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What to know about transparent commission schemes for recruitment consultants in Japan.

A few years ago I tried to shed some light on the difference between a Transparent and a Discretionary commision scheme that we often see offered by recruitment agencies.

It is always a common theme when talking to experienced recruiters, but I noticed that even the most experienced recruiters may not fully understand the types of transparent commission schemes on the market, not least their pros and cons. So this article aims to introduce some of the most popular transparent commission schemes for the Japanese recruitment market and to help recruiters when considering moving to a new recruitment agency.

**Please note that the numbers I am going to share are based on my own experience speaking to 100s of recruiters in the Japanese market. While I am confident that this is relevant information and very close to reality, please take that with a pinch of salt!

The “Guarantee against commission scheme” or so called “Forgiving Draw”
One of the most popular transparent commission schemes that we often find in bigger organisations is the “Forgiving Draw System”. 

Recruiters are offered a base salary and they have to cover a threshold before getting a commision. Generally we are looking at commission caps starting at 25% up to 40%. It fluctuates quarterly, based on the individual’s revenue for every quarter. For example, you would start at 30% in Q1, and move up to 35 % next quarter if you cover your threshold but would go down to 25% in the next quarter if you do not.

In this structure the threshold to cover per quarter is generally averaging 5.5M￥. Until you reach it, you can rely on your base salary, but won’t see any commision. Once the 5.5M￥threshold is reached, you enter the commission zone.

Example 1: For 1 quarter
● For someone making 4.5M￥ salary/year (1.125M￥/Q).

Your quarterly threshold: 5.5M￥
Your quarterly revenue (sales): 7M￥
Your commission (%) for this quarter: 30% of the revenue

→ Result: 30% of the 7M￥revenue minus your own cost (1.125M￥).
= 975 000 ￥ commission.

Example 2: For 1 quarter
● For someone making 4.5M￥salary/year (1.125M￥/Q)

Your quarterly threshold: 5.5M￥
Your quarterly revenue (sales): 4.5M￥
Your commission % for this quarter: 30% of the revenue

→ Result: 0￥ commission, because you did not hit your 5.5M￥ threshold. It is also likely that next quarter your commission % will fluctuate down to 25%.

The pros in this scheme are that if you don’t cover your threshold, you do not have to cover the lacking revenue in the following quarter (that is why it is called “forgiving draw system”).

The cons are that sometimes it can be challenging to cover your threshold which results in no commission and a decrease of commission on the next quarter.

The “Draw System”
The “Draw System” is another popular transparent commission structure and often implemented by small boutiques or mid-size agencies such as Morgan McKinley. Technically, we cannot really talk about a base salary but more of an advance against future commissions.

In such an outcome, your advance (let’s call it a base for the sake of this example) is calculated pro rata (proportional rate). The idea is that you only have to cover your own cost before getting a commission. The major advantage is that there is no threshold. In such a scheme, you are generally given a starting 30% commission that can go up to 40% (or more) when hitting certain yearly revenue caps through a 12 months roll. (Each firm may have slightly different rules).

Example 1: For 1 quarter (see that there is no threshold)
● For someone making 4.5M￥ salary/ year (1.125M￥/Q)

Your quarterly revenue (sales): 7M￥
Your commission for this quarter: 30% of the revenue

→ Result:  30% of the 7M￥ revenue minus your own cost (1.125M￥).
= 975 000 ￥commission.

Example 2: For 1 quarter (see that there is no threshold)
● For someone making 4.5M￥ salary/ year (1.125M￥/Q)

Your quarterly revenue (sales): 4.5M￥
Your commission for this quarter: 30% of the revenue 

→ Result:  30% of the 4.5M￥ revenue minus your own cost (1.125M￥).
= 225 000￥ commission.

The pros are that there is no threshold, so even with a quarter at 4.5M￥revenue, you still get a commission, while in a “Forgiving Draw System” because you did not hit your threshold you get no commission.

Another good point is that in such a scheme, you typically will never be subjected to a decreasing bonus scheme. It tends to be a flat start 30%, with potential to go up only.

The cons are that with a draw system, if you are not able to cover the totality of your own cost for a quarter, the remaining amount will be added into the following quarter which increases your next quarter draw. (Generally your draw refreshes at the end of the financial year so you can start a new year fresh).

Straight commission
In recent years, I have seen (in Japan at least) an increase of very small boutiques offering a straight commission structure which means that you would have no base salary or draw. The idea is that you get a certain % on whatever revenue you generate. From what I have seen in the market the average take home varies between 50% up to 85%  of the generated revenue.

The pros are that you are in complete control of your P&L (profit and loss) and can see huge earning potential from smaller fees.

The cons are that you have no source of regular income until a placement is made with often the responsibility to manage your tax declaration.

Here is some food for thought for all the recruiters wondering about transparent commission schemes.
Please take this information with caution, as there might be several differences from company to company. In the case you would like to know more about Morgan McKinley’s transparent commission structure, I would be very happy to discuss further with you.  You can reach out to me via LinkedIn or my email address.evie@morganmckinley.com