The Secret Guide to Recruitment Fees
Recruitment fees come in all shapes and sizes. Most have only a light correlation with the work done and the outcomes that employers want to achieve.
I want to discuss the practices, illogical and misplaced incentives of the market in the hope that Employers negotiate better with Recruiters; Recruiters start using more logical pricing metrics; and everyone starts working towards better outcomes. Let’s make the recruitment pricing market work better for everyone.
Fees can be calculated as a percentage or fixed. There are retained, exclusive and success-basis fees. Fees can be refundable and non-refundable. Fees can include a warranty or rebate period. Fees can be tied to specific outcomes (make a hire) or targets (generate a certain number of suitable profiles within a period of time).
All of these factors can be adjusted to ensure positive outcomes, better recruitment practices, shorter time-to-hire and lower overall costs-to-hire. With experimentation, creativity and a willingness to invest in long-term value, employers and recruiters can do better.
The most common recruitment fee is calculated as a percentage (from 5% to 100%) of all or part of the hire’s actual or simulated annual salary. These fees can be capped (not to exceed $X amount) or have a minimum charge (at least $X will be charged). In many markets, 18% to 25% has become a default range.
The percentage charged is based on what the market can accept and have no relationship to the actual work required for a given project. Recruiters think about percentage fees as “what is the highest possible percentage that I can charge without loosing the work?”. Employers think about percentage fees as “what is the lowest possible percentage I can accept and still get a reasonable pipeline of candidates?”.
In markets and for positions where there is an overwhelming number of qualified job seekers, easily accessible, percentages will be closer to 0%. When the recruiting firm has leverage either through an exclusive service agreement, brand or position fees can even exceed 100% of the annual salary.
On the high end of the recruitment market, just like luxury bags, companies pay an extreme premium for the brand (and story) of the recruiting organisation.
One major failure of percentage fees is that the amount charged has no correlation with the actual quality or volume of work done. A recruit could be paid a premium simply because the candidate selected for the role is higher paid. Likewise, a company could pay less simply by selecting a candidate who is at a lower salary band. The percentage doesn’t provide accurate quality information. A low percentage on a high salary role can provide an equal fee at the end of the day to a high percentage on a low salary role. Without more detailed information, percentage alone ensures inconsistent work across varied roles.
I used to run my teams with a very high percentage fee to help prequalify the work. Companies willing to pay the higher percentage are more likely to need help.
Percentage fees also create motivations which both parties likely want to avoid. Recruiters are encouraged to find higher salary candidates and boost expectations. Employers are encouraged to press down salaries and remove components which might increase the salary calculation.
Percentage fees remain a standard in the recruitment market due to a lack of information about other options and a reluctance by all parties to experiment with different approaches.
When I started in recruitment, I was confused by percentage fees. “What is your budget to hire this role?” I would ask my clients. They would reply “XYZ percentage of base”. That isn’t a budget to hire. Doesn’t it make sense to just fix a fee for the hire? My question was never answered.
Still rare but increasingly common in some areas are fixed fees. I prefer fixed fees as they allow for many things that percentage fees do not. Fixed fees can more closely represent the actual work done for the project and be used to measure additional value-added services. Fixed fees remove any possible risk of the recruiter pumping up salaries or employers pushing down. The actual cost-to-hire that role is know from the start of the project.
Fixed fees make it possible for the recruiter and employer to negotiate pricing based on specific components (guarantees, services, add-ons, etc) which add to or subtract from that actual cost. Once costs are fixed, different providers and services can be compared.
Employers and recruiters tend to avoid fixed fees due to company policies which require percentage fees or fear of paying more / being paid less. Percentage fees make the market opaque and employers, recruiters try to leverage that to their advantage. Fixed fees make the costs and services largely transparent.
I’ve been told by companies that I have to charge them a percentage fee even when my fixed fee quote would have been cheaper.
Recruiters generally dislike fixed fees because they see it as giving away one of the negotiation tools that they use to leverage. Employers often feel that fixed fees could mean they “over pay” if they happen to hire a cheaper than expected candidate.
These concerns with fixed fees are misplaced. By fixing fees, employers have a unique opportunity to directly encourage behaviours they want from their recruiters and discourage other behaviours. Recruiters are offered more clarity on revenue forecasts and able to better control the services / work required and provided for each project.
I prefer fixed fees because negotiations become logical and straightforward. I no longer need to find creative ways to justify an additional 1% to fee which simply makes no sense. Instead, I can quantify different parts of the service and offer reductions in price in return for trade-offs on the service itself.
No reference check? Discount. No guarantee? Discount. Unlimited guarantee? Additional charge. Additional screening of all candidates? Additional charge.
Fixed fees add a layer of transparency which is needed within the recruitment industry. Professional services firms don’t charge on percentages unless the work is purely speculative. We can do better to drive the right behaviors. Embrace the experimental opportunity of fixed fees.
