How does a commission scheme work? As a recruiter, are you making enough money with your scheme? As an agency, how competitive is your commission scheme in the market? You’re a recruitment entrepreneur starting a new business, what scheme should you use?
In this complete guide to commission schemes in recruitment, we answer these questions and much more.
Here’s a summary of what we’ll cover:
- Two common types of commission schemes
- Understanding the components
- Qualification period
- Percentage tiers
- Retaining commission
- What is a competitive return
1. Types of commission schemes
A non-discretionary commission scheme is black and white. The components are transparent and laid out before you join. You’ll know exactly what you’ll be earning depending on the revenue you generate for the organisation. Non-discretionary commission schemes are more common than discretionary in the recruitment market.
A discretionary commission scheme is when your commission is paid at the company’s discretion. Whether you’ll get paid or not depends on a number of factors; a majority of these factors are related to your own performance and perceived contribution.
More often than not, you will be paid if you perform to or above agreed targets. However, if the company as a whole is not performing, other consultants’ performances may be taken into account and this may reduce the amount of commission you receive.
A discretionary commission scheme may also be built around your perceived contribution towards a particular placement. For example, if you were involved in the process flow management and closing of a placement, but the successful candidate was identified by one of your colleagues, then the proportion of commission allocated to you could be decided by your manager, at their discretion. In this case, commission would probably be distributed between yourself and your colleague involved in the identification of the candidate.
Discretionary schemes are less common in the recruitment market.
2. Understanding the components and how competitive they are
The qualification period is the time in which a recruiter’s commission is assessed.
The most common qualification period is a quarter, although some companies have a monthly or annual qualification period.
A qualification period is not related to the period that you’re paid, which is covered later in this article.
The threshold is the amount of revenue a recruiter must generate before commission becomes payable.
Multiplier of base
A threshold is commonly calculated as a percentage multiplier of your base salary. The standard multiplier in the market is 9 x your monthly base salary for the quarter (the qualification period). For example, if you’re on 5k per month, the calculation would be 5k * 9, which equals a threshold of 45k for the quarter. Some firms offer lower thresholds, such as 7.5 x your base salary per quarter, or if you’re very lucky, 6 x your base salary per quarter.
The advantage of this calculation is that when you’re on a lower base salary, your threshold is lower and on the flip side, as your base salary increases, so does your threshold.
As your base salary increases, so does your threshold, meaning your total earnings will stay roughly the same if you bill the same amount, despite your base increasing.
A threshold can also simply be a flat revenue figure rather than the percentage multiplier structure above. The standard revenue figure for this type of threshold is between SGD 40 – 60k.
The advantage of this calculation is that, as your base salary increases, your threshold remains the same. The disadvantage is that when you’re on a lower base salary, your threshold is more challenging to surpass.
As your base salary increases, your total earnings will also increase if you bill the same amount.
A handful of firms offer a no-threshold scheme, although there is a trade off as percentage tiers (discussed next) are often lower.
Less common variations of a threshold include calculating commissionable income from your total revenue for the qualification period first, and then subtracting base salary. Whilst this still yields competitive returns, it shouldn’t be confused with a scheme that offers a threshold of simply just your base salary, as the calculation is different.
When you surpass your threshold, you’ll be eligible to collect commission on the amount above your threshold (total revenue – threshold). How much depends on the percentage pay-out of the scheme.
A majority of firms operate a tiered percentage structure. In this structure, percentages will start at a specific amount and increase in tiers as you generate more revenue. Percentages commonly start at 20 – 35% and increase in tiers until 40 – 45%, and even 50% in some companies. Some firms offer above 50% but it may be extremely challenging to generate enough revenue to earn that.
Some firms operate a simple flat percentage structure. In this structure, you’ll earn the same percentage on any revenue you generate above your threshold.
In some rare cases, some firms offer a tiered percentage structure, but rather than the percentage being based on the revenue you generate, it may be based on other factors at the discretion of the company, such as how many clients you’ve brought in or how you’re performing in comparison to your expectations.
