Publisher’s Corner

Money Musings

I vividly remember hearing from a very successful practitioner (60% retained search, 40% contingency) asking our opinion of his intention to hire a “rainmaker” to sell his firm’s services. The candidate had a strong brand management and marketing background but had absolutely no experience in the search or recruiting business. The salary guarantee was $160,000 a year with various bonus components that would permit her to reach her previous income of $200K+.

This particular firm pays a 20% commission to those who sell the search and 30% to those who do the search – source, recruit and perform the rest of the process. At this rate, the new rainmaker would have to sell $800,000 worth of business per year just to justify the salaried portion of her compensation package. Perhaps she can sell (or acquire) a $30K search every other week but, as a rookie, it is doubtful. Her best shot would be to move up the corporate pecking order and aim for those assignments with fees from $50 – 100,000.

Many of the larger retained firms are split between those who “sell” and those who “do.” There are as many different approaches (and compensation packages) as there are firms. In the contingency world, the sell/do responsibilities are more likely to reside in one person although, lately, sourcing and the production of a potential candidate list is somewhat more likely to be done by a sourcing specialist within the firm because of the increased recognition and usage of the Internet as a “go to first” resource. Recruiters whose business has been the most stable during these recent economic ups and downs are those who have established lasting relationships with clients.

Although many in our industry profess that they are “consultants,” we prefer to view the process as more akin to “sales” than advice-giving. As such, the primary objective of a compensation plan is to correlate the practitioner’s rewards with results. Payment should be commensurate with productivity and in this business that equates with “cash” in the door. A first-class compensation plan is one that will attract the right people – but also eliminate those who have been poorly selected or badly motivated. (See Doug Beabout’s article later in this issue.)

Providing a compensation plan for your staff which is fair to them and to the owner is a balancing act which has been brought to the fore within the past year or so as the search and recruiting business continues to blossom. A few years ago, candidates were a dime a dozen and search assignments were scarce. Now that situation is reversed. A year ago business developers were paid the lion’s share of the fee. Now candidate developers are becoming the star attraction. Many firms who used to internally split the fees favoring those who brought in the business have now switched their plans to more fairly compensate those who bring in the successfully-placed candidates. Freelance sourcers report doing a very busy business. Formal networks report increased membership and even some of the informal networking agreements are now recognizing that perhaps the candidate provider should get more than the job opening supplier.

A number of firms are reevaluating their compensation plans in view of the changing marketplace landscape and their desire to increase staff size.

In the widely disseminated Personnel Consulting Pay Practices ($45 from www.fordyceletter.com) we noted, “Paying too much shortchanges the ownership. Paying too little promotes undesirable turnover.”

Ours is an industry brimming with optimism. Owners expect every new hire to be the next recruiting black belt. Pro forma spreadsheets are always loaded with “blue sky” projections based upon the rosiest of predictions but far too few take into account the realities of “the nut.” We’ve discussed it before but here’s the Reader’s Digest version.

Every firm’s architecture is different and every owner/manager has different ideas on what is appropriate compensation for consultants. We can’t presume to give blanket advice but since we’re frequently asked, we’ll share our basic premise. You can fill in the details based upon your own set of circumstances, but we implore you to set your compensation plan, as well as your everyday business decisions, based upon the following. We are always surprised to learn how few practitioners know what their “nut” is.

The “nut” is that amount of money required to keep the doors open. Some use the raw number . . . others factor in a profit percentage . . . but it doesn’t matter for our purposes.

The equation is simple. Assuming a non-producing owner, if the “nut” is $20,000 per month, a one-desk operation will require that desk to earn $20,000 per month, plus a commission for the desk’s consultant and a profit for the owner.

Add another desk and divide in half, right? Wrong! A second desk requires a second phone, computer terminal plus other support dollars which raise the “nut.” Get the idea?

We are attempting to lead you to the conclusion that, no matter how many desks you have, each has an intrinsic minimum earning potential and it is your job to optimize and maximize those earnings by the proper and enlightened management (motivation? manipulation?) of the people occupying those desks.

Firms have ‘comfort levels’ just like individuals. One owner may be pleased if every desk ‘earns’ a $10,000 profit. Others aren’t happy with 10 times that amount.

Every desk costs you money every month whether it is occupied or not . . . whether it is producing or not. If only eight of 12 desks are producing, you are not only losing lost production from the empty four, you are also inflicting an additional cost drain on your producing desks. During economic downturns there may be some reasons to leave some desks empty so long as it is just furniture and not support (telephone, computer, job boards, etc.).

If you assume that every desk costs $2,000 per month, then every desk not pulling its own weight must become a cost lug, and its costs must be assessed against those which are producing.

In a 12-desk operation with only eight desks producing, it is simple to deduce that the 8 producing desks are costing you $3,000 each instead of $2,000. To make your “nut,” each of the eight must produce even more than when all are producing. This presents some dicey management problems.

Every desk is theoretically its own profit center and there should be very few reasons for leaving one empty for any reason. The same inconsistency occurs when you leave an unproductive person on a desk.

Here we come to the point where we disagree with some of the more traditional theories on goal-setting.

If you wish to sit down with your consultants and democratically discuss goals and quotas, so be it. But there must be a minimum . . . a floor in the discussions. That floor figure begins at your minimum production expectation for the desk, not the occupier.

Do not concern yourself with “how” the desk produces to your expectations. The successful firms we visit and interview seem to agree that a desk should produce a minimum of $150,000 per year, no matter how it is utilized or structured. This is actually lower than the average cash-in of $230,000+ from last year’s Consultant Earnings Survey.

A clerical/office support placement desk with an average fee of approximately $5,000 needs only to produce about 30 placements per year. Not that tough for the specialty since most placements are local and quickly consummated – a placement every couple of weeks or so.

