As an accountant and recruitment industry expert, I am frequently approached by recruitment business owners who are seeking guidance on commission schemes. Finding the right commission scheme is crucial, as it can determine the profitability of your company and the motivation of your team. However, with a multitude of options available, selecting the ideal scheme can be a challenge. In this blog, we will explore various factors to consider when designing your commission scheme to ensure it aligns with your business goals and maximises the potential for success.

Understanding Commission Schemes

Commission schemes in the recruitment industry can vary significantly, with different structures and payment frequencies. Some common types include quarterly, monthly, paid when paid, ratchet, and flat rate schemes. It’s important to note that there is no one-size-fits-all approach, and each business may require a tailored scheme to suit its unique needs.

According to APSCo’s Remuneration, Reward, and Retention survey, frontline sales functions typically receive the highest commission percentages, while roles such as account management, business support, business development, and resourcing receive a smaller slice of the pie. The survey also highlighted that less than half of the respondents had increased commissions in the past year. However, many businesses reported making adjustments to commission packages and exploring areas where non-commission incentives could boost pay without increasing basic salaries.

Considerations for Designing Your Commission Scheme

  • The Magic Ratio: To maintain a profitable and sustainable business, aim to keep staff costs to 50% or less of your net fee income. Calculate staff costs by including base salaries, national insurance, pensions, and commissions. If applicable, include costs for researchers, admin staff, or head office staff separately.
  • Cashflows: Ensure your commission scheme aligns with your client payment terms. Where possible avoid paying out commissions before clients have paid your fees to avoid cashflow issues. Consider quarterly commission schemes or adding a retention element to manage cashflow effectively.
  • Different Bonuses for Different Roles: Recognise the contributions of various roles within your organisation. While frontline consultants often receive generous rewards, don’t overlook the importance of head office teams. Consider profit-related bonus schemes based on departmental contributions or profitability (EBITDA).
  • Focus on the “Why”: Clarify the purpose of your incentive scheme. Identify your goals, such as developing key client accounts, bringing in new business, maximizing profits, boosting revenue, retaining or attracting staff, or building recurring revenue. A clear understanding of your objectives will guide the design of your commission scheme.
  • Set Ground Rules: Ensure fairness and transparency in your commission scheme. Consider cultural implications of employees in the same role being on different schemes. Keep the scheme simple and clearly communicate its structure. Include a line in contracts reserving the right to alter the scheme with notice, and differentiate between commission schemes and other rewards.

Types of Commission Schemes

  • High Basic Salary/Low Commission vs. Low Basic Salary/High Commission: Strive for a balance between basic salary and commission. Overinflating the commission scheme while skimping on the basic salary may hinder recruitment efforts. Aim for a salary-to-net-fee-income ratio that aligns with industry standards.
  • Desk Costs: Determine if a desk cost threshold is suitable for your business. This approach requires employees to reach a fixed threshold before earning commission. Anything below the threshold contributes to the costs of employment, while commission is paid on amounts exceeding the threshold.
  • Flat Fee vs. Percentage: Most schemes utilise a percentage of income model, but flat fees can work well for specific roles or arrangements. Flat fees may be suitable for research or lower-level delivery roles, new business schemes, cross referrals, or retained placements. Consider using flat fees in combination with a percentage for different scenarios within your business.
  • Tiered Commission Structure: Implement a tiered commission structure to incentivise higher performance. As consultants reach predetermined targets, their commission percentage increases. This approach encourages consultants to aim for higher billings and rewards them accordingly.
  • Team or Group Bonuses: Consider introducing team or group bonuses to foster collaboration and teamwork. This approach encourages employees to support each other and work towards common goals. Group bonuses can be based on team performance, divisional performance, or company-wide achievements.
  • Long-Term Incentives: Explore long-term incentives such as deferred bonuses or profit-sharing schemes. These can provide a sense of stability and encourage loyalty among employees. Profit-sharing schemes, for example, distribute a percentage of the company’s profits among eligible employees, aligning their interests with the overall success of the business.
  • Non-Financial Incentives: Remember that not all incentives have to be financial. Non-financial incentives can be equally motivating and rewarding. Consider recognition programs, career development opportunities, flexible working arrangements, training and certifications, and employee benefits as part of your overall incentive package.

Monitoring and Adjusting Your Commission Scheme

Once you have implemented your commission scheme, it’s crucial to monitor its effectiveness and make adjustments as needed. Regularly review key performance indicators (KPIs), such as billings, revenue, profitability, and staff turnover. Seek feedback from your employees to gauge their satisfaction and gather insights into what is working and what could be improved.

Be prepared to make changes to your commission scheme over time. As your business evolves, market conditions shift, and employee expectations change, your commission scheme should adapt accordingly. Stay informed about industry trends, competitor practices, and legal requirements to ensure your scheme remains competitive and compliant.

Conclusion

Designing an effective commission scheme is a critical task for recruitment business owners. By considering factors such as the magic ratio, cashflows, role differentiation, goal alignment, ground rules, and different types of commission schemes, you can create a scheme that motivates and rewards your employees while driving the success of your business. Regular monitoring and adjustment will ensure that your commission scheme remains relevant and effective in the long run. With a well-designed commission scheme, you can inspire your team to achieve exceptional results and propel your recruitment business to new heights of success.

Partnering with a specialised accounting firm like Recruitment Accountants will provide you with the expertise and guidance needed to navigate the intricate world of taxation, enabling you to focus on growing your business while keeping your tax affairs in order. If you have any questions or would like to find out how we can support you then please do get in touch.