How to Pay Your Team a % of Revenue and Why You Might Want to
It’s the end of August and it is super hot outside! I have been starting to spend more time inside, due to the incredible heat. Plus, I am getting back into a normal routine, because my kids are back in school. I’m not sure how long they will be there, but they are there and I will take the normal routine feeling for now.
In this week’s blog post, I want to address how to pay your team. I am not talking about all of those details like direct deposit. I am talking about considering hourly and salary pay rates. Basically, how to determine how much to pay your team.
How to Pay Your Team a % of Revenue and Why You Might Want to
I am focusing on this topic this week, because so many of you have been reducing your teams over the last few months and are starting to bring them back. Everyone seems to be asking about how to do this the right way with our new normal.
Where to Begin When Determining What to Pay Your Team
Before you can even start paying your team, you must have a client to service. That means you must have made a sale and you must be aware of your pricing. Some people will say pricing and how much you are paying your team is like a chicken or an egg thing. Which one comes first??!!
Pricing has to come first, because as I said, you must have a sale before you can really start thinking about how much to pay your team and your coaches.
It’s not as easy as looking at what’s going on in the world around you and saying $99 a month. While that sounds good, you need to make a few calculations to see if that pricing really works for your business. I’m not going to use too many specific numbers right now, because that can open a whole other issue. After all, I am an accountant and I do have a habit of geeking out with numbers and trying to solve what appears to be a puzzle in front of me.
Determining Your Pricing – The Short Version
You should make sure you have your pricing right before you do anything else in your business, including paying your team. I am going to give you the short version here with a little reverse engineering. As you are determining your pricing, you must know what your expenses are and what you need your revenue to cover.
A little hint, your team payroll is one of those expenses that your revenue must cover. This is when you must make your decision of how much you are paying your team. I say that you must do this now, because you need to make sure your revenue is covering your payroll and all of your other expenses. Once you know that your pricing is right, you can go sell and then pay your team.
It is important that you are paying yourself as the coach as well. And the amount you are paying yourself must be a market based wage, because you may be the only coach in your business in the beginning. Therefore, you must make sure you are paying yourself the same amount you want to pay all of the coaches you bring on in the future.
Target Amount for Paying Your Coaches
The target for how much you should be paying your coaches based off of your revenue is 25%. That means 25% of your revenue is going directly into your coach pay account. With the Keep More Money Method, we recommend that you have a separate account for coaches and that you place 25% in there to cover those payments.
I will remind you that the 25% is a target, or a goal, that many people cannot hit when they are starting out. We do have people who are at the 25% revenue for coaches pay, so we know it can be done. We also have people who are at 44%, because they are paying commission or part of a member’s revenue if the coach is responsible for that member. It basically depends on your business model.
As with your profit, taxes, and owner’s pay, your team pay should always be in a separate account.
You can see that I definitely believe in paying your team a livable and professional wage. You may think you can skip this payment, if you are doing all of the coaching. However, if you are not paying yourself that market-based wage, then it is going to be really hard for you to bring in somebody else later and start paying them a livable and professional wage.
You can also compensate your team by giving them a portion of your profit bonuses. That money will come directly out of your profit account when you take your quarterly profit distributions. That should not be included in their livable wage pay. That money should be considered a bonus to encourage them to help you become more profitable in your business.
Of course, the only way you can make sure your team understands and is actually helping you be more profitable in your business is to be completely transparent with your numbers. This is also something we strongly encourage. You should be sharing some sort of numbers with your team, at least monthly if not weekly. This will allow them to see where the business is and what they need to do to get on track to receive their bonus. These bonuses also work to get your coaches to reduce expenses wherever they can.
You can choose to pay your team a livable wage based off of how many hours they work or how many members they have. We do have some clients who base all of their coaches pay off of their “book of business” and how many clients they have in the gym. You can easily do that with software. It works really well for some people and the profit distributions bonuses incentivize the team to keep members there as long as possible.
Hourly or Salary?? – Pros and Cons of Each
As you are determining how much to pay your team, you will need to decide if you are paying them hourly or salary. There are pros and cons to both. I can’t even say there is a right or a wrong answer. I believe it is what you, as the business owner, is most comfortable with.
When you decide to pay a salary, you know exactly what your payroll cost will be every single week and month. The amount is always going to be the same. However, it is very difficult to change somebody’s salary, especially if you don’t change the responsibilities.
I have a non-fitness client that does this frequently. He is always changing his employees’ pay from salary to hourly and back again. I told him that his team was probably not very happy with him in that situation, because they wanted to be on salary since it is predictable for them too. They still know they are going to be paid a specific amount, even if they don’t work as much one week. They also know that they will be paid that amount if they work more hours for a few weeks and in the end it should even out.
While switching to hourly helped him reduce his expenses, his team was finding it hard to depend on their paycheck.
As a business owner, you can control how many hours an hourly person works. That means you should be able to budget and plan what your payroll cost is going to be within a couple hundred dollars for every single pay period. Yes, you need to manage this closely, so you know no one is going over their set hours.
Our clients that pay their team based on a commission feel like they have this figured out. Those team members might not own the business, but they feel like they do because they take care of their members or clients and your business. They have an incentive to do it too, because if one person leaves, their pay goes down.
Those team members will reach out to clients they have not seen in a while to make sure everything’s okay. They are like a personal marketing team, because they get even more pay for bringing in new clients. While it all depends on your business model, we have seen it work well, even with group coaching.
These are all of the different ways to determine how much you can pay your team. You must make sure your pricing is at the point where you can pay your team the amount you should. Everyone working for you should be receiving a livable wage, or market-based wage. The goal for that wage is 25%. That means your pricing must cover 25% payroll, plus all of your other operating expenses at the percentages that they should be at for your targets with Keep More Money.
Start working on those numbers and then see where you should be when it comes to paying your team. Plus, share this with anyone who is struggling to determine how much to pay their team. Also, feel free to comment with your thoughts or questions. These conversations are the best way to see what is working for other businesses and get ideas on how we can improve on our own businesses.