Traditional base-plus-commission remuneration structures are no longer appropriate for many recruiters, and are one of the main factors driving unsustainable costs in the industry, says business consultant Rod Hore.
Recent RIB Report figures show some 30% of recruitment companies are trading unprofitably, and unless something changes Hore estimates as many as 70% of businesses in the industry face an uncertain future.
“As the recruitment industry moves from being a real cottage industry with low barriers to entry… to a more mature services industry, there’s a long tail of smaller companies that will be caught up in those changes,” he told Shortlist.
“They don’t have a strategy for adapting to the changes that are going on in the industry, and that’s the group that I think may not yet be aware that there’s an issue coming because they might even be trading quite well at the moment.
“But how are they going to win new customers? And how are they going to provide value for what customers want in future?”
RIB figures show recruitment companies’ costs are spiralling out of control, with average staff and management expenses now sitting at well over 60% of gross profit, said Hore, who is the director of recruitment industry advisory and M&A specialist HHMC.
Related: Traditional Recruitment Processes Under Threat
“It is not possible for a services company of more than a couple of people to survive in the medium term if staff costs continue to absorb over 60% of gross profit. The old rule of thumb is that staff costs should take one-third of gross profit. Maybe that is no longer relevant but we should be concerned when it rises above 50%,” he said.
“One of the big issues in the industry is that so many of the reward structures are based around base plus commission for all staff, and the type of work that a recruitment agency is doing now probably doesn’t allow all staff to be paid a commission.”
With panel arrangements, for example, recruiters undertake a range of activities that are not “commissionable items”, such as account management and sourcing, and often do so at quite low margins, said Hore.
“Commissions were initially brought in for people who achieved sales, and sales to me is about winning new clients, not necessarily about doing the job of recruitment,” he said.
“I think the links between rewards structures within an agency and the culture of an organisation are so tight that business owners and business managers are almost afraid to have the conversation or afraid to raise that as something that needs to change.”
Recruitment companies should consider incentives that are more appropriate to the type of work recruiters are doing, such as group bonuses, or rewarding non-financial performance goals, said Hore.
“There can be sometimes group reward structures for a team of people achieving some outcomes and those outcomes might be financial or they might not be financial. They might be about the quality or volume or something of a service delivery environment.”
With the survival of their businesses at stake, Hore said four areas recruitment company owners need to review are:
Consider which recruiters can undertake genuine business development activities, rather than just job filling or account management.
“Those who cannot do business development probably don’t deserve a sales-based reward structure, and further, may not have a role in your business”;
Review the processes that are currently keeping consultants at their desks, instead of face-to-face with clients and candidates, and consider outsourcing them.
“Consultants will then have little excuse to do anything but the job you are paying them to do”;
Recruitment companies have to articulate and prove their value to give clients a reason to use them, over an internal recruiter or a competitor.
“What percentage of placements over the past few months have been made from your database, as opposed to fresh candidates sourced from the job boards or from LinkedIn? If the majority of your placements are fresh candidates, then why wouldn’t the client do that themselves? They have access to job boards and to LinkedIn”; and
Leaders have to look at themselves critically and consider whether they’re inhibiting change.
Originally Published in Shortlist March 2014. Click Here to read the full article (login required).