When running a recruitment agency, designing an effective commission structure is crucial. It impacts your finances, drives performance and shapes the future of your business. But which commission structure is best? To determine the most suitable recruiter commission structure, you need thorough data analysis and a deep understanding of your business goals. Let’s explore how to establish the right ground rules and review the various models to help you make the best decision for your agency.
Why Offer a Commission Scheme?
Commission schemes make recruiters accountable for their performance, driving them to hit bigger targets. However, it’s essential to align the commission structure with your agency’s needs and values. Are you looking for your team to develop key client accounts, bring in new business, achieve excellent candidate feedback, build recurring income or maximise profits? Clarifying these goals and understanding the specific behaviours you want to encourage is the first step in designing an effective commission structure. A well-thought-out scheme not only rewards achievement but also aligns with the overall strategy and values of your business.
Setting Ground Rules
To set up a successful commission scheme, you’ll need to consider more than just thresholds and percentages. Here are some fundamental considerations:
- Fair Access: Fairness is the cornerstone of any commission structure. Ensure all employees in the same role have equal access to the scheme. Any other rewards should be given separately, such as recognising long service. Don’t forget your back-office staff; these team members are the grafters behind the scenes that often get forgotten about.
- Simplicity: Keep the scheme simple and easy to understand. This motivates staff by making it clear how close they are to earning extra money. 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.
- Contract Clarity: Build flexibility into your contractual agreements. Lay out the commission scheme in a contract, including a clause that allows you to alter the scheme with one month’s notice.
- Beyond Commission: Good leadership, culture, training and development are also crucial for a motivated workforce. A good commission scheme is just one part of the puzzle.
What do you need to consider?
The right structure can vary, I’ve seen many commission schemes over the years I’ve been working with recruiters – there’s no one size fits all. However below are areas to consider when creating your commission scheme:
- High Basic Salary/Low Commission vs. Low Basic Salary/High Commission
Currently, the market is seeing an increase in base salaries. Quality staff command a premium, and you might feel like it’s high basic/high commission. The goal is to achieve the same salary-to-net fee income ratio (see the ‘Golden Financial Rule’ below). With a higher fixed salary this may encourage more collaborative and less competitive environment, promoting a positive work culture where the team is motivated to perform without the pressure to earn. Although there is a risk that recruiters may settle for the base salary and not push to earn commission. - Desk Costs
Some businesses use a desk cost threshold, meaning employees must meet a certain threshold before earning commission. This threshold covers the running costs of employing that staff member. Commission is paid on any income above this threshold, usually at a higher rate the more they exceed the target. When calculating the desk cost include staff salaries, NI contributions, software costs, licences, and directly attributable costs. - Flat Fee vs. Percentage
The percentage-based commission model is the most popular in recruitment. In this structure, recruiters earn a percentage of the total placement fee charged to clients, with rates varying depending on the agency and the type of roles filled. This model is performance-driven, with recruiters paid only after successful placements. While it’s a relatively straight forward model, it may lead to a focus on quantity over quality. In contrast, a flat fee can simplify calculations, though it may discourage recruiters when hiring for diverse roles. A flat fee model can work well for roles with consistent output, such as research or lower-level delivery, and for new business schemes or cross-referrals. - Tiered Model vs Sliding Scale
A tiered commission plan offers varying rates based on performance levels, providing clear incentives for recruiters to surpass targets. For instance, recruiters might earn 5% for salaries up to £50,000, 7% for salaries between £50,000 and £100,000, and 10% for salaries above £100,000. Alternatively, commission can be based on the number of placements, with rates increasing as more candidates are successfully placed. This model is particularly effective for executive search firms, motivating recruiters to focus on high-value roles. However, while tiered commissions drive top performance, they can create unhealthy competition and significant earnings disparity. To further incentivise, accelerators can be integrated, enhancing commission rates based on exceptional performance. For example, a sliding scale might progressively increase rates with each additional deal closed, whereas a tiered model might offer escalating commissions at bronze, silver, and gold levels, rewarding overachievement and sustained excellence. - Split Commission Fees
When splitting commission between multiple recruiters, the structure changes significantly from the straightforward approach used with 360 recruiters who handle everything themselves. In situations where multiple stakeholders are involved commissions need to be divided based on contributions to the process. Key factors include who gained the business, who found the candidate, and who recruited the candidate. For instance, if Recruiter A sources a candidate and Recruiter B recruits them, a typical split might be 60-40 in favour of the recruiter who completes the placement. If an account manager is involved, the split might vary from 50-50 to 60-40, depending on their level of effort in acquiring new clients. Additionally, commission splits can vary based on the seniority of the recruiters, ensuring fair compensation aligned with their roles and efforts. - Frequency of Payments
Choosing the right frequency for commission payouts is crucial for managing cash flow and preparing for unexpected financial strains. When determining the best payout frequency for your agency, consider your team’s preferences, market standards and client payment terms. Most recruitment agencies favour monthly payouts as this aligns well with quicker deal cycles, providing timely rewards that help maintain recruiter motivation and retention. However, for deals that take longer to close, a quarterly commission payout might be more practical. This method allows for a comprehensive view of a recruiter’s performance over time and ensures commissions are distributed only after client payments are received. Analysing past placements, noting when roles were opened, candidates were placed, and clients were billed can help you make an informed decision. - The Golden Financial Rule
Maintaining a healthy ratio of employment costs to net fee income is crucial for the profitability of your recruitment agency. Ideally, this ratio should be between 35% and 45% for established businesses. To ensure you’re not overpaying, it’s essential to regularly evaluate your commission structure. Trial different scenarios and calculate the total cost, including salaries, commissions, pensions, Employers National Insurance, and the Apprenticeship Levy (if relevant).
Other Rewards
While commissions are a powerful incentive, they aren’t the only way to financially reward your team based on performance. Profit-sharing schemes can also be effective in recognising team or department achievements rather than individual performance. Additionally, consider long-term incentives like share option schemes, including EMI, Growth, and Phantom share schemes. These options are excellent for tying individuals into the business in a tax efficient way, aligning their efforts with the long-term goals of the business.
Key Takeaways
Designing an effective commission scheme for your recruitment agency is crucial for driving performance and shaping your business’s future. It involves aligning the scheme with your business goals, ensuring fairness, simplicity, and clarity, and avoiding pitfalls like the ‘loading up’ period. Consider different models such as high basic salary/low commission, desk costs, flat fee vs. percentage, and tiered vs. sliding scale. Pay attention to the frequency of payments and maintain a healthy ratio of employment costs to net fee income. Lastly, remember that commissions are just one part of a broader strategy that includes creating a thriving culture that aligns with your purpose and values. By carefully planning and regularly reviewing your commission structure, you can create a motivating and effective compensation system for your team.
Get In Touch
At Recruitment Accountants, we specialise in supporting ambitious recruitment companies. We can help you design and implement a commission structure that aligns with your business goals and drive performance. Our expert team can provide tailored advice, financial strategies, and comprehensive support to ensure your commission scheme boosts morale, productivity, and profitability. Contact Recruitment Accountants today to learn how we can help you with creating your commission scheme.
