There has been increasing press about staff costs and pay structures within recruitment agencies. You’d think staff were overpaid and unproductive. But maybe that’s not true. Maybe the remuneration structures have not evolved to meet the realities of today’s industry.
What’s the Problem?
Traditionally salespeople have been remunerated on a combination of base salary and sales commissions calculated as a percentage of their sales. This is a fixed and variable component model and it makes “break-even point” the most important item to manage.
To some degree this traditional model protects the employee from sales downturns, a bit like an option traded on the stock exchange, however, the cost of purchasing this reduction in risk has always fallen on the employee because it is spread across the cost of all the sales staff. Moreover the protection it provides when sales go south is temporary at best and usually comes with large amounts of anxiety, discomfort and even ill will. This model is basically a carrot and stick approach; and the stick is brutal and final.
No wonder salespeople make up stories about expected sales; they want to believe it’s true to save themselves. We all know the story about the big placements that are coming in next month. The stick is also a difficult and costly tool for the employer to administer. Together these factors set up a conflict of interest between the parties with resultant squabbles over the share of the pie and, worse, diverts focus away from client engagement.
Any discussion with recruitment agency owners and managers includes the topics of staff costs, commission structures, and staff productivity. The RIB Report shows total staff costs average over 60% of gross profit, an unsustainable level.
The issues can be put into three categories.
Firstly, there is a shortage of quality experienced recruitment consultants in the market, and salary packages are being driven higher. Is that justified? Maybe, maybe not. But if you are a business owner with growth opportunities, you might be prepared to sign up an experienced consultant for more that you had hoped to pay. Unfortunately salaries tend to go up but not down, so managers need to be careful when adding permanent cost increases to their business.
Secondly, even though 2014 is showing improved market conditions for most sectors and geographies, the productivity for most agencies is well below that achieved before the financial crisis. Job orders are harder to win, tend to be for harder to fill jobs, margins are lower in many situations, there are increased processes and regulations, and clients are slower at making hiring decisions. So today agencies are getting less revenue from higher priced consultants.
I believe there is a third category of conversation in this area. Remuneration models are tightly coupled to the culture of the organisation, and not necessarily in a good way. The services offered by a recruitment agency have diversified a lot over the past few years. Many consultants do not have a “hunting” sales responsibility, but the common reward structure is based on commission for sales. Should an account manager on a preferred supplier agreement where the jobs come to the agency be paid commission? It’s a debate worth having.
Moving from a homogenous commission structure to a more granular structure that rewards the job actually being done is too large a task for many agencies. The culture of these agencies is bound to the remuneration model. “It’s the way things are done around here”. And in general, these agencies have issues with staff costs representing too high a percentage of Gross Profit.
The Benefits of Getting it Right
There are many rewards for having a remuneration structure that is fit for purpose.
A good reward structure in a clearly measurable industry like recruitment should promote transparency and provide reward for defined and desirable activities and behaviours.
It should be self-managing. If consultants don’t achieve the defined results, they know it, the management knows it, and the consultant will actively seek assistance or depart.
From our perspective, as an organisation that looks at business performance, we want to see a reward structure that pays the company first and does not put the company at risk. It’s fine that everyone shares in overachievement. But too often consultants receive incentives for average results while the company is at break-even or in a loss situation. That is dangerous - the company must be looked after first.
There are plenty of other service industries that the recruitment industry can learn from. We are not unique but sometimes fail to look broadly for working models.
It is important to stress that there is no “right” model for an agency – it is dependent upon the circumstances of the organisation: its size, geography, sector, leadership, heritage and so on. Think deeply about this before making any changes!
An Example For A Mixed Business
For many recruitment companies managing how they service their PSA accounts and larger volume clients can become a real issue of balancing costs and quality of service. While it is important to have experienced and capable staff working on your biggest client accounts, there is also the risk that the cost of the commissions payable to staff can drastically reduce the business' productivity. The tight margins demanded by big corporate and government clients creates the problem of delivering services AND doing it profitably.
There are different approaches taken to dealing with this issue in the industry. In some circumstances less experienced, often younger, staff are hired to focus on filling the volume roles on major accounts. Usually, that means lower-cost staff, which helps to manage expenses but can also mean more mistakes, lower fill-rates and a people learning their job while servicing the company's biggest client! While not suggesting that this model can't be managed effectively, there are other ways that can be more effective for everyone.
An interesting model that HHMC has seen working well, is where the recruitment company has identified the accounts that "belong to the house". These should include all of the PSA's won through RFT-type processes, long term accounts that pre-date current staff, and accounts won through company marketing and sales processes. If these are producing solid flow of fillable roles, then there is a good argument for those working on them to be rewarded differently.
These accounts have a deduction from the Gross Profit (NDR) of each placement fee and kept for the "house". The balance is attributed to the consultant for monthly/quarterly threshold and commission purposes. This applies to both temp and perm placements.
For the experienced consultant, good at filling jobs, they can meet their threshold requirements from the steady job flow, though having a lower level of billing per placement attributed to them. For many recruitment consultants; the greater certainty of having house accounts to manage is a good trade-off for potentially higher commission but having to develop more new business.
For the client, they have more experienced people working on their vacant roles. For the recruitment company; they have better control over their expenses on volume business and greater likelihood of ensuring these accounts remain profitable.
A More Aggressive Example
So how can you manage a traditional base and commission structure in a less combative way?
Sales people by their nature are optimistic people and that optimism is needed for them to come to work every morning and hit the phones, but even optimists will admit that sometimes things don’t work out the way we’d all hoped.
The sensible thing to do, the fair thing to do, is to have a conversation up front and agree what action you will both take if you get to a point in future and haven’t reached a certain goal. It basically takes the form of “Let’s give this a try and if we haven’t done X by the end of Y then we will stop what we’re doing and try to work out what’s wrong”. Notice that there is a commitment by both parties to try to fix the problem? To do this both parties need to have a share in the risk and in the rewards – and both these outcomes should happen automatically because they have been agreed in advance.
In practice the risk to the employee would be a reduction in fixed remuneration if they don’t make target, where the old model would see them laid off if they couldn’t tell a good enough story about the next month. They might well decide that the role isn’t worth it. Isn’t that a better outcome for everyone?
The reward would be a higher percentage of sales paid to the employee made possible by a reduction in the cost of paying high base salaries to non-performing staff. One of the best ways to provide a higher reward is to pay a high percentage commission on all sales but deduct any fixed salary payments. So [GP earned] x [agreed Commission%] - [fixed salary costs]
There are a number of other benefits to this type of structure: productive employees can be better rewarded and paid a higher base salary, new employees can be given a probationary period that will automatically trigger base reductions if targets aren’t reached and, perhaps best of all, there can be less reliance on salary reviews or disputes about perceived fairness.
Admittedly it seems harsh at first pass but it is also more empowering and rewarding for the people that undertake this difficult work and do it well.
If the issue of staff remuneration is on your agenda, consider an external review by HHMC. We look at the strengths and risks of your business so that you have clarity of the opportunities in front of you. Call Rod or Richard now.