-employment-style salons has risen to nearly 50% over the past three years. This has arguably led to long term staff questioning their loyalty to the salons where they work. Many salon owners I meet frequently ask me what they can do about people wanting to be self-employed. The dilemma many salon owners face is the fact they want to hold on to the identity and culture they have built for years. For this reason, I’m also frequently asked how to motivate the team financially to encourage them to stay if that’s the only reason they are leaving. As an ex-salon owner and current business consultant to many salon owners who are facing this dilemma, I believe the clear solution is to begin operating an organised, recognised profit share system within the salon company.

1. Decide your percentage

What percentage of the profits would you like to be allocated to your scheme? This can be a profit percentage of the entire company and you could have a communal pool that each staff member can qualify for. For example, you could say 20% of the company profits are available to the scheme and all of the staff who qualify can draw from this pool. Alternatively, you might decide on x% of company profit per staff member.

2. Decide who will be part of the scheme

Make your decision based on who you consider to be employees who are responsible for managing the company, making decisions, taking more risks and providing leadership to other employees. These are people who are committed to fostering the team and creating cooperation among employees.

3. Set the parameters

You need to decide what each staff member must achieve to qualify for the scheme. This can be a monetary target or can be measured in terms of key performance indicators.

4. Produce a company policy document

A company policy document must be available to the relevant staff members to read and review detailing the information in the points above.

5. Assess at the company year-end

At the end of the year you need to decide how much of the profit is allocated to the scheme and then how much to each of the various staff members. Profit sharing usually occurs after the results for the annual company profitability have been calculated. However, some organisations pay out their profit share quarterly based on the premise that employee recognition is most effective when it is used to reward an employee’s efforts in real-time, as opposed to them having to wait to the end of the year.

The pros and cons of profit-sharing

The positive impact of profit sharing is that it sends the message that all employees are working together on the same team. The employees have the same goals and are rewarded equally to reinforce this shared service to customers. Employees who know they will receive financial rewards if the company does well are more likely to be motivated to help the company succeed because they have a vested interest in the company's success. The weakness of profit-sharing is that individual employees can't see how their own work and actions have impacted the profitability of the company. Consequently, while employees enjoy receiving their profit sharing money, it could be regarded as more of an entitlement than a motivational factor. Also, with overall profit sharing, all employees receive the profit-sharing money regardless of their performance or contribution. It could be argued there's no reason for an individual to improve on their performance. As a result, I would recommend cherry picking the people in your company who you want to become part of your profit-sharing scheme. Penny Etheridge is a business coach and lecturer with over 30 years in the business. She runs Radiant Hair & Beauty Consultancy. For more information go to radianthairandbeautyconsultancy.com.