When building a compensation structure for your team, there are many factors to consider. Is the compensation provided fair to your employees? Does it motivate them in a way that benefits the clients, the organization, and themselves? Will the employees be incentivized to hit their targets?
Depending on your company's goals, you need to foster an environment of growth and sustain your profit margins.
The following will provide you with an overview and structure for building a compensation plan with impact for your team.
7 Steps to Building a Recruitment Compensation Plan
Having a well thought out compensation structure will not only benefit the financial sate of your organization, but it will entice top talent and retain them throughout their career.
No two organizations are the same; some compensation plans are better fits than others. You must consider the following steps carefully when creating the most effective compensation structure for your organization.
Establish what the different roles and level are within your organization
Establish a target for total earnings at each role/level
Determine the base salary vs. the commission
Set objectives
Establish a compensation plan for new employees during their ramp-up
Consider these additional sections for your compensation plan
Compensation Plan Worksheet (step by step guide)
Download the following free compensation plan worksheet to follow along with the seven steps below:
Download Free Compensation Guide
Scroll to the bottom to download example compensation plans for your recruitment business.
A Few Tips Before Getting Started
Before you sit down and start building your compensation plan, here are a few helpful tips to keep in mind:
Do not over complicate your compensation structure. You should be able to relay it to those in your organization easily, and you should be able to summarize it on a 1-page document.
Work backward. First, establish what you wish to achieve from this compensation structure. Next, ensure the compensation has a direct relation to your desired outcomes.
Do not delay your employee’s compensation. The time between revenue generation and their pay should be at a maximum of 60 days.
Ensure that the compensation structure is fair to everyone involved (employees, the organization, and the clients).
Make sure your compensation plan is easy to assess and easy to execute.
Step 1.
Establish what the different roles and level are within your organization
The simplest way to do this is to map the role functions out based on experience required (ex. Entry level, mid level, experienced/ top performer). Sort all the positions in your organization under these buckets and define what the overarching responsibilities are. This will help you to:
Know where to place new people within your organization
Create a career path for your employees in which they can be promoted along
Step 2.
Establish a target for total earnings at each role/level
Total earning includes a person’s base salary plus their commission. You now need to establish what the Median overall total earnings will be for each position at each level. To determine this, you will have to do some research based on your location, and in some instances, your vertical. The following example is based off the New York market:
Step 3.
Determine the base salary vs. the commission
The objective of having a commission structure is to establish a performance-based culture — one where the team is accountable for the outcome. There are multiple ways you can build this structure, each having their pros and cons.
Considerations:
If you weigh it too heavily on the base, people will not be motivated to achieve their targets
If you weigh too heavily on the commission, people will be less drawn to join your organization. Low base salary could affect things like potential mortgages or loans. It also means less stability.
There are also a few variables that will affect the total compensation:
The market. Is your market established and, are people only looking at the price? Is it new, and people are focused on the offering/service?
Do you have a well recognized and established brand name? Does business come flooding into you, or do you need to work hard to get it?
How long is your sales cycle, and what is the volume of your sales?
There are three common commission structures used by recruitment firms, for pure revenue generators:
1. Base + Commission
Most organizations will opt for a 50/50 split, as they are trying to balance their risk versus their reward. Other common splits include (base/ commission) 25/75, 60/40 or 90/10.
Example:
2. Base + Threshold + Commission
There are two types of threshold:
Fixed threshold: The Consultant must pass the fixed and pre-determined revenue threshold before they start making any commission. Example: If the threshold is $10k, the consultant only starts making commission once they have billed over $10k. This will apply for a period (i.e. 1 month or 1 quarter).
Variable threshold: Operates like a draw, and is variable based on salary. A key difference between variable threshold and a draw, is that a variable threshold is not owed back by the employee. Example: Consultant A makes $50k base salary, they must generate double their monthly base salary in revenue before they make commission ($8,333.00)
3. Draw
A Draw is when a company lends money against the future commission earned by the employee. If the employee does not generate enough revenue to pay back the draw, they then owe the remaining money to the company. In this scenario, the risk is low for the employer and very high for the employee. Example: the company pays an employee a monthly draw of $10k. If the employee only earns back $8k they will then owe an accruing amount of $2k to the company.
Every organization has roles that are not solely focused on revenue generation, below are options commission structures for:
Managers: Base + Commission + Team Override (calculated based off a % of achieved team revenue)
Directors: Base + Commission + Profit Bonus (calculated based off a % of total team profit)
Managing Directors: Base + Profit Bonus + Long Term Incentive Plan (i.e. equity or shares)
Step 4.
Set Objectives (KPI’s)
Before you can set your objectives, you need to take a few factors into account. To start, look at your financials, what is your total revenue? How do you price your services or products?
There are three traditional approaches to setting your objectives:
Step 5.
Establish a compensation plan for new employees during their ramp-up
One of the most challenging aspects of the talent acquisition process for recruitment professionals is getting them to walk away from their current well-established book of business. In most cases (especially in contract recruitment), these candidates have guaranteed commission coming in, or clients that they continually do business with. Having to restart after everything they have built can be a daunting task.
It is for this reason that many recruitment firms will offer alternate compensation plans during someone’s onboarding and ramp-up period. Here are examples of compensation models that you can use when onboarding a top-performing Consultant:
1. Non-Recoverable Draw
You pay the Consultant 66% of their old monthly commission. If they generate 100% of that commission amount you pay them the remaining 34%
2. Recoverable Draw
You pay the Consultant 66% of their old monthly commission. If they close 50% of that commission amount, then 16% rolls over to the next month.
3. Clawback
Instead of the extra 16% commission rolling over to the next month, the Consultant must pay back the 16% that they did not close.
Step 6.
Consider these additional sections for your compensation plan
To make things clear for all parties involved, consider including the following information in your compensation plan:
Will you have monthly or quarterly commission payments?
Will you have a capped commission, if so, how much?
Equal compensation (consider establishing a fair compensation board, the reviews compensation on an annual basis)
Example Compensation Plans
If you are thinking about changing your compensation structure or are unsure where to start, contact us below or reach out via live chat. We are happy to discuss and help establish what compensation structure is best for your organization.
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