Whether you’re looking to check that your recruitment firm remains competitive or want to set up a new commission scheme – crunching some numbers and ensuring that your recruitment firm’s commission scheme keeps you ahead of the competition while still earning you a healthy profit is crucial.
We take a look at some of the common decisions you’re going to have to make.
First: focus on the why
One of the first things to clarify is why you’re offering an incentive scheme. Yes – it’s to financially reward staff for their efforts and encourage them to work harder. But what do you hope to achieve by doing this? Are you looking to develop key client accounts? Bring in new business? Maximise your profits? Boost revenue through fast growth? Retain or attract staff? Or are you looking to build recurring revenue? Don’t forget, commission schemes in recruitment are fundamental to your success.
Set some ground rules
If you’re setting up a commission scheme you’ll need to do more than just determine thresholds and percentages. A basic set of considerations should form the bones of your scheme. Think about:
- Ensure everyone has fair access to the scheme. Consider whether culturally it’s sensible for employees who are doing the same role to be on the same scheme.. Any other rewards you wish to make to employees should be done separately – for example recognising long service
- Keep the scheme simple and make sure it is well laid out and easy to understand. If your staff know how close they are to making extra money they may be more motivated to go above and beyond.
- Any commission scheme should be laid out in a contract. Equally, include a line in any contract that you reserve the right to alter the commission scheme with one month’s notice so that you can, if you need, make adjustments.
- Don’t forget a good commission scheme isn’t the only way to incentivise your team, it’s just one financial solution . Good leadership, culture and development are also integral in a happy, motivated workforce.
The type of scheme you choose may depend upon the sector you trade in, the mix of income and the staff member’s responsibilities. Here we talk very simply about a few options available to you.
High basic salary/low commission Vs low basic salary/High commission
What we are seeing in the market today is an increase in base salaries being offered. The market is buoyant and quality staff always command a premium. We’re sure many of you probably feel like it’s high basic/high commission right now!
Whatever solution you choose, what you want to achieve is the same salary to net fee income ratio. The lower the ratio of overall staff costs (including commission) to net fee income, the more profitable and potentially valuable your business. Be warned, it’s all about balance. Don’t be tempted to overinflate your commission scheme and skimp on a basic salary. Yes – the threshold is lower so it’s easier for staff to earn their commission but a fair basic salary will help you attract the right type of staff to the business. If the basic salary is too low you will struggle to recruit .
You know your market; you know your staff; do your market research and decide on a model that ensures your business meets its goals.
Some businesses adopt a desk cost threshold, some don’t. Taking this approach means your employees must hit a certain fixed threshold before they earn commission. It is usually calculated with reference to the running costs of employing that staff member on a weekly, monthly or quarterly basis.
Commission is paid on anything that an employee brings into the company above this threshold. Anything below is used as a contribution to the costs of employment. The commission is paid at a pre-agreed rate which usually is higher the more they exceed the threshold target.
If you would like to build in a desk cost, you’ll want to make sure you include staff salaries, NI contributions, software costs, licences and any directly attributable cost.
Flat fee V percentage
Most schemes incentivise workers using a percentage of income model. As indicated above, there are set thresholds/bandings which are often linked to income and which determine how much the staff member may earns. A flat percentage/fee works well for team members who may have research or lower level delivery roles. It may work well for new business schemes, cross referrals or even where there are retained or fixed fee arrangements,
Tiered model Vs sliding scale
You may like to reward your overachievers and financially motivated staff by implementing an accelerator. This method incentivises staff to continually strive in their jobs as the more they exceed their target the higher the commission they can earn.
A tiered model works well and is the most common we see. As staff reach a certain level of performance/income their commission percentage increases. Sometimes it’s ratcheted, sometimes not. We’re sure it’s a model you are all very familiar with.
You may wish to build in an accelerator. This accelerator could be a flat fee, an increase in the % commission payable on some or all deals, or even a non-financial reward, A basic financial example, could see a staff member receive 8% as standard but if they improve on their target by 20%, the commission structure creeps up to 9% commission. The permutations are endless and I am sure many of our readers already have something similar in place.
Monthly Vs quarterly
When determining how often to pay commission take into consideration your average deal cycle. If it takes several months for a deal to be closed then it may be worth paying commissions quarterly and structuring the scheme to match. If deals are done quickly, monthly should suffice and tends to be the most common in the recruitment industry.
It’s fair to say your consultants and market will also have a big say on how frequently you pay out commission!
The golden financial rule
As you can see, there are heaps of different types of commission schemes. As recruitment experts, we’ve seen a huge variety, some better than others!However, as intimated above, in all instances the golden financial rule is to get the ratio of employment costs to net fee income down. Ideally, we would like to see that ratio somewhere between 35% and 45% for established businesses.
Our advice is to trial a few different scenarios and calculate the total cost of the salaries including commission, pension, Employers National Insurance and Apprenticeship Levy if relevant.
Leave it to the experts
From expert business advice to accounting and tax services, our mission at Recruitment Accountants is to help your recruitment company prosper. If you are already a Recruitment Accountant client then please get in touch if you would like a free copy of our commission calculator.
Contact us to find out how we can help you grow and establish a flourishing business.