Though it is clear that there is a gradual easing of restrictions as a result of the COVID-19 pandemic, the challenge in our industry remains. We are a very long way from getting back to normal as the easing of the lockdown in Hong Kong, and introduction of phase 2 in Singapore, propels us into a recessionary economy.
It’s clear that this is a structural recession with high levels of unemployment across many impacted industries. Traditionally, getting large swathes of a workforce back into full-time employment does take many months or even years. Luckily for us, the recruitment industry tends to be one of the more responsive sectors. As the economy grows and jobs return, there are few barriers to expanding a recruiting business. Contrast this with other industries such as aviation, then we have reason to be both optimistic and thankful.
Recruitment jobs will come back and, in fact, they already are. There is a very long way to go but we are seeing a very gradual improvement. Some of the most sought after recruiters in the market are available today and it’s a great time for talent acquisition teams to start pipelining for critical roles.
The question is: how can agencies develop creative remuneration structures that will enhance profitability in today’s market, whilst remaining fair to current employees and recruiters who elect to join them?
Recruitment agencies are looking to balance expansion, growth and hiring with the inherent risk and cost increases associated with on-boarding new recruiters. There are commercial ways, of course, to reduce risk and cost.
Consider the likelihood that many firms will adopt a partial work from home and office share policy. This will reduce cost and risk, but an agency’s biggest single cost is usually their employee’s remuneration. This is a special case and one to consider purely on its own merits.
A recruiter’s remuneration is made up principally of basic salary and commission or bonus payments. It’s going to vary on a case-by-case basis, but pre-COVID, I think it’s safe to say that base salary would, for the very great majority of recruiters, represent 70-80% of total income. Of course, the highest billing recruiters would see base salaries representing close to 40-60% of total compensation.
It’s a fairly simple conclusion to recognize that a solution to reducing risk and cost is that salaries can be reduced. I stress the base salary only, and not total income or compensation. In theory, total income can remain the same, but of course this will probably be offset by the impact of having to perform in a far tougher market.
No one comes out of this unscathed, that is for sure.
It is fairly straightforward but there are some steps that agencies could take when creating remuneration structures for new hires. Individual approaches will vary across recruitment agencies and how entrepreneurial or flexible they can be.
1. Reduce the base salary of current and incoming recruiters
This step has already happened for many recruitment agencies in Hong Kong & Singapore. Salaries for senior managers have been reduced by approximately 30 – 40% and 10-20% for their direct reports.
2. Outline a phased salary level remedial approach with clear targets
Most recruitment agencies have highlighted a phased return to 100% salary either based on the company’s performance or equally based on individual performance and contribution. We are still at the early stage of this phase and this will continue certainly until the end of this year, and possibly into 2021 for the worst-hit desks.
3. In exchange for a reduced base salary, consider an increase in commission percentage
An agency could increase the commission returned to compensate for a lower base. Given any outgoing payments will be a direct result of a recruiter having billed, then there is little downside to an increase in commission return. Both agencies and recruiters alike need to be very candid and transparent when it comes to future expectations. If salary goes back to normal, then most likely commission percentages will have to revert back to what they were pre-COVID.
4. Lower your commission threshold
The standard commission threshold is 3 x the revenue generated in a quarter period. Of course, this varies across firms, and there are plenty of examples of 2.5 / 2x and even 1.5x thresholds. If your threshold is standard at 3x, then this could be lowered to 2.5x, so a recruiter has the confidence that, although their base salary has been cut, the entitlement to the commission will come sooner than before. This should have a positive impact on motivation during a challenging time.
5. Phasing the payment of commission
To ease an agency’s cash flow, a recruiter could agree to receive a fraction of the commission paid over several months. This would be a good approach if the recruiter can afford it budget-wise and was prepared to assist their employer out of loyalty. It sounds unusual but this does exist, and I recently negotiated such an approach. In this instance, negotiations were as professional as they were unambiguous. Everything was clearly documented including the expectations for future payments.
6. Adjust the date a recruiter is paid commission
Most agencies tend to pay commission upon payment of the invoice by the client to the agency. Of course, this is to support the firm’s cash flow, to protect the firm if the candidate leaves prematurely and to protect them from any fraudulent invoicing (sadly it happens!). To combat a reduction in base salary, consider paying commission upon offer signing or on the start date to increase motivation. There is a degree of risk attached to this, but this can be somewhat mitigated by strong and attentive management.
As alluded to above, salary reductions can actually lead to an improvement in commission term and increase overall return for the same revenue generated prior to the changes. Concessions won will be hard to take back even, I suspect, once the salary payment is restored. This could perhaps lead to a significant shake-up of the way recruiters get paid and the circumstances under which they are paid commission.
I wonder what the ‘new normal’ will eventually look like? Will we move to an environment where more recruiters back themselves and move towards a more commission-based model prior to COVID-19? A contentious issue for sure and one I am sure we will address once the economic improvement has significant momentum.
Creating an innovative remuneration structure can enhance profitability in today’s market and could create room to hire great talent – individuals who may not be on the market during normal times. Any change in remuneration structure could have a strong impact on motivation levels of current and future hires. It’s important that these changes are well-thought out, clear and that there is a plan in place to return to normal in the future.
Of course, any suggestion made in this article should be considered only in consultation with the local labour law of the country.
This article has focused on how agencies may look to make positive remuneration changes. My suggestion to a recruiter looking for a role would be to stay very proactive and suggest some of the ideas above. You could present a few remuneration ideas to a potential employer in a pre-prepared business plan. Check out my article on the subject here.
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