How Do High-profit Staffing Firms Manage Their P&L? Part 2
Measuring and maximizing employee profitability
This is the second in a two-part series based on a recent presentation by Rick Carlson, director of the TechServe Sales Recruitment Management Program and founder and president of Harvyst Consulting Partners and. In the first part, we looked at financial analysis for staffing firms. Carlson spoke on the essential financial metrics that every staffing firm leader should know and how to calculate and interpret them. Carlson also looked at how staffing firms are performing with respect to these metrics, by digging into data in the 2022 Operating Practices Report (OPR). If you haven’t already read part one, please review it now, as this article builds on that one.
At the end of part one, Carlson shared the importance of focusing on the ‘S’ of SG&A, as it produces the best return on investment. Payroll expenses account for 14.8% of the total expenses of the typical firm as defined by the OPR and 13.7% for the high-profit group. That similarity makes it clear that the percentage of expenses directed to payroll isn’t in itself a differentiator. In fact, Carlson notes, making cuts in this area can do more harm than good, as payroll expenses are also those that ultimately generate revenue. That being the case, it’s a better strategy to manage this area effectively, ensuring that your firm generates the maximum profit from your people. That is our focus here.
Effective Compensation Rate
“The fundamental question here,” Carlson says, “is whether your compensation plan is producing the results you want.” To answer that question, the first step is to calculate your Effective Compensation Rate (ECR) – also known as the Personal Productivity Ratio or PPR – for your revenue producers.
When calculating your ECR, first add the following expenses:
- Sales compensation (including sales managers, if they sell)
- Recruiter compensation (including recruiting managers who also recruit)
- Payroll taxes
- Group insurance
- Benefit plans
Then, divide that total expense by your gross profit to arrive at a percentage. According to the OPR data, the ECR was 34.1% for the typical firm. For the high-profit firm, the ECR was significantly lower, at 28.1%.
According to Carlson, the target percentage for this number should be between 25 and 30%. If the number is too high, you’ve likely got too many underperformers in your producing group. This Carlson notes could be due to an influx of new hires. Producers typically need time to ramp up before performing at their best. There could be other issues, though. A compensation plan that’s too rich will result in a higher ECR. One possible culprit here, Carlson suggests, is a compensation plan that pays the same for high-touch roles as for low-touch positions.
It’s also possible for the ECR to be too low. If your ECR is lower than 25%, Carlson says, your compensation plan may be ‘light’, paying your producers below the industry average. This could create a flight risk, for the employees you most need to retain.
Employee profitability and firm profitability
There are several linkages between employee compensation, employee profitability, and the profitability of the firm overall.
To begin with, data from the Operating Practices Report shows the effect that the compensation structure has on the gross margin of the firm. The OPR grouped salespeople into three categories depending on the makeup of their compensation: incentives making up less than 25%, between 25 and 50%, and over 50% of their total compensation. According to the data, salespeople for whom over 50% of their compensation is incentive produce more gross profit dollars for the firm: $951,000 versus only $100,000 for the under 25% group. Even the group in the middle – 25 to 50% incentive compensation – produces significantly less gross profit revenue, at only $357,000.
Connecting these metrics with those we calculated in part one produces some notable impacts on firm profitability. Specifically, Carlson uses the example of two equivalent salespeople to illustrate the importance of the amount of gross profit that drops to EBITDA. For an employee producing $500,000 in annual gross profit, the total cost of that employee is approximately $162,000. In a high-profit firm, as measured by the OPR, $183,000 drops to profit, meaning the employee produces $21,000 profit for the firm. In the typical firm, however, only $114,000 drops to profit, meaning that – in a sense – that same employee is a $48,000 loss.
To protect the profitability of your firm even further, Carlson suggests one more formula that can tell you when to hire: gross profit dollars per producer. To calculate this figure:
- Take your gross profit (dollars) for the period you want to measure
- Divide by the number of producers on your staff
- Divide by the number of months for that period
If the resulting figure is less than $18,000, Carlson suggests there are too many low producers on your staff, and he recommends either fixing the issue or cutting the poor performers. Between $18,000 and $29,000, there’s no need to add staff, as there’s still room for performance improvement. If the figure is over $30,000, Carlson suggests you consider adding more producers to the staff. The OPR data shows that both typical and high-profit firms are in the latter situation, at $32,200 and $33,600 gross profit, respectively.
