Commission structures in recruitment
Updated in May 2023
There is always a lot of debate over commission structures in recruitment and it is something we get asked about a lot. In this meritocratic industry, this is certainly an important area to consider carefully. So, if you’re a recruitment business leader and you are looking to change or start a new commissions structure, there are some key points that you should keep in mind.
Note: Commission payments are not only for recruiters– great businesses set up a mechanism to allow ALL employees to earn commission based on measurable goals and outcomes.
Recruiter commission: Starting with the “What” and “Why”
What is a recruiter commission structure?
A recruiter commission structure is a compensation system in agencies where recruiters receive a commission, typically a percentage of the placed candidate’s first-year salary, on top of a base salary. This structure incentivises recruiters to source, screen and place candidates effectively. The commission structure is often tiered, taking into account how many placements a recruiter has made, or rewarding more difficult placements with a higher commission.
Recruiters should understand their company’s specific commission structure for compensation details. For example, you may want to consider whether you are working through internal or external recruiters. A full time recruiter’s commission could be different from that of a consultant whose help you might enlist only occasionally, for special placements.
Should you offer commissions in addition to regular pay?
Offering commissions in addition to regular pay is considered beneficial because it can help you achieve your objectives, compensate your highest performers, keep your team motivated and attract the best recruiting talent in the market. However, it’s important to note that offering commissions should be done thoughtfully and with clear guidelines and expectations. The commission structure should be fair, transparent, and compliant with legal requirements. Proper performance monitoring and management systems should be in place to ensure that commissions are distributed accurately and in a way that motivates recruiters without fostering unhealthy competition or unethical practices.
Here are some questions to consider:
Why are you using a commission structure?
The simplified version is that you want to pay your employees commission to reward them financially for the right behaviour such as closing more deals and bringing in revenue for the business.
What are you trying to achieve with a commission structure?
Often, companies implement standard commission structures without much thought, simply because it’s common or expected. However, it’s crucial to understand the purpose of a commission structure and the specific goals your agency aims to achieve through it.
The question to ask here is: What is most important to your company? Is it:
- Bringing in new business?
- Developing major client accounts?
- Encouraging recurring revenue?
- Retaining existing accounts?
- Growing fast – 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 to Consider
Now that 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.
Ensure fairness: Fairness is the cornerstone of any commission structure. Each person in the same role should be on an equivalent commission structure. Any discrepancy, especially in a recruitment agency, can cause disappointment and frustration, particularly if one individual earns more than another for doing the same work. If you wish to reward someone based on tenure or outstanding performance, consider increasing their base salary or providing a non-financial incentive rather than changing the commission structure.
Emphasise clarity: Clarity is essential. The structure that you put in place should be straightforward and easy for both you and your employees to understand. If the structure becomes too complicated, it might not create the type of motivation that you’d like to achieve. For example, your recruiters might not know if they’re close to achieving the next commission tier and lose interest in closing that next, difficult, deal.
Avoid the ‘Loading Up’ period: Try to avoid any mechanism that allows for ‘loading up,’ which could encourage some of your team members to hold back sales for the following month. This could lead to inconsistencies in your cash flow, distort your understanding of sales patterns and complicate financial forecasting.
Build flexibility into your contractual agreements: Your contractual agreements should allow for some flexibility to help you adjust in case there are significant changes in the business. A clause to include could be similar to “The Directors reserve the right at any time, in their absolute discretion, to alter the amount of commission payable and/or to modify the terms of the commission arrangements and/or to withdraw the commission arrangements in their entirety upon giving one month’s notice.”
Cover costs: When planning your commissions structure, ensure that costs are covered, for example the base salary of a sales person who might be involved in acquiring new accounts, or even the recruiter’s salary before commission.
Using these ground rules, you can create a fair and efficient commission structure that promotes desired behaviours, maintains positive cash flow, and ultimately boosts the success of your recruitment business.
Setting up a commissions structure
Payment frequency: In recruitment commission is commonly paid on monthly basis, but is sometimes done quarterly. Anything exceeding this duration could be considered as more of a bonus system—for instance, an annual pay out that reflects the achievements of an individual recruiter or the collective performance of a team, department, or the entire company.
Payment timing: While the pace at which your clients make decisions can influence your commission timing, it shouldn’t be the only factor to be considered. If closing deals with clients typically takes several months, a quarterly commission structure might be more effective. Also, take your billing cycles into account to ensure you have the cashflow to pay commissions: how often do you issue invoices, how soon do you typically get paid by clients?
Another factor to consider is the commission threshold. Models may vary, but generally, a recruiter must reach a certain billing amount before commissions start rolling in. The fundamental principle here is to cover the company’s costs associated with this recruiter, such as their base compensation before substantial commissions can be paid out.
Choosing the right commission structure:
Two methods are commonly used: a flat commission fee or a percentage.
- A flat fee commission is most effective when the client pays a fixed charge for each placement.
