The Best Compensation Strategies for IT Staffing & Engineering Staffing Firms

Are you struggling to find the right balance between keeping your team motivated and controlling compensation costs at your IT staffing or engineering staffing firm? Have you wondered if your current compensation plans are truly driving the performance you need, or if they might be holding your business back?

These are all valid questions. Developing a compensation plan requires fact-based strategies. A good or great compensation plan should be easy to understand, competitive, and affordable all at the same time.

No matter if you’re currently dealing with rising salaries, motivating your sales or recruiting teams, or trying to track performance over time – it’s really important to get it right. Without the right knowledge and compensation strategies, this can feel like an impossible task.

Industry expert Tom Nunn shared some of the most effective strategies and best practices for designing effective compensation plans, including how to refine your compensation approach, reward your top performers, and achieve long-term stability for your business.

Compensation Tips, Trends, and Common Pitfalls

These days, compensation plans are under pressure in part due to inflation which has pushed up base salaries while commission percentages have remained relatively stable.

Tom Nunn advises that staffing firms focus on weekly or monthly gross margin dollars as a reliable method for calculating commissions. He also mentions that so-called “cost of living adjustments” (COLA) should be avoided when raising salaries. This is because they can disconnect compensation from performance. Instead, make sure that any raises or bonuses are tied to measurable achievements.

One of the most common pitfalls is overpaying experienced producers who may not deliver on their promises. When you offer high salaries without performance-based rewards, this can easily lead to inefficiencies. As Nunn explains, “You could be working 12 hours a day, but if you’re not very good at what you do… the effort is not what you should be paid for. It’s the results.”

Another thing to avoid is complex compensation plans that are hard to understand or manage, as they become less effective this way.

Compensation Strategies & Best Practices for Compensation Plans

A good compensation plan is simple, competitive, and incentivizes the right behavior. Some of the best practices for compensation plans that you want to follow are:

• Focus on Gross Margin (GM): As Nunn says, “Good compensation plans motivate desired behavior… if you’re paying out based on gross margin, it will drive good behavior so that you’re negotiating well.”
• Carrot vs. Stick: Nunn advocates for the use of carrots (incentives) over sticks (penalties). Providing bonuses or commission increases for hitting specific GM quotas can drive performance without creating a negative work environment.
• Activity-Based Incentives: Sales and recruiting staff can be rewarded for specific activities such as client meetings, starts, or candidate connections. A point-based system, where top performers receive quarterly bonuses, is one way to guarantee steady activity.
• Modeling Changes: Before making any changes to your compensation plans, make sure to model the impact. You might want to use tools like Excel to forecast how adjustments in commission rates or bonuses will affect your profitability.

Bonus Structures and Incentive Plans

According to Nunn, one of the biggest drivers of profitability is new customer growth. This is why he suggests offering bonuses for breaking into new accounts and expanding business within those accounts. He says that a tiered bonus structure based on gross margin and growth is an effective way to reward salespeople who not only land new clients but also grow them over time.

Another bonus structure involves activity-based metrics. What could this look like? For example, you could create a score sheet that awards points for every client meeting, phone call, or candidate submission. High achievers would then receive bonuses based on their overall performance at the end of each quarter.

Managing Gross Margins

Ever heard of the “rule of thirds”? This is a guide for managing gross margins. Nunn explains that top-tier staffing firms allocate one-third of their gross margin to cover fully burdened sales and recruiting costs (salary, commissions, bonuses, employers benefits and taxes. Another third goes to cover all other operating expenses like rent and job boards. The remaining third is profit. With this balance, compensation can remain competitive while profitability is protected at the same time.

Another aspect of gross margin management is putting approval processes in place for deals with low gross margins.

Let’s say, for example, that any deal with a gross margin below 25% would require manager approval. This could guarantee that low-margin deals don’t negatively impact your overall profitability.

Promoting Leaders and Retaining Top Performers

Promoting a salesperson to a leadership role simply because of their success in sales can be a mistake. Nunn says that “great sales leaders produce great salespeople.” What does this mean? Basically, effective leaders should focus on developing their team, not just their personal performance.

So how do you incentivize team leaders to drive overall company success? You reward them based on the gross margin growth of their team. This is a performance-based bonus system.

Staffing firms should also consider using ramp schedules when adjusting compensation plans for top producers. This can involve a three to six-month period where commissions are trued up to make sure that top performers don’t feel penalized by new plans for newer employees.

Tracking production over tenure (POT) can help you make sure that their performance is being measured appropriately over time.

Discipline and Execution Lead to Growth

Ultimately, the firms that succeed are those that have a “discipline of execution,” as Nunn describes it.

Implement clear compensation strategies, focus on leadership development, and make hard decisions when needed. This is how you, as an IT staffing firm or engineering staffing firm, can achieve sustained growth.

You can use tools like margin calculators, scorecards, and modeling tools to help you stay on track and stay profitable.

And lastly, don’t forget that compensation strategies for IT staffing and engineering staffing firms have to evolve with the market.

This is how you motivate the right behaviors, reward your top performers, and ultimately drive long-term profitability.

TechServe Members can view the full webinar here.

Meet Tom Nunn and gain further insights at the 2024 TechServe Executive Summit.