Since the firm’s profitability is inextricably connected to the profitability of individual employees, the best decisions are data-informed decisions. Measuring producer performance is the first step to making them as profitable as possible.
Measuring and improving producer performance
Carlson recommends putting in place a structured path for both sales and recruitment staff, made up of the individual steps in their workflow.
For sales, that workflow would likely include:
- Clients sourced
- Dials to set meetings
- Client meetings set and/or conducted
- Qualified job orders received
- Candidates submitted
- Candidates prepped
- Interviews conducted
- Offers made and/or accepted
The recruiter workflow would be similar:
- Skill sets pipelined
- Resumes reviewed
- Candidates called
- Candidates screened
- Candidates submitted
- Candidates prepped
Using the steps in that workflow, you can begin to measure your current performance level. Carlson recommends four calculations:
- Placements divided by job orders = the percentage of jobs filled
- Client visits divided by job orders = the number of client visits to get a job order
- Submittals divided by interviews = the number of submits to get an interview
- Interviews divided by placements = the number of interviews to make a placement
Using these calculations, you can predict the most likely outcomes from your staff’s activities. “I like personal prescriptions for people,” Carlson says, “and what activity targets they should have.” If you know how many dials it takes to get a client visit and how many client visits it takes to get a job order, you can determine how many times a salesperson should dial to hit their monthly target of job orders. Similarly, if you know how many candidates your recruiting staff screen to get one submitted, and how many candidates are submitted to get an interview, and how many interviews it takes to make a placement, you can then determine with reasonable certainty how many candidates your recruiter should screen each week to hit their targets.
“Now I can calculate what each individual needs,” Carlson says. “They know what they need to do, and it’s based on their work.”
This process also helps with onboarding new staff, Carlson points out. When you use these calculations to develop team performance averages, you can provide new staff with activity targets to aim for – the activities that will help them be successful in their new role.
Metrics and trends from the Operating Practices Report
The OPR data provides some insight into what some of these initial targets might be.
A senior salesperson can be expected to produce $15,000 of the weekly gross profit from 3-5 placements each month. To achieve this, they would generally conduct between 25-30 client meetings per month. A new salesperson, on the other hand, produces only $3,500 weekly gross profit from 1 placement each month and would conduct only 10-15 client meetings on average.
The performance metrics at varying levels of experience apply to recruiting staff as well. According to OPR data, a senior recruiter produces a $10,000 weekly gross profit resulting from 3-4 placements monthly. To achieve this, they submit 31 candidates on average. A new recruiter can generally be expected to make only 1 placement per month, from between 20-25 candidate submittals.
Carlson notes that these industry statistics are just illustrative. “The OPR data is helpful because it’s nice to know where people are,” he says, “but for meaningful performance measurement, you need to calculate your own benchmarks, based on your own team.”
At an industry-wide level, the OPR data also highlights some thought-provoking trends:
- Sales rep performance is up year-over-year, with 49% showing as profitable in 2021, compared to 43% in 2020.
- Base salary has only risen 16.7% since 2017, but incentive compensation – bonuses and commissions – have increased by 100% in the same time period.
- Gross profit dollars generated are up 64.9% since 2017.
Protecting your profit
The three pillars that can protect and increase your firm’s profit are:
- Understanding how revenue moves in and out of your organization
- Measuring and tracking the essential financial analysis metrics and managing/using those numbers
- Measuring and maximizing employee performance
“One last note,” Carlson adds on that point. “Revenue cures a lot of ills. As long as, you’re bringing in profitable revenue, it really changes a lot of these numbers quickly.”
Want more? There was much more in Carlson’s presentation than is possible to cover here. TechServe Alliance members can view the full recording of that webinar here. We’ll be compiling Carlson’s ten-point ‘Protecting your Profit’ checklist into a handy reference infographic; watch for that coming soon.