The Illusion of Percentages
There’s a lot of talk about “fairness” these days, especially when it comes to taxes. Warren Buffett famously commented that he pays a lower tax rate than his secretary. But there is a huge difference between the tax rate, or percentage, that Uncle Warren pays and the size of the check he writes.
Let’s say he’s paying a 25% effective tax rate (because he’s blending capital gains at 15% and his ordinary income tax rate of 45%.) His secretary is paying 35%. His income is in the millions. Let’s call it $10 million (it’s much more). Her income is probably south of $100,000 (he’s famously cheap), but let’s assume it’s exactly that.
Who’s writing the bigger check? Uncle Warren, of course. Miss Cathcart pays $35,000 in taxes. Uncle Warren pays $2,500,000 in taxes. Does that sound fair? When you look at it in dollars in cents, it probably does.
The notion of percentages haunts the spa industry, too. You’re interviewing Mona, a new and promising massage therapist and you ask her what she would like to make working at your spa.
“50%,” says Mona without hesitation.
“But how much money would you like to make?” you ask.
“50%,” replies Mona, a bit more slowly (poor thing, you probably didn’t understand her the first time.)
“Why 50%?” you finally ask.
“I think that’s fair,” she says.
Ah, there’s that word again: fair. (To be frank, “fair” and “unfair” are two of my red-flag words in a job interview.)
“But you don’t know what we charge for our services and how busy our schedule is,” you say.
“Yeah…um…I want 50%,” says Mona, aware now that you are obviously trying to pull the wool over her eyes. “That’s what they pay at Spa Ajax.”
“But 50% of nothing is nothing,” you point out helpfully, aware that Spa Ajax is about to close its doors.
She blinks.
The spa industry is not dominated by math majors and financial whizzes. But we share something with a large chunk of the American public, including the media (“Communications” majors, they were called when I was in college.) And that something is a spectacular lack of understanding about the way that basic accounting works. This is why we confuse percentages with actual numbers.
To wit: the esthetician who, when hearing that she receives 40% commission on services but “only” 10% commission on retail sales, tells herself that the latter is not worth her time. Despite the fact that it takes virtually no time compared to performing a service.
While I was having a manicure yesterday, one of my nail care specialists, when I mentioned that I was working on securing financing for our expansion, informed me that I was rich. It was sort of cute. Her explanation: “You’ve been doing this for 28 years. You must be very rich.” In her mind, everything that she doesn’t get goes to me.
To free ourselves from the shackles of the past, spa employees must learn how businesses actually work, instead of feeling that it’s “fair” to simply divide everything in half. We learned that from our mom when we were battling with our kid sister over who got the cookies. Business literacy can only be accomplished by something many spa owners are loathe to do, which is open our books periodically and share the real numbers (not just the percentages) with our employees. Believe it or not, this really works.
Another technique we’ve used is to translate the profit and loss statement into a play, “Mrs. Hunnert Goes to the Spa.” Mrs. Hunnert (so named for the ‘hunnert’ dollars she has in her purse) walks through an entire spa service experience, handing out dimes and dollars as she goes along, for various expenses. For example, at check in, Mrs. Hunnert is asked by the helpful receptionist to proffer ten dollars for her wages. During her facial, she is asked to proffer four dollars and sixty cents for the supplies used on her (which equates to 4.6% of total revenues on your P & L). She is asked for money for rent, utilities, etc. and at the end, usually has little, if anything to spare. It’s a comic way of demonstrating “where the money goes.” In Mona’s mind, that other 50%, minus rent and utilities, has gone right into your pocket.
As to whether it is “fair” to tax the fruits of investing your money at a lower rate than the fruits of your labor, I’m sure we’ll hear a lot more about that before this November.
