I’ve been contacted by a number of different recruitment firms over the past few weeks who are looking for advice from me on pay structures for their recruitment consultants. This is a good thing. It shows that firms out there are thinking properly about talent management, risk and reward, and employee retention.
Sometimes they are paying fair commissions and sensible base salaries, sometimes they are a bit off the mark and just need a bit of tweaking to remain competitive. There have also been encouraging signs of more expansive-thinking in remuneration packages, with non-monetary additions like Rostered Days Off (copied from our Aussie cousins), days off for birthdays and the fabulous ½-day per month to conduct charity work.
However, from time to time I come across a real dinosaur in recruitment remuneration, which is known as the Deficit Model or “Clawback”. This can work in different ways but essentially it means that if the recruiter fails to reach their target billings for the month or quarter, then the shortfall, or deficit, amount between their target and their actual billings is added to their target for the following period.
Now at first glance this may seem fair enough. If your target is three times base salary to ensure you cover the costs of your desk, and you have failed to reach that target, then you have been a cost to the business during that period, rather than providing a profit. Many professions are a cost to the business but here in recruitment it isn’t supposed to work that way. Your billings are the lifeblood of the firm and if you are a cost, as well as all the non-revenue-generating staff like reception, payroll, IT support, tea lady, then that is not a viable recruitment business.
However, the truth is that this is a model very easy for recruitment owners to implement because it means there is absolutely no risk in them employing that recruiter. If they hit a rough patch and cost you money, they will have to pay back that money from future commission cheques anyway. But the trouble with no risk is that there is often no reward. What many of these firms end up with is recruiters entering a downward spiral. They may hit a few good months at first and all seems rosy. But as soon as they have a bad month, or even a dreaded scratch month (come on, most of us have had one at some time or other), they are immediately behind the curve. Unless they have a stellar month to follow up with, they will see their hard work go unrewarded. This affects morale, confidence, and self-belief. In no time you find yourself with a recruiter initially showing great promise but now, for some reason, lacking in drive to exceed targets, seemingly happy to collect their base salary, with no real prospects of making commission for months to come no matter how good their performances.
This recruiter will leave you and take their recruitment skills, that you have provided training for, to a competitor.
It is easy to say that in theory if the recruiter isn’t good enough to reach their target then they don’t deserve to earn commission in following months. The good billing recruiters won’t fall foul of this model because they are able to bill consistently and not get into deficit. But this is over-simplifying things, especially as we work our way through a patchy economic recovery where billing performances are very much up and down out there.
In practice you will lose the knowledge and skills of a recruiter who may well bill $400k in 2011 and $500k+ in 2012, the only trouble being that money is going into the coffers of your competitor. This is not speculation, this is fact. A senior recruiter recently left a large, global recruitment firm where he was facing 6-months of solid billing performances to get any chance of reaching commission again and paying off his deficit. He has joined a boutique, where his slate is wiped clean and where he will make good commission from day one, assuming his desk is now back on track.
I know of another large global who have recently scrapped the deficit model, at least in their New Zealand operations. This takes bravery from recruitment leaders but you will be rewarded in the long-run. It is out-dated and cannot be competitive any longer.
The way forward is to keep commission plans simple. The simpler the better. If you are a recruiter reading this and you cannot tell me how much commission you will earn if you bill $35k this month, without the use of calculators, excel spreadheets and astronomy charts, then you are not on a good commission plan. And recruitment leaders ask your staff. Ask them how much commission they will make if they can get that last perm placement over the line for November. If they can’t tell you, then you will have problems retaining and building your teams during the busy years ahead.
I would be interested to hear from anyone out there who has experienced this deficit model first hand and your experience of it, good or bad. How does your commission plan stack up?
I’ve worked with a couple of agencies, some global, some boutique and all have had different models. Ranging from a plain and simple staggered model – once above your threshold the more you bill the higher the percentage, easy to understand and easy to follow; on the other hand a system based on team incentive, you could bust your gut and bill a 200k quarter and get next to nothing because your team didn’t hit their targets, no set percentages, and basically no idea! Currently I work on a system where once you hit your threshhold you get a set percentage (which is high!) paid on a monthly basis, a portion of your bonus is held back and paid yearly. It’s simple, it a motivating system and you know exactly where you stand! Employers should keep it simple – and also note that bonus and $’s are not the only way to motivate consultants!
