How well does your commission scheme measure up?

Due to the sheer number of commission schemes currently available in the market, it can often seem quite daunting to analyse just how attractive and profitable they may be to you as an individual fee earner.

The below analysis is based on the most common ‘vanilla’ commission schemes. There are so many variances to this that it is well worth assessing your current scheme; our advice would be to break a scheme down to its individual variable components…

Qualification Period

A qualification period is a measure of time in which individual commission is assessed. The most common period is a calendar quarter, but commission can be assessed in any combination of months in a year.

Commission in a qualification period is usually paid to a recruiter upon completion of the period, and only after the client has paid the invoice (of course, this can vary from firm to firm).

Threshold & Sales Targets

The threshold is the amount of fee income that a recruiter needs to generate before commission becomes payable. It is usually expressed as a multiple of salary payments payable in the qualification period; thresholds can be as low as 0x, 1x or 2x, but the most common multiplier is 3x. More often than not, the threshold becomes an individual recruiter sales target.

Typically, the higher the threshold multiplier, the higher the percentage applied. Conversely, the lower the threshold multiplier, the lower the percentage applied.

Some schemes run a deficit into the next qualifying period, i.e. if the recruiter is below target, then the missed fee income can be carried forward and in effect added to the next qualifying period’s target.

Commission Percentages

Commission is paid above a threshold in a qualification period and at a percentage of fee income generated. It is no surprise that this is also variable! Typically, the payout above threshold commonly starts in the 25-35% range.

Tier Payments & Total % Return

Performances up and above the threshold / sales target attract greater percentages, and more often than not are based on a tier system (see example below). We believe, however, that all recruiters should calculate total % return taking into account salary, commission and any applicable bonuses.

Example Payout

Qualification/Threshold

 

Qualification Period

Calendar Quarter

Recruiter Base Salary

US$ 5,000 per month

Recruiter Threshold

3 x base salary per month

Threshold Calculation

US$ 5,000 x 3 x 3 months = US$ 45,000

 

Commission Example

 

Fee Income Billed

US$ 109,000 in a single quarter

Commissionable

US$ 109,000 minus US$ 45,000 = US$ 64,000

Commission Tier 1 (30%)

45,001 to 60,000 ≈ 15,000 x 30% = 4,500

Commission Tier 2 (35%)

60,001 to 80,000 ≈ 20,000 x 35% = 7,000

Commission Tier 3 (40%)

80,001 to 100,000 ≈ 20,000 x 40% = 8,000

Commission Tier 4 (45%)

100,001 to 109,000 ≈ 9,000 x 45% = 4,050

 

Total % Return (in the Quarter)

 

Total Salary paid

5,000 x 3 = 15,000

Commission Paid Put

4,500 + 7,000 + 8,000 + 4,050 = 23,550

Total Salary + Commission

15,000 + 23,550 = 38,550

Total % Return (in the Quarter)

38,550 total comp / 109,000 fees = 35.4%

Bonuses Up & Above

Some firms may offer bonuses, kickers, accelerators, retention schemes, incentives (financial & non-financial) up and above the commission scheme, and are usually based on achievement or over-achievement. They may be individual or team-based.

So, does your commission scheme stack up? Please reach out to Roger in complete confidence to find out:

Roger Smart
Managing Director

Email me at: roger@tiger-partners.com
Connect with me at: https://www.linkedin.com/in/rogersmart/