HOW GOOD IS MY COMMISSION STRUCTURE?

When talking to candidates and clients alike, the question we get asked most frequently is: How good is my commission structure?

The answer always has to start with ‘it depends’, on a number of factor, which we will cover later in this blog. 

But for now let’s put down a rule of thumb for a good structure.

 

 

1. THE RULE OF THUMB

For a ‘360’/ full life-cycle consultant who’s billings aren’t very low (sub ￡100k) or very high (over ￡500k) a commission structure that adds up to a gross total package (including basic) of around a third of billings/ GP is a good structure. E.g. a ￡300k biller could expect to get a P60 showing circa ￡100k on a good structure. The business logic behind this being; a third of billings to the consultant, a third of billings to cost and a third of billings to profit.

Please note that this does not mean that a good commission structure is a structure with no threshold and 33% on all billings (that would be an exceptionally generous structure). A consultant would receive a Gross total of a third of billings including basic. The make-up of a good structure could vary greatly to render this result. It could have a threshold or not, it could be a single percentage or be tiered, trigger structure or margin based. All we are doing here is giving a rough rule of thumb.

 

 

2. WHEN A COMMISSION STRUCTURE SHOULD BE LESS THAN ABOVE

Let’s deal with the instances where we would expect a structure to be lower than our rule of thumb.

If you are not a 360/ Full Life Cycle Recruiter. This would include Business Development Managers, Account Managers, Resourcers and Delivery Consultants. The reasoning behind this is that if you are not responsible for the full recruitment cycle then you shouldn’t be rewarded on all of its value.

Recruiters focussed purely on developing new business (a ‘180 degree’ role) without filling roles tend to have a different structure to ‘360 degree’ or full life cycle recruiters. Typically this structure will be a set percentage against the business done with any new client developed. Giving a general guide to what percentage is a good return in this scenario is difficult, it needs to be judged against the target market, usage levels and margins. Typically these percentages are between 2% and 15%. Often the commission on new business has a life span e.g. after 12 months the client is no longer new and therefore the BD Managers’ commission either reduces or expires. Again judging this against typical accounts in the target market is important to gauge what return can be made on a new client during the commission window.

Account Managers and Delivery Consultants typically either receive a reduced commission structure against GP or the same commission structure as consultants with only a percentage (usually 50%) of the GP generated by a placement being applied to their billings, and therefore reducing their commission against each placement.

Resourcers are sometimes rewarded in the same way as Account Managers and Delivery Consultants (above) or by a ‘Per-Placement structure detailed later in this document.

If you are a trainee. Some businesses operate different structures for consultants new to recruitment. The business case for this is that you will be heavily mentored through adding value to begin with and therefore part of that reward should be attributed to the business cost of training you. I don’t necessarily agree with this structure, but if you move onto a full commission structure within a reasonable amount of time I think it’s an acceptable model.

If you are inheriting a large account. You may be a 360 recruiter but moving onto a desk with a large legacy account. In some instances, particularly with contract recruitment, it may be that you’re offered a ring-fenced structure to account manage the existing business.

If you are not working in a professional/ technical space. As a general rule businesses operating in the High-street, Generalist and Industrial recruitment space work on tighter margins and higher overheads (shop-front offices etc.) than those in the professional and technical sectors and as a result commission schemes are commensurately lower.

 

 

3. WHEN A STRUCTURE SHOULD BE HIGHER

Some businesses are more generous than our rule of thumb, this will be to attract and retain top talent, or to motivate their consultants. There are very few instances where you should expect a more rewarding structure. But these may include:

A situation where you are taking a lower base in lieu of a highly generous commission structure.

A start-up opportunity. You may mitigate your risk in this scenario either with equity or an increased commission structure.

If you are a ‘super’ biller. If you are one of the industry’s top billers you can drive a hard bargin.

TEAM MANAGEMENT REWARDS

Along with an increase in responsibilities almost all businesses will offer a reward structure against having team responsibilities.

