The Evolution of Recruiter Compensation - A look at different compensation models

Recently, I was looking at the structure of different recruiting companies and how they compensate their recruiters. Recruiter compensation is a very interesting topic since there is no standardization in the industry. Our profession is not like a doctor (however, sometimes we can get paid like one), nurse, dentist where salaries and compensation are set by some governing board. Instead, recruiter compensation is all across the map. Some firms promise you a 'book of business' - (basically job orders that the firm cant fill!) and a guaranteed salary (usually around the 30k/yr -35k/yr mark) + 20%-25% of all potential billings that you bring into the firm. Usually, the larger firms will follow this compensation model. They boast that it is very easy under their environment to bill at least $250,000+ given the support they provide you. The recruiter can generate a gross income of 80k/yr - 90k/yr. I guess with some bonus potential, the recruiter can make 100k/yr.

Unfortunately, what is not said about this compensation model is that you are working as an employee to the company which means that a) you are taxed as an individual and are issued a T4 slip and b) you are not allowed to make deductions against your gross income. In Canada, if you are making close to 100k/yr, then the government will take approximately 47.5% in income tax which lowers the net income of the recruiter compensation to about 45k/yr - 50k/yr as a take home salary. (Please excuse me as these are rough numbers).

Compare this to a different compensation structure. Other recruiting companies don't offer you a base salary but say that they will payout a recruiter approximately 50% - 60% of gross income. Given the same scenario as before, if a recruiter can bill at least $250,000+ (given once again that there is a book of business for the firm - basically unfilled job orders that the recruiter can manage) , then the gross income would be $125,000. Now this income is considered as gross revenue (instead of personal income) and from a taxation stand point, recruiters can add numerous amounts of allowable deductions bringing this gross revenue down quite a bit. On top of this, the corporate taxation in Canada is quite a bit lower than personal taxation and the recruiter can probably bring home a net income of $90,000 per year.

This is a pretty big difference when comparing these two different models. The last model is being an independent recruiter. Incorporating yourself into a business and working as a lone wolf. This is a dangerous scenario and I would only advise this route to the most senior recruiter. Even though the risks are great, the payoff is even better. The chance of owning your own boutique recruitment organization, building equity within the organization and having total control of the expenses is a good feeling to have. Working in this way, the recruiter would not have the trusted support / contacts (book of business of unfilled job orders) of a larger organization in which he/she can rely upon. This would probably affect his/her billings in the beginning but in the long run, the payoff can be big. If successful, the recruiter is now setting up the business to either a) be sold within the next 10 - 15 years or b) growing a successful practice from scratch. The recruiter now transitions himself/herself to become a business owner. He/She is now responsible for hiring employees to manage his overflow of job orders and possibly receiving some form of override commissions on his/her employees on top of his usual commissions that he/she would make on his own placements.

The last compensation model is probably the hardest but most rewarding. There is a different skill set that needs to be learned when transitioning a recruiter to a business owner status. The business owner now has to deal with different recruiter personalities, the effect of hiring/firing a potential individual as it relates to an existing team, company culture and last of all taxation.

There are many different recruiter compensation models. Normally a recruiter would start his career at a large firm learning basic fundamentals of recruiting. Some will evolve and learn that it may be more profitable for them to go to a boutique organization. Even fewer would take the last step and turn themselves into a business owner. Others would not want to touch the entrepreneurial lifestyle and stay safe in a base salary + bonus environment. I guess it depends on what he/she is looking for in a recruitment organization.

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Comment by Will Branning on August 10, 2010 at 12:32pm
Good post Brian! I have worked as a HR Recruiter on strictly a salary, as a Recruiter at a botique firm with a monthly draw and commission, and now as a member of a botique recruitment firm and an independent contractor (commission only, but a relatively high commission). The potential rewards in my current situation are definitely higher for me versus either of my previous one's...perhaps one day I'll take the plunge and "own" my own sounds like tax rates are higher in Canada than the US!
Comment by Barbara Goldman on August 10, 2010 at 2:03pm
Interesting discussion.

We actually have two models. One for employees, which is a draw against 40%, and one for independents, which is 70%.

It seems like a large disparity, but there are advantages to employees besides the cost of benefits, there is the advantage of actually being in the office as things happen, it is motivating.

Our independents earn 70% because they are coping with their own expenses, and we know they left a firm to make more money. The advantage of working within a group, and having the opportunity to work in teams makes sense for the independent operator.

Our employees are also able to become contractors. There is no reason for us to lose them if they want to go out on their own.
Comment by Brian Pho on August 10, 2010 at 2:51pm
@Will: We are a country with high taxes -- unfortunately....
@ Barbara - Your comp. plan sounds good. Flexible according to who comes in your door. I know other recruiting organizations (up here in Toronto, ON) that won't do commission only (independents) and want everybody on a 30k/yr (base) + bonus structure....
Comment by Jerry Albright on August 10, 2010 at 4:03pm
After several years of success in recruiting there is absolutely NO reason to work for an agency unless you are the type of person that needs to see other people at the coffee pot each morning.

The elusive "book of business" turns out to be a bunch of req's off some Vendor Management free-for-all with no direct contact with clients, no ability to influence anyone and a non-stop race to pull applicants off Monster and Dice before your competitors do.

With today's technology - everything you need is right at your fingertips.

If you can make a placement "all by yourself" then you should. It pays 100% commission.
Comment by Brian Pho on August 10, 2010 at 4:11pm
@Jerry Albright: Very well said.......
Comment by Robin Eads on August 10, 2010 at 4:17pm
I'd say the only reason a good recruiter should work for a firm, is if they don't like to do (or aren't good at) business development. If they don't want to run a full desk, working for themselves is not the answer.
Comment by Jerry Albright on August 10, 2010 at 4:26pm
Robin - there is plenty of room out here for recruiters who are better at one half of the job than the other. I know dozens of recruiters who spend their time working on split placements and do very well.
Comment by Robin Eads on August 10, 2010 at 4:48pm
Really? I've never had any success with that, without ultimately someone trying to steal from the other. (usually from me) so I quit doing it.
Comment by Jerry Albright on August 10, 2010 at 6:27pm
There is a thriving community of recruiters working together. It's happening all around us - or at least all around me. It's great!

It does take time though - sorting through recruiters who "sound" like they can help but don't do anything in the end. Put enough effort into it and find people you work well with and life is good!
Comment by Brian Pho on August 10, 2010 at 6:32pm
@Robin -- Most of my business is through 50/50 splits. It depends on how well you develop the relationship with the other recruiter. If successful, it can increase your business 10 fold..... (or add that extra gravy on top of your meat and potatoes business).....


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