(This is part of a series of articles on becoming a Recruitment Entrepreneur. These articles are meant for first-time recruitment entrepreneurs and the more experienced recruiters may find some parts elementary. I shall start dwelling deeper into each aspect once we get done with the basics. If you wish to contribute to this topic please write to email@example.com I will be happy to incorporate your ideas as well. You may also mail me if you wish me to write on any specific topic.)
Now you have a team and have assignments to do. One of the most important elements of building a business is the motivation of your team to achieve organizational goals. Much as enough has been spoken and written about motivational factors and hygiene factors in a work context, the situation on the ground for a start-up is very different. No team member is going to motivated by your story about changing the world (And change the world doing what, Recruitment?).
Changing the world sounds fine if you are doing something novel (like researching cancer drug) or if you are already running a large corporation (which still has some chances of impacting the world). For a startup like yours, it is all about, compensation, incentives, growth opportunity and quality of work. Therefore incentive structures are the most valuable tool with an entrepreneur to ensure that the objectives of the organization and team are well aligned.
There are ‘n’ number of ways in which incentives can be structured. It depends on the kind of work that the team member is doing and the results that are expected to be achieved. The quantum of incentive will also depend on the amount of fixed compensation already being paid. So, incentives are basically a reward for achieving the desired results. Ideally, an employer would like to give a compensation which is 100% variable. So when the company earns money its pays, else, zero pay. However, that is being in a fantasy world. From the employee perspective, an employee would like to get her total compensation as assured pay irrespective of results. However, this will not sit well with the employer. What is expected by the employer and the employee are two ends of the spectrum.
Compensation structures define the nature and culture of an organization with respect to its competitiveness and aggressiveness. For example, if an organization does not pay incentives/variable pay it will end up collecting employees who are risk-averse, and who though working sincerely have no motivation to go the extra mile. Such businesses do sustain but rarely flourish. On the other hand in organizations where a large amount of compensation is variable, the employees would be highly competitive and result oriented.
Types of Incentive Structure
- The incentive can be based on
total revenues or on profits. In case you choose to do it on profits be sure
the employee has some control over the costs. At least the variable costs if
not the fixed costs like office and salary costs. You could add costs of travel
for business, use of software or such tools, marketing costs, etc to arrive at
a notional profit.
- Incentives can be a fixed amount or a
percentage amount of Revenue/ Notional Profits.
- The incentive can be paid right
from the first $ of revenue/profit earned or after a particular base figure
achievement. Typically a base figure achievement is to ensure that all costs
are covered before you start distributing incentives.
- You can pay the incentive as soon
as it is earned or at the end of the financial year.
- You can choose to add an
accelerator (added amount of incentive) after the achievement of a specific
target. This is to further motivate top performers.
Recommended Incentive structure
In my personal experience, I have seen that just a salary is not enough to motivate people. A fixed salary is more like a hygiene factor and something over and above that is required to motivate the employee. Yes, annual appraisals and growth in fixed salary can be a motivator, though it seems too far away at the end of the year. Therefore, while hiring a recruiter always look for a person who would be ready to earn more (though not guaranteed) rather than someone who is fine with a lower earning but a higher fixed component.
I recommend that the incentive must be a percentage of the revenue earned by the recruiter rather than the profit (you can always calibrate the percentage depending on how much you wish to pay out). To bring out the aggressiveness and animal spirit, it is prudent to have incentives right from the word go. This means for each $ of revenue earned the recruiter must receive their incentive.
The incentive must be paid to the recruiter the moment the payment is received from the client and after the mandatory free replacement period (typically three to six months) is over. You may choose to pay a part of the incentive immediately on receiving the payment from the client and the rest after the free replacement period as well.
The percentage of the incentive depends on the fixed salary component that you are already paying to the recruiter. The lesser the fixed component the higher could be the incentive percentage. However, I feel that 10% of revenues as an incentive would be a good motivator. You can look at it in two ways. A recruitment business would normally spend about 40% – 50% of its revenues on salaries, another 30% – 35% on other office & business costs, leaving a profit margin between 15% – 30%. In such a case giving out 10 % of revenue seems like giving out most of your profits.
However, the other way of looking at it is that even if a recruiter works 10% more because of the incentive, you have more than made up for the additional expense. Let us take an example. Let us assume you pay your recruiter an annual fixed salary of 48000 $. As per norms she would be expected to generate a revenue of about 5 times that which is 240000 $.
This would be about
8-10 placements in the year or more (depending on the level). With a 10 %
incentive ( which would be about 50% of the annual salary), the recruiter is
bound to be excited and would surely put in more than a 10 % extra effort
leading to a more than 10 % result.
And surely if you have more than one recruiter, some would do 20% or even 30% more than usual. Overall it evens out and you would be much better off with your profits even after the incentive payout. Another good outcome is that now that your recruiter is earning a good total compensation, that leads to higher employee retention.
Also, consider building an accelerator into your incentive scheme. Based on specific on-target achievements, you could have an additional percentage point of incentives. Remember that all this extra revenue coming in now is pure margin after paying out the incentive. This also fires up your top performers in a big way.
The above numbers
would vary from country to country and would also differ based on the size of
the agency, the level jobs they recruit for and the salary levels and norms
prevalent. However, the explanation above holds good in the most situation if
You will also need to incentivize the other members of the team directly involved in the placements. These could be the business development team and the research assistant (in case of executive search). We obviously want everybody to be aligned towards common goals. Therefore you could also give about 5% of revenue to the business development resource. In a recruitment business, there will always be the concept of hunter vs farmer (as mentioned in my previous article Conducting Business Development).
In view of the same a business development person could be given a % of every revenue earned from a client signed by her for a period of one year (or whatever you feel is appropriate) from the date of signing an agreement. Subsequently all incentive to be given only to the recruiter. In case a recruiter is assisted by a research assistant you could split the incentive between them (maybe 2% – 3% from the 10%).
Never ever make
incentive a zero-sum game. That is someone loses when another wins. Ranking and rating people would be the worst
kind of scheme and be counterproductive wherein people stop collaborating with
each other. Nothing should be measured in relative terms and all calculation
must be with absolute numbers.
Also, do not put a
minimum performance base for recruiters to start earning an incentive. If the
base is too low, it is meaningless and if it is too high, people stop trying
after some time when they feel it is unachievable. When you incentivize for
every $ earned, then every day is a new day full of opportunity even if you
have screwed up earlier. And anyway, if a recruiter is not performing and not
picking up, you as an entrepreneur would assess that quickly and can fire the
non-performing recruiter. Whichever way the risk is minimal.
As you grow your
team and have independent team leaders or branch heads, you could move towards
profit based incentive for such leaders as they would now hold profit &