When you don’t have an ongoing deficit model the business owner wears all the downside and only a proportion of the upside, The obvious thing to do is to hold back a certain proportion of the commission due each month or each quarter to be paid the following month or quarter so that income is less up and down. Sensible and fair.
I don’t think there is a problem with the deficit model, itself, the problem is with a culture where a recruiter can, theoretically, be allowed go for months racking up deficits. Either the recruiter is not in the right job or they are in the right job but are not receiving appropriate support from their leader.
That’s where a performance plan and coaching are critical to get a recruiter back on track with their confidence and billings.
Deficits work in recruitment companies with strong leadership and a high performance culture. If a recruiter doesn’t like deficits then they should go and work somewhere with minimal (or no) commission, and enjoy their Rostered Day Off while they are at it.
Ross ‘Dinosaur’ Clennett
In response to the self-confessed ‘Dinosaur’ – If recruiters were able to control every situation, client and candidate then a clawback system may work. But we all know this is impossible – when ever there is the ‘human element’ the situations are nigh-on impossible to ‘control’. Agreed that with the right management or guidance this shouldn’t happen (in theory), but it does. The claw back system gives no back-up to consultants as it usually takes immediate effect after one bad month, it gives no reward for the amount of hard work, activity or hours the consultants put in and is the ultimate de-motivational tool available. If you need to encourage your staff, give a postive target and put the archaic ‘beating stick’ away!
Consider this:
Deficit System:
Consultant A bills 500K in a year, gets paid for it.
Consultant B bills 500K in a year get paid exactly the same.
VS.
Tiered commission structure:
Consultant A bills a huge amount in one month, then nothing the next, then a huge amount, then nothing, ends up getting paid more than Consultant B who bills an average amount each month, even if both consultants end up with 500k at the end of a year. So how is that fair to consultant B??
Most tiered systems reward inconsistency and put pressure on the businesses that hire them. I have worked under both and can tell you that if you have a poor month in the tiered system then there is huge pressure to make that up, that’s when the so called ‘beating stick’ comes out . The deficit systems assumes that it will be made up anyway so you can focus on building the pipeline, focussing on activities that matter and maintain confidence in your work. I couldn’t agree more with Ross when he says “Deficits work in recruitment companies with strong leadership and a high performance culture.”
Recruiters, here is a question: Do you back yourself to perform? If the answer is YES, then you have nothing to fear from the deficit system.
Perhaps it would be a better model, if a company insisted on using a deficit system, to look at the performance over a quarter instead of on a monthly basis. Everyone is capable of a bad month, but a for a bad quarter the consultant has to back themselves.
Purely to play the devils advocate here – If you back yourself with so much confidence then why not go the whole nine yards and work commmission only?
Question for dinosaurs and the like – for one considering recruitment as a career what percentage of recruiters are billing 4-500k and above? I could imagine that these individuals will be happy working where they choose.. no?
Possibly! However it would potentially take a recruiter to have been in certain industry for a couple of years to bill those figures once a client list and reputation have been built. When a new consultant joins a company they aren’t always astute when it comes to the variance of how bonus is put together, when they become established they may look to move which incurs a restraint of trade (see Jon’s previous article). Whilst bonus is a major factor when considering where to work, there is also a lot more to consider such as environment and what tools are you given to ply your trade.
Having worked under both schemes, a high performing team thrives under a highly performance based model – I know of agencies out there paying 50% , but no base, and the consultants love it – better than opening on their own I have heard.
The I know of other on good basses who do great work and highly respected – BUT – bill half of what the others do – – so the question begs;
* Do you want to be liked and do great work
or
* Do you want to earn plenty of $$ and back yourself
I think high performers will always gravitate to a high peforming commission model as they know they can make it work, where those less confident will always want higher base salaries
Ross has a great point – it is a sales role and numbers on the board is what we live and die by
Hi,
I would tend to agree with the high performing commission model because it demands excellence and speed from a recruiter.
I have a bit of a side question, do owners and partners of recruitment firms get compensated on salary plus commission as well or is a piece of the bottom line enough of a variable incentive?
Saara
Hi Saara thanks for your comment on this old post. I would say the most common way for recruitment owners to get remunerated would be paying themselves a base salary and then drawing down dividends when cash flow allows it. So in a way they reward themselves depending on the current success of the business.