- Alternatively, percentage models, which are calculated based on revenue, gross margin, profit, or contribution, are more suitable when the client’s fee varies. This should also consider the salary range of your recruiters and how much of your margin you can afford to pass on to your team.
Capped or uncapped commission.
A capped structure limits the amount of commission that recruiters can receive within a specific timeframe. For instance, they might only be allowed to earn a maximum of 15% commission on each job placement within a single month.
Alternatively, an uncapped commission structure places no restriction on the earning potential for your team members. This can lead to higher motivation, particularly at times of exceptional growth but it can also have its downsides, such as increased competition amongst the team and the need for effective performance monitoring and management.
As long as it is kept simple and easy to understand, you should think about commission overrides for certain types of billings (i.e., paying an increased commission for business delivered at a certain margin, or an override for consistency etc.).
In recruitment and with commission structures, it is common to also reward for over achievement. If a recruiter exceeds expectations, consistently sources quality candidates or performs extraordinarily within a month, you can increase their commission.
This can be applied in two ways: a sliding scale or a tiered model. A sliding scale progressively enhances commission rates based on performance against targets, which encourages recruiters to close as many deals as possible, making it ideal for high-volume/lower-value deals.
Alternatively, a tiered model—such as bronze, silver, and gold levels—might offer commissions at 8%, 9%, and so on, depending on the tier reached. This structure is better suited for lower volume/higher value deals.
How do you know when you’re overpaying?
It’s important to strike a balance in commission structures, ensuring that they provide adequate incentives for your recruiters without excessively impacting your business’s profitability. Regular evaluation and analysis can help prevent overpayment while maintaining a motivated and high-performing team.
Establish clear performance metrics and research industry standards and benchmarks to stay in line with the competition and market demands. Conduct regular audits and seek feedback from your team and stakeholders to make sure your commission structure is achieving what you set out to do, and adjust it where necessary.
Consider other rewards
Commissions are not the only way to incentivise your team. You can also look at other types of rewards, such as bonuses, to boost morale and encourage productivity. Bonuses are typically paid bi-annually, annually, or quarterly. They can be based on the achievements of particular teams and departments or your entire business rather than on individual performance.
Profit-sharing schemes can also serve as a significant incentive. However, it’s crucial to use these with caution to avoid diluting equity or creating phantom schemes that never come to fruition and can demotivate employees.
A word about salary
While the focus of this blog is on commissions, you should never underestimate the importance of base salaries. It is crucial to strike the right balance between offering a fair basic salary and a good commission structure. This balance can help you attract and retain the best recruiters but also employees in other parts of your organisation, such as finance, marketing or HR. When thinking about salaries, take into account the business impact of each role, but also consider what your ideal candidate looks like, how would they align with your company culture? Do they sign up to your vision for the business? How motivated are they?
Even if you pay high commissions, salaries are important for workers because they impact financial assessments they might need in their personal lives for things like applying for mortgages. A low basic salary might discourage potential candidates from considering roles within your company. On the flip side, overcompensation in terms of basic salaries can trigger undesirable behaviours, particularly in a sales culture that thrives on people doing more, selling more, and placing more.
Not all workers are solely driven by monetary rewards. Try incorporating non-monetary incentives that can also play a significant part in motivating your team. In today’s world of flexible working, make sure you offer good benefits, flexibility, and work-life balance. Some recruitment leaders have seen remarkable improvements in their business by using non-financial incentives, beyond commission.
It’s vital to remember that commission structures are not a one-size-fits-all solution; they must be tailored and crafted to suit your recruitment business specifically. A key consideration in designing these structures is ensuring that your costs are covered before the commission is paid.
Understanding your business, and identifying what works and what doesn’t, is an essential step when deciding on a commission structure. This system needs to be mutually beneficial, serving both the interests of the business and the recruitment consultant.
Conducting market research is a valuable step before you create your commission schemes. Investigate what other organisations in the recruitment industry are doing as they continue to innovate and become more creative in how they reward their employees.
Recognising the behaviours you aim to encourage and promote within your team will guide you in designing a commission structure that aligns with your objectives. The structure is designed to be advantageous to both the recruitment consultant and the business – it’s an incentive meant to stimulate growth, a true win-win situation.
Wondering how to keep your cashflow going and improve your working capital? Sonovate can fund you by providing up to 100% of the value of your outstanding invoices. We will pay you, so you can use your cash to continue to invest in the growth of your business, pay commissions or hire new employees. We will then wait for your client to pay us back on terms that they are comfortable with. Whether you’re an established business or just starting out, we provide invoice financing solution designed to give you cash, reduce admin and save time. Choose from an all-in-one funding and back-office platform or just business funding to complement existing systems. Get funding when you need it.
Get in Touch
To find out more about how Sonovate can help your business grow, get in contact with us today! Alternatively, you can book a short demo, and one of our team members will introduce you to our comprehensive platform at a time that suits you.
About The Recruitment Network
This blog is based on an original post provided by The Recruitment Network.
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