For many years, service businesses have been shifting their compensation structures to a more performance-based system. The health club industry has been adapting this concept slowly and only to a limited level. Even though the recession caused more club owners to revise their pay concepts, most have not done so in a systematic manner.

Typically in the health club industry, most employees at the department head level and above receive salaries that account for 90 percent or more of their total compensation. They get a variety of benefits (health benefits with co-pays, club benefits, maybe 401(k) programs), but their actual remuneration is focused on the salary element. This setup implies a culture where all employees make best efforts but are not significantly rewarded nor punished by the results for the overall club and the specific department or area for which each is responsible.

Pay for performance programs should focus on creating either key performance indicators (KPIs) or key success factors (KSFs) for each of the important leaders in a club organization. This starts with the general manager and includes the various club department heads (e.g. fitness, sales, maintenance, programming, child care, front desk/reception, group exercise, housekeeping, aquatics, racquet sports, accounting, human resources, office management, retail, food and beverage, etc.). All leaders with decision-making power should have KPIs or KSFs. They need to be adjusted each year and tied to specific numbers and measurable goals. They should be mostly quantitative so the club owner or general manager can track them simultaneously with a department head.

These KPIs should be created at the same time as the club’s annual budget and approved before the start of each year. Often, they represent significant underlying assumptions that were used to create a club’s detailed monthly budget by department for the coming year. Obviously, this means that each is trackable and not subject to a judgment call.

Often, specific measures are created for each specific area. These measures typically include a mix of overall club measures (like the club’s bottom line or EBITDA) for a period or total membership levels as well as specific department goals. Typically, three to five measures are appropriate. Once the measures have been created and employees buy into them, the measures need to be monitored monthly. If you notice weaknesses, club operators should offer coaching that shows the tools a department head has to get back on track. One of the most powerful motivators for department heads (and above) is for them to see in the final budget a dollar line item that includes the total bonus amount assumed if the KPIs are achieved.

Keep a Balance

Typically, the tendency is to weigh too much of the incentive pay on financial measures. Instead, the best programs have a balance of several types of measures. For example, general managers may have the club’s bottom line (or EBITDA) as one measure and total club gross revenue as another. But they might have other factors that include the number of new joiners and the number of cancels or deletes or a net number of members that takes both into consideration. The measures for GMs might be tied to bringing in a renovation on time or introducing a major new programming thrust (with a predicted number of users) or a re-organized staff or a major marketing thrust toward a new segment. In any case, the set-up should not be tied to just financial measures.

Directors of personal training have a wide spectrum of criteria that could be considered: total revenue of personal training, the total net contribution of that department, the net margin (percent), the number of new clients, the percentage of renewing clients, the number of new clients as a percentage of the number of new joiners last month, the number of trainers at various levels of rankings (expert to new hire) and the number of assessments or re-assessments given. Again, an overall club measure might be included, too.

For a director of housekeeping, the indicators could start with a departmental net contribution (which would be a negative, given that it is a cost center), a tie-in to regular in-house inspection ratings of the physical plant, the absence of member slips and falls, the passing of local health department inspections, the members’ ratings on an annual written survey and the cost savings on materials used in the cleaning process.

Each month, the incentives for each department head should be tracked and recorded. The department head or general manager will be able to do so on his or her own. The actual bonus payments should be made quarterly. Typically, if a particular indicator would pay $2,000, the amount paid quarterly would be 20 percent (instead of 25 percent). This would mean quarterly payments of 20 percent, 20 percent, 20 percent and 40 percent. The reason for the weighting is both to make sure the employee is there at year end and to allow a make-up of any lost quarters by a successful catch-up by year end.

Department heads will then learn how to make mid-course corrections for any of the indicators so they can earn the total bonus. This could amount to as much as 20-25 percent of the individual’s salary. The club could afford to pay this out since this was tied directly to the year-end goals of the club.

Pay for performance should become the norm for all clubs of all sizes and in all stages of their lifecycle.

BIO

Rick Caro is President of Management Vision, Inc., a consulting company that serves the club industry. The company focuses on market analyses, valuations, member surveys, club finances, expert witness testimony and operational analyses. It can be reached at (800) 778-4411 or mgmtvision@gmail.com.