In this article, we examine data from US industrial staffing firms to highlight trends in internal employee compensation levels and compensation structure. Not surprisingly, personnel expenses represent the largest category of operating expenses for staffing companies. Personnel expenses equaled a median 54.8% of gross profit in our 2H16 Staffing Industry Benchmarking Consortium (SIBC) study, with the remaining gross profit dollars going to facilities, IT, and marketing expenses, and then flowing to operating income. For industrial staffing firm owners and executives, astute management of compensation expense and compensation strategy can achieve the dual goals of maximizing profitability while incentivizing and retaining internal talent. To aid executives in their decision-making, we note the following trends.
1. Compensation for internal employees at industrial staffing firms is on the rise.
With the unemployment rate falling to 4.3% in May, the supply of available workers is now smaller than it has been in many years. And, consistent with textbook economics, the shortage of workers has spurred acceleration in wage growth as competing employers bid for the services of each available worker. The accompanying chart shows year-over-year growth in average hourly earnings reported by the US Bureau of Labor Statistics from 2011 up to May 2017. Acceleration is apparent during 2015 and 2016, although the growth rate has eased slightly so far in 2017.
Click on chart to enlarge
In our 2016 survey of 10,099 internal employees of staffing firms, we observed that a net 62% of industrial staffing firm employees reported an increase in salary, a higher proportion than the net 54% reported by employees of all skill segments of staffing. In looking at the magnitude of pay increases for those reporting an increase, 65% of industrial staffing employees indicated a 1% to 8% raise, while the remaining 35% reported an increase of 9% or more. For employees of all skill segments of staffing, 57% of employees noted a 1% to 8% raise, while the remaining 43% received 9% or more. This data implies that while pay increases were more common at industrial staffing firms, the pay increases were more concentrated in the 1% to 8% range. More details can be found in our Internal Employee Compensation Estimator: 2017 Edition.
For staffing executives, rising internal compensation costs may suggest a need for vigilance regarding both expense management and pricing discipline with clients. On the expense side, executives may wish to target efficiency gains or explore greater outsourcing to reduce internal payroll. On the revenue side, executives may need to focus on maintaining gross margins that can support their desired level of profitability, given rising operating expenses.
2. Variable pay remains a substantial portion of total compensation at industrial staffing firms, although less so than in other segments of staffing
Data from our Internal Employee Compensation Estimator indicates that variable pay — bonuses, commissions, and other incentive cash payments — represents a substantial portion of total compensation for industrial staffing employees. For recruiters focused on placing temporary workers, variable pay was a median 17% of base salary, and spanning a midrange from 10% to 29% of base salary (the midrange spans from the 25th percentile to the 75th percentile). For salespersons/account managers, variable pay was a median 43% of base salary, with a midrange from 21% to 79%.
Variable pay at industrial staffing firms made up a smaller portion of total compensation than for the broader staffing industry at large. For all segments of staffing combined, recruiters reported variable pay equal to a median 33% of base salary, and salespersons/account managers indicated variable pay equal to 50% of base salary. The difference may in part be due to the more specialized skills required for some types of professional staffing (for example, physician recruiting) where higher amounts of variable pay are offered to reward performance. Another factor may be the relatively more mature business model of industrial staffing, with more well-defined processes, resulting in more fixed rather than variable compensation.
For staffing executives, decisions on compensation structure can have a profound impact on both profitability and the retention and engagement of their internal talent. Given the present amount of uncertainty in the economic outlook — both potential upside and downside — due to government policy uncertainty and from being in the later stages of the economic cycle, staffing executives may be well advised to test their compensation plans under a wide range of potential scenarios.