The weighting of these rewards tends to be connected to the amount of emphasis on your team management and your seniority. Here are a few examples:

At a Billing Level. Most Team Leader/ Managing Consultant’s will be managing a team along-side producing their own billings. Therefore there are two typical ways to reward at this job level.

The first is to provide two structures, one is the businesses standard consultants commission structure, applied to the MC’s own billings, alongside an ‘override’ on the team’s billings – typically between 2% and 10%.

The second structure is to have a single percentage of the total team billings including the MC’s contribution, typically between 5%-15%.

At an Operational Level. There are several options here. These include:

A team override on GP in the same fashion as an MC above.

A percentage of the NP produced by the team. I would suggest for this to be a sensible structure the recipient should have full P&L/ Cost control.

A percentage of Year-on-Year GP/NP or Growth.

Quarterly or Yearly bonuses based on GP/NP or Growth.

THRESHOLDS / STANDARD REQUIREMENTS / DESK CHARGES

Some commission structures start from the first pound you bill, but many businesses operate a commission threshold (also referred to as a standard requirement or Desk Charge). This is where a consultant must bill a standard amount each month before commission is applied. i.e. 0-￡3k = Threshold, ￡3k+ = 20%.

A structure without a threshold is generally more attractive, but as a rule a commission structure without a threshold is not necessarily yield a greater commission than one with a threshold. You must look at the structure as a whole against your predicted billings. Although a structure with no threshold will guarantee you commission as soon as you’ve billed anything, it may not be as generous as one with a threshold and a higher percentage pay out.

 

 

4. WHEN COMMISSION IS PAID

As with most things the Devil can be in the detail with how commission structures pay out.

The first thing to check is what figure your commission structure is calculated against. The industry standard is that your commission is calculated against the total figure invoice (billed) to the client in a month. This is a good structure.

However some structures are calculated against the monies received against your invoices (please note that this is very different to pay when paid). For example if you bill ￡20k in a month and only ￡10k is paid to your employer by your clients the following month and ￡10k is still outstanding, in this structure your commission would only be applied against the ￡10k received, not the ￡20k billed. This is not a good structure, it penalises consultants for the businesses poor debtor days and should be avoided.

The next detail that should be considered is when your commission is paid to you. Here are some of the most common structures.

Paid in arrears against billing. This is the most commonly used structure and the one favoured by most consultants. You are paid your commission against your billings in the following months’ pay run regardless of whether or not the invoice has been paid.

Pay when Paid. This is quite common for smaller businesses. Your commission is paid in the next pay run after the invoice has been paid by the client. This is commonly used by small businesses to preserve cash flow. Whilst this is not as preferable as paid in arrears it’s a perfectly acceptable structure – just check the businesses average debtor days (average time to get an invoice paid) to make sure you won’t be waiting for your commission for an excessively long period.

Paid Quarterly. Commission is paid to you 4 times a year – this can be worked with a ‘in arrears’ or ‘pay when paid’ policy. This can be employed by businesses for a number of reasons, cash flow, staff retention, for commission structures that are calculated quarterly. This can be an acceptable structure, but it does require consultants to manage their personal finances with a longer term view than on an in arrears structure and can make it difficult to change jobs mid-quarter because you may forgo your commission.

Held Structures. Some structures hold a portion of your commission for a period of time before paying it out. For instance your commission is 20% but you receive 15% monthly and 5% is held for a half yearly pay out. Once again this can be employed by businesses for a number of reasons, such as cash flow or staff retention.

 

 

5. TYPES OF COMMISSION STRUCTURE

How a commission structure is applied to billings can be just as important as the percentage that is applied.

Assessing this alongside the percentages involved is crucial. Some commission structures have a high banding at the top tier. This is all well and good if that top tier is accessible and therefore applicable to you.

I often hear consultants say ‘my commission structure goes up to 40% or 50% and therefore it is better than one that goes up to 25%’. That may be the case, but not always. If the ‘super banding’ starts once you hit ￡40k in a month and you are a ￡200k biller it is irrelevant to you unless your billings more than double. It is important therefore to assess each structure against your predicted or previous performance.

