There is always a lot of debate over commission structures in recruitment and it is something we get asked about a lot. There is no doubt though that in recruitment the more you put in the more you get out and the industry is very meritocratic.
So, if you’re a recruitment business owner and you are looking to change or start a new commission structure, then there are some key points that you should certainly consider.
Note: Commission payment are not only for consultants – great business set up a mechanism within their business to allow ALL employees to earn commission based on the achievement of measurable outcomes.
Let’s start with the Why
The best place to start is establishing the ‘why’. This is frequently overlooked and often companies put standardised commission structures in place just because they think they should or because that’s what other companies do. It is vital to understand why you are using a commission structure and what you’re trying to achieve in doing so.
The simplified version is that you want to pay your employees commission to reward them for the right behaviour. By closing more deals and bringing in money for the business you are rewarding them financially. So, ultimately what you need to decide is what are the ‘right behaviours’ for your company and what do you want to achieve before setting up the commission structure.
What is most important to your company?
- Is it bringing in new business?
- Developing major client accounts?
- Recurring revenue?
- Retained work?
- Fast growth- are you more concerned about boosting revenue rather than profit margins?
- Maximising profits?
Note: Not all commission structures need to focus on revenue – some of the best structures actually focus on profitability over turnover.
Ground Rules you should consider
Now you have decided why you’re putting a commission structure in place and what you’re trying to achieve, there are some simple rules that you should follow.
- Make sure that your commission structures are fair. This sounds like an obvious one but everyone who is doing the same job should be on the same structure. It can cause huge disengagement if someone is able to earn more money than another person for potentially doing the same thing. If you want to reward someone more than another, maybe because of length of service or general performance, it is better to do this through other means (ie. rising their base salary or some non-financial reward).
- Clarity is key! Whatever you decide the structure needs to be clear and easy to work out, both for you and for your employees. If the structure is too complicated it won’t work in motivating and promoting the right behaviour, as they won’t be able to see when they are close to reaching the next level and may stop pushing for that extra closed deal.
- Try to avoid allowing for a mechanism for ‘loading up’ (holding back sales for the following month).
- Contractual; agreements should have added in: “The Directors reserve the right at any time, in its absolute discretion, to vary the amount of commission payable and/or to vary the terms of the commission arrangements and/or to withdraw the commission arrangements in their entirety upon giving one months’ notice.”
- Ensure that at the very least the costs of the sales person are covered before paying commission.
Note: Commission payments should align with people achieving their minimum targets / thresholds so you’re not rewarding people who haven’t hit their target (and in essence rewarding under performance).
Details of setting up the Commission Structure
Frequency of paying and timing of payment
Commission is commonly paid monthly in recruitment, but sometimes it is done over a quarter. Anything longer than this may be considered as more of a bonus scheme, rather than a commission structure, for example a yearly bonus based on the whole team, department or company’s performance through the year.
How quickly can your clients be persuaded to make a decision should be taken into consideration but is not a defining factor in terms of timing. If it takes a long time, possibly over a few months, to close deals with clients then maybe structures on a quarterly basis may work. Whatever you decide it is important to incentivise your recruiters aligned with your typical deal cycles.
Something else to decide is at what level does the commission kick in? With some models this is a lot lower than others, but usually there is a threshold for the recruiter to bill before the commission starts to be paid. The key here is to make sure that the costs of the recruiter to the company are covered before you start paying large sums of commission.
Flat fee or % structure
There are two main approaches to paying commission which we see a lot. These are either a flat fee or percentage of revenue or gross profit of the deal. Flat fee commission only really works well if the price to your client is a flat fixed fee. The percentage model is one that we see more often and is usually done on a % of revenue, gross margin, gross profit or contribution. These models work well when the price to your client is variable.
Note: As long as it is kept simple and easy to understand, you should think about commission overrides for certain types of billings (ie. paying an increased commission for business sold and delivered at a certain margin, or an override for consistency etc.).
In recruitment and with commission structure it is common to also reward for over achievement. If the recruiter goes above and beyond all expectations and has a brilliant month then you can increase the commission quicker.
There are two common ways to apply this, a sliding scale or a tiered model. The sliding scale means that the recruiter gradually gets paid higher rates of commission based on performance against their target. For example, they get paid 8% up to 100%, 9% from 101%-120% then 10% on 121%+. This type of accelerator is best with higher volume/lower value deals as it will encourage them to close as many deals as possible.
Tiered could be something like bronze, silver, gold where if you hit bronze you will get 8%, silver 9% and so on. This structure is best with lower volume/higher value deals as the jumps between deals will be bigger.
Other rewards to consider
As we have mentioned before paying a bonus can encourage the whole team performance. A bonus is where the payments are not regular but are bi-annually, annually or could be quarterly. It is usually based on team, department or company rather than the individual.
Profit sharing schemes are a great incentive too, but be careful you don’t dilute equity to quickly or create a phantom scheme that in reality will never be realised.
With the recruiter’s basic salary there needs to be a balance. The balance needs to be right between paying a reasonable basic salary and offer good commission to get the best recruiters (as well as other factors such as culture, vision and work-life balance). Basic salaries are always relied on when people get financially assessed for things like mortgages, so a particularly low basic salary may discourage people from working for your company.
On the flip side, overpaying basic salaries can tend to drive the wrong behaviours, especially in a sales culture where we are looking for people to do more, sell more and place more.
Note: Not everyone is motivated by money, so don’t be afraid to factor in other incentives and rewards alongside your commission structure that align to what really motivates the people in your business – we have seen some fantastic examples of recruitment leaders using non-monetary incentives to create greater uplift in their sales and conversion ratios above and beyond commission.
Final things to remember
Commission structures are not one size fits all and they need to be customised and made to fit your business. It is important that above everything else you cover your costs before paying commission.
You need to know your business, what works and what doesn’t when deciding on a commission structure and it needs to work for both parties, the business and the employee.
Note: Assess the market first to see what other recruitment organisations are doing before building something as the industry is becoming more and more creative in how they reward their employees.
Knowing what behaviours you are striving for and working towards will help you a long way to designing the structure that will work for you. The final thing to remember is that this is designed to be beneficial to both the recruitment consultant and the business itself – a win:win incentive to drive growth.
Members of The Recruitment Network Club have access to our online portal which contains a huge amount of information and downloadable templates on a range of areas, including commissions structures. We have examples of commission structures that are in use in the industry ready for our members to put in place. If you would like more information about becoming a member of TRN please give us a call on 0844 272 8990 or Click Here to enquire.