On the other hand, a specialty with an average fee of $15,000 (quite a bit less than the real average fee of $18-19,000) needs only to produce less than one placement per month – ten a year, to be exact. Not a great performance by anyone’s standards since our Consultant Earnings Survey showed average consultant earnings/commissions at around $100,000.

Article Continues Below

The goal-setting, motivating, hiring expectation discussion is: “I will not accept less than $150,000 in production from this desk. I consider the desk to be a profit center division of my company and you are the division’s general manager and C.E.O. Your job is now very well-defined. If you meet or exceed the minimum expectation, you keep your job. If you don’t, I find another general manager for this profit center.”

What you choose to compensate your “Division General Managers” is up to you. We have previously chronicled a firm which pays a salary with strictly discretionary bonuses. The owner requires $150,000 production per desk . . . and gets it.

If you set a commission schedule, it will depend upon the profit you want from each desk (profit center). If, for example, you want a keystone 50% profit ($75,000), deduct $24,000 (desk cost) from the other 50% which leaves you with 34% to pay as a commission. If you decide that your profit from each desk should be 40% ($60,000), that will leave you with 44% to pay as a commission. Once the occupant of that desk (its General Manager) reaches the $150,000 optimum break-even point, you can bestow a higher commission percentage to the person who has made it happen.

You can pay it straight out of every cash-in dollar or set up a sliding scale which, in the aggregate, will produce whatever percentage you decide is reasonable. If you want to take less profit and give more to your Division General Managers, it’s your decision. The important thing is the ‘profit center principle’ which allows you to set up a pay plan based upon true business costs rather than on wishful thinking or as a clone of someone else’s program. After all, operating expenses in Peoria are less than overhead on Park Avenue and that must be factored in.

Another consideration is the fact that the greater the number of desks you have, the greater the chance that one or more will not reach the anticipated production goal. Experience has shown that only two out of every three desks will perform as expected and prudent owners will factor this into their overall profit projections.

This pay plan philosophy is overly simplistic but was written that way to emphasize its simplicity. It is to be used as a guideline to your thinking . . . not an end all and be all to be etched in stone.

Remember, ours is an industry that is paid for results. Too many owners pay their consultants just for showing up or for activities which don’t directly lead to increased production.

Some compensation formulas are so incredibly complex that we doubt that even the participants understand them. For instance, is filling a job order where the client company pays a 20% fee worth as much as a 30% job order? Of course, the cash-in will be significantly less so the commission cuts will come from a smaller pie. We know of more than one owner who, in an effort to discourage the working of discounted job orders, subtracts the profit percentage he would have made if the job had been filled at 30% and then gives a commission based on what’s left.

Others have complicated recipes to deduct actual desk expenses from the desk against which they are incurred. For example, a desk working a local market will have fewer phone expenses than one which works a national market. A desk which heavily utilizes expensive job boards will incur larger expenses than a desk which doesn’t. Using in-house researchers will also exact a toll on desk expenses. Just keeping up with the accounting problems involved in the more intricate programs can leave consultants scratching their heads over what they will actually be paid for their efforts. And sometimes, hoping to depress desk expenses, consultants may not make calls they should make.

The traditional consensus is that revenues should ideally be split at 1/3 for the consultant, 1/3 for overhead, and 1/3 for the owner. The most recent Consultant Earning Survey shows that the average consultant share was 41.76% which included salary/draw, commission, bonuses, and benefits (where offered). This was down from previous years. And our most recent Operational Analysis for non-solo firms showed owner profits had dropped significantly to only around 18%. These findings convinced many owners that their compensation package was too generous and that in order to bring owner profit margins up, consultant compensation must come down. Obviously these will differ depending upon the firm’s architecture and other variables.

Consultant support (both technological and other) provided by owners has been a big contributor to the increase in the overhead component of the equation. It was assumed by most owners that the addition of expensive technological tools would more than be paid for by increased consultant productivity. This has not been the case.

I opined recently that since technologically-supported consultants have access to from ten to twenty times the information as non- technologically-supported ones, theoretically their productivity should improve by a similar amount. It hasn’t. In fact, in many cases, it has caused a decline in production, especially for those who haven’t yet learned that time spent hovering over a computer is time not spent personally interfacing with someone who can actually sign a fee check. If you really think that e-mail is the nirvana-like solution to hasten the process from initial presentation and sendout to an acceptable job offer, why is everyone complaining about the snail’s pace at which today’s mating dances are taking place? E-mail has allowed potential clients to break your heart in minutes rather than the days or weeks it took in days gone by.

If a human resourcer spends hours every day looking at the voluminous flotsam and jetsam that comes from the Internet, having to make instantaneous decisions on whether these resumes should go into Pile Yes, No, or Maybe, doesn’t it seem likely that they often become desensitized to the point that your first-class impact player referral might get lost in the shuffle? Especially if the human resourcer expects to get an “attaboy” or “attagirl” if their efforts result in a freebie hire.

Yet, we saw one owner who actually paid his consultants partially based upon how many resumes they sent to companies they thought might be interested. Didn’t matter whether they were interested, qualified or anything else. Hoo boy! Paying for activity instead of results is a one-way trip to bankruptcy.

We have compiled a number of compensation plans from firms of all sizes. They will appear in next month’s issue. Stay tuned.

Paul Hawkinson is the editor of The Fordyce Letter, a publication for third-party recruiters that's part of ERE Media. He entered the personnel consulting industry in the late 1950's and began publishing for the industry in the 1970's. During his tenure as a practitioner, he personally billed over $5 million in both contingency and retainer assignments. He formed the Kimberly Organization and purchased The Fordyce Letter in 1980.

Topics

Leave a Comment

Your email address will not be published. Required fields are marked *