Below are some explanations of the most common formats:

 

Tiered structure – This is the most common form of commission. Percentages rise as GP increases and each percentage is applied to a tier of your GP.

e.g.

Total monthly billings/ GP of ￡18.5k

￡0-￡3k @ Threshold

￡3k-10k @ 15% (applied to ￡7k billings in this tier) = ￡1,050.00

￡10k-￡15k @ 20% (applied to ￡5k billings in this tier) = ￡1,000.00

￡15k-20k @ 25% (applied to ￡3.5k billings in this tier) = ￡875.00

Total commission = ￡2,925.00

 

Flat Rate – A flat rate commission structure gives a single percentage against all billings/ GP. This can work with or without an SR or Threshold.

e.g.

Total monthly billings/ GP of ￡18.5k

Flat rate percentage 15% (￡18.5k x 15%) = ￡2,775.00

Total commission ￡2,775.00

 

Per-Placement – A Per-Placement structure is usually used for Resourcers and Trainee consultants and gives a commission value to each placement as opposed to a percentage against GP. For each candidate successfully placed into role the consultant/ resourcer will receive a commission of ￡X. These structures tend to be less rewarding than others, but are perfectly acceptable with a trainee or resourcing role – depending upon the value to placement remuneration.

e.g.

Total monthly billings/GP of ￡18.5k from 3 placements

￡300 paid per placement = ￡900.00

Total commission ￡900.00

 

Trigger – Triggers structures are rare but usually very rewarding structures. They can often look on paper like a classic tiered structure, but the key here is that once your billings cross into a new tier that percentage is paid against all of your billings – making this structure far more rewarding than a classic tiered structure.

e.g.

Total monthly billings/ GP of ￡18.5k

￡0-￡3k @ Threshold

￡3k-10k @ 15%

￡10k-￡15k @ 20%

￡15k-20k @ 25% (applied to all billings having reached this tier) = ￡4,625.00

Total commission = ￡4,625.00

 

As Percentage Charged – These structures are generally set up to encourage consultants to be robust in negotiating fees or margins with clients. The percentage charged to the client is the percentage of the GP paid to the consultant on that deal.

e.g.

Total monthly billings/ GP of ￡18.5k from 3 placements

Placement 1 = ￡7k derived from a placement charged at 18% = ￡1,260.00

Placement 2 – ￡7k derived from a placement charged at 15% = 1,050.00

Placement 3 = ￡4.5k derived from a placement charged at 10% = ￡450.00

Total commission = ￡2,760.00

A capped structure can be any of the above with a limit on how much a consultant can earn over a given time period. This one is easy. If your commission structure is capped (and I can’t think of the last time I came across one that was) it is no good. Not only is it not good for a consultant, I would argue that it does not make sense for your employer. If you hit your cap inside the given time frame you are left with no further incentive to achieve more.

 

 

6. RECRUITER CONSIDERATIONS

Considering all elements that make up your commission structure (not just the highest percentage) is essential when weighing up your career options. Make sure you consider the details of how the structure is applied to your billings, when you are paid and most importantly take into account an honest appraisal of your predicted Billings/GP and apply that figure to a structure to estimate a structures value to you.

To assess how fair your structure is you must fairly appraise your job role and performance. Structures tend to be weighted towards recruitment professionals bringing the most value to the recruitment process, and towards those working in the ‘right’ sectors.

 

 

7. BUSINESS OWNER CONSIDERATIONS

Pitching your commission structure at the right level can be tricky. Too generous and you risk the growth or stability of your business – not attractive enough and you risk not attracting the right talent or losing the good talent you have.

I would suggest the key here is to be informed and to know your market proposition. Know not just what your close competitors are paying, but have a good sense of the market as a whole. Then you can understand where your structure sits within the market allowing you to adjust either your commission structure or your expectations against talent attraction and retention accordingly.

Richard Clarke

Director - Pantheon Rec2Rec Ltd