Some firms have a deficit. If your firm has a deficit and you don’t achieve your sales target, you will go into a deficit. The amount by which you missed the sales target in the previous qualification period will roll over to the next qualification period. This means that you’ll have to make up for the revenue that you fell short of in the previous qualification period before earning commission.
Whilst deficits are less common these days and unfavourable for obvious reasons, there’s a reason why companies still use them and it’s important not to overlook this. Schemes with deficits offer a high risk, high reward option. You’ll find that with these schemes the threshold may be lower and percentage yields may be higher. As the firm is taking a risk in losing money based on a highly lucrative scheme, they need to protect themselves if sales targets are not met.
Certain firms wipe the deficit clean from time to time if non-revenue related performance has been strong.
Different firms write revenue on the board at different times. Revenue is commonly recognised on the start date of a candidate or when the invoice is settled by the client.
Once revenue is recognised, your commission becomes payable. Commonly the payment will be made at the start of the upcoming qualification period. For example, if you’re due $30k for placements in Q1, you’ll be paid the 30k at the start of Q2.
There are some firms who don’t relate the qualification period to the payment period. For instance, take the example of a firm who has a qualification period of a year but pays monthly. If you’ve earned 10k in Feb Q1 under the scheme, that will be payable in March, even though the qualification period concludes at the end of December.
In the market, firms often pay on a quarterly basis, a handful of firms pay on a monthly basis and some firms also pay on an annual basis.
Most firms will withhold commission until the client pays the invoice even if they’re late paying, despite the commission being payable to the consultant. Whilst most consultants understand the reason behind this, naturally they would prefer a scheme where they’re paid despite when the client pays the invoice.
Some firms in the market retain a percentage of your commission over a qualification period or over a year. The average amount retained can range anywhere from 5 – 20% and upwards to 50%. To collect that commission, the firm will often set additional targets, the most common being to surpass your threshold for three out of four quarters of the year.
If you hit the target and collect the commission back, some firms return the same amount and others will offer interest on top of the collectable amount as a reward. If you don’t hit your target, the company retains the commission.
This mechanism is strong for retaining employees and encouraging consistent performance, however it receives mixed opinions from recruiters.
Retaining commission is a newer addition to schemes and has become more common in recent years.
3. What is a good commission scheme?
Now that we’ve looked through the various standard components of a commission scheme, what’s a good one and are you being paid enough?
When it comes down to it, a majority of commission schemes in the market, although varied in structure, end up returning a similar percentage return on your billings.
The percentage return of your billings, including base salary and commission, is considered to be competitive around 33%.
If you’re earning less than 33%, it doesn’t necessarily mean you have a bad commission scheme. You may be working with a large global player who offers access to established relationships with clients, allowing you to maintain a strong pipeline without the pressure of business development. They may also offer more support in the form of learning & development, marketing and more.
If you’re earning more than 33%, you’re earning a competitive amount in the market.
The graph above shows the example of total percentage return of billings vs quarterly billings for a boutique recruitment agency with a base salary of SGD $5,000 and billings ranging from 0 to 250k in quarter. The threshold in this example is 7.5x monthly base salary with percentage tiers ranging from 30 – 50%. This particular example includes CPF, so for non-Singaporeans or PRs the percentage return would be slightly lower.
The graph starts at a higher percentage return of nearly 60%, as at lower billings levels, a majority of your return will come via your base salary. At that stage, the agency is losing money on the consultant. The return averages at roughly 38% on standard billings of 75k per quarter. As billings increase, say to 200k per quarter, the return goes up to 42%.
In the early stages of your career, finding a platform with established relationships that has a good percentage return is the sweet spot. When you become more experienced and you’re ready to step into a new environment where the risk of starting or building a desk is higher, you’ll have the opportunity to reap the rewards with higher percentages.
Do you want to learn more about recruitment entrepreneurship?
As the Co-Founder of Vocay, I have run small teams of recruiters and I love blogging about entrepreneurship, especially in the field of recruitment. My business partner Roger Smart built Charterhouse Partnership from zero to 180 recruiters across 5 offices and he also writes articles.
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