There has always been lots of debate about commission schemes and no doubt this will continue. The truth of the matter is that sales people, including recruiters in the agency world, are all coin operated. A good commission scheme incentivises sales people to deliver on the company business plan by rewarding the right selling behaviour.
Let’s start with the business plan. Take a look at this list below, what do you prize most?
- New business?
- Recurring revenue?
- Retained work?
- Development of major client accounts?
- Do you need to grow fast and looking to boost revenue but are less concerned with profit?
- Are you well established and want to maximise profit?
Having a clear picture of what kind of sales behaviour you want to focus on and reward is the first step to setting up a commission scheme that will work for your agency. Once you’ve got that nailed, here are some other factors you’ll want to consider:
What is the customer decision making process like?
As a manager you must decide to what extent your clients/candidates can be influenced to decide faster, like before the end of a week/month/quarter/year. This is important because if you incentivise recruiters to close within a time frame they will aim to do just that, but if your customer responds negatively to that then you could be denting your brand and future revenue.
The sales person/recruiter
You are looking to encourage the right behaviours that ensure you hit the business plan goals in the short term and not drive your customers away from buying in future so this will take some thought, the next part is about the key elements of the commission scheme.
There are two common approaches - a flat fee per deal or a % of the deal revenue or Gross Profit. A flat fee will only work well in a situation where your price to the customer is a fixed flat fee.
% of revenue, gross margin, gross profit, contribution % is the most common and works best in a situation where price is highly variable, for example if your fee is based on a % of year one salary.
Do you get commission when you sell over X or do you get it for everything closed within a month/ quarter/year? Some plans start with no commission until you bill above x then a flat rate above that.
These are rewards for over achievement and there are two common ways to apply them: sliding-scale vs tiered. Sliding-scale means getting gradually paid higher rates of commission based on performance against target. e.g. 8% of revenue up to 100% of target then 9% from 101-120%, then 10% for 121% upward. Tiered means that if you achieve Bronze, Silver or Gold status you are paid at that level for the duration that you are in that tier e.g. if you hit Bronze level you will earn 9% commission for the remainder of the year.
Sliding scale is more appropriate for higher volume whereas tiered is more appropriate for higher value/lower volume. The psychology behind this is that both encourage recruiters to keep pushing, in the case of high volume sliding scale this could be 3 or 4 more placements whereas the tiered plan encourages your recruiter to do one more high value role even when they are already at or beyond target. This is important because you will always need top performers to fill in the gaps left by core performers.
Sales people prefer payment ASAP and your agency probably prefers to hold on to cash, so there should be a balance between the two. Pay too early and sales people don't take ownership for getting all the boxes ticked and operations spend too much time picking up pieces, pay too late and recruiters end up wasting time on financial and administrative issues to make sure they get paid.
Simplicity is essential, some commission plans go on for 10 pages, others can be summarised in a couple of sentences guess which kind is easier to manage and more motivating?
Want commission made even more simple? Download our free commission calculator tool below!
Credit: Images from ammer and Stuart Miles via freedigitalphotos.net
Alan is an advisor here at Firefish with experience in both sales and marketing.