There are Retained, Exclusive, Contingent, Deposit, and Subscription fee types within the market. These are often used wrongly by recruiters and employers. All can be applied to drive specific outcomes that employers want from the process.
The employer retains the services of the recruiter by paying a certain amount upfront or upon a certain trigger point in the project. Historically, retainers were used to commit the services of premium recruiters. Some executive search firms still operate on a pure retained model similar to some lawyers or consultants. The practice has widely become unpopular due to abuse on both sides of the market.
Many recruiters pitch retainers as a way to get additional short-term revenue without considering the repercussions of taking money for a recruitment project which may not be full defined. Employers often agree to retainers without clear performance expectations and refund-clauses. This has created a lot of frustration within the retainer market. Employers (often rightly so) feel cheated by recruiters who were paid upfront and didn’t deliver. Recruiters end up with unfillable roles which need to be requalified and reworked, yet they feel obligated to fill the role “as-is” because they took a retainer.
Retainers need to be structured with clear delivery targets, refund clauses and upfront alignment with the employer on the outcomes needed for the project. Otherwise, no one should be retained on work that isn’t defined.
Retainers should be used when the employer needs more than “just CVs” from a recruiter. Market intel, market maps, compensation structures, talent benchmarks and other detailed research, process-driven recruitment approaches require a retained structure.
The employer grants a period of exclusivity to the recruiter guaranteeing the employer will not work with another recruiter. In some cases, the exclusivity may bind the employer to making the hire only via the recruiter. When the exclusivity is binding on the role, the recruiter will be paid even if the employer hires the candidate via another means (internal, advertising, etc).
Exclusivity is often misused by employers and recruiters. An employer may define a very narrow window of exclusivity for a few days or weeks. If the recruiter doesn’t fill the role within that time, the employer opens the requirement to another recruiter. This can often create additional mess within the market and extend the time of the search. Just as the first recruiter is understanding the requirement, it is opened to another firm.
Recruiters can use exclusivity as a reason to be complacent in the search. If the recruiter is overconfident, they may not cover the market within the agreed timeline. The exclusive recruiter may simply focus on known contacts and pressuring the employer to decide on what they have in hand.
I prefer rolling-exclusivity where there isn’t a defined expiry to the exclusive commitment. The employer can revoke the exclusivity at any time with justification. This allows for a mutually respectful relationship between the recruiter and employer and the reassurance to the recruiter the if they continue to keep the client informed and aligned, they will likely retain their chance of filling the role and getting paid.
Exclusivity should be used carefully when there is a benefit to a single recruiter representing the employer in the market and the project will not require as much upfront work as a retained project. Exclusivity is an excellent way to build loyalty with recruiters as they have visibility on getting paid for the work done. With agreement and alignment on expectations tied to the exclusivity, it is an excellent way to drive successful recruitment projects.
Recruitment projects where fees are contingent on the recruiter helping hire someone are likely the most popular structure. Percentage-fee based contingent recruitment is the market standard. Misuse of the structure is a source of frustration with recruiters, employers and job seekers.
Contingent recruitment is also referred to as success-based. The recruiter involved in the project is only paid upon successful hire of someone introduced for the role.
As a contingent recruiter often has little visibility on their ability to get paid for the work being done on a project, they will need to work on a high volume of projects and spend less time on each project. Contingent recruiters drive the transactional feel of the recruitment industry.
Recruiters like contingent projects when they are uncertain of their ability to deliver the role and want to minimise obligations. If the recruiter enjoys transactional, volume work, they will prefer contingent projects where systems, mass-emails and advertising is common.
Employers use contingent projects to limit risk as much as possible. The structure allows the company to work with as many recruiters as they want in whatever structure they want. The downside is the employer has no control over the quality or type of work the recruiter does. Since there is no mutual obligation, the employer isn’t able to ensure the recruiter works in a professional manner. The recruiter is often indirectly incentivised to act unprofessionally.
Contingent recruiters are incentivised to do whatever possible to “fill the role and get paid”. Many of these activities aren’t in the best interests of the employer.
Contingent recruitment should be used carefully by employers. Contingent works well when there is a large volume of people qualified for a requirement and the recruiter is being hired largely to screen and shortlist. I recommend employers select a small number of contingent agencies and review them regularly to ensure they are representing the company well in the market.
Contingent agreements with recruiters can also be useful for building speculative/unsolicited introduction channels if of interest to the employer. Without obligation on both sides, the recruiter often won’t mind keeping the employer updated with interesting or relevant profiles on the market.
Mandated and Speculative
When an employer requests a recruiter to work on a hiring project, the request is considered a mandate. If the recruiter introduces someone to the employer without a mandate, the introduction is speculative. Some recruitment firms work only on clearly mandated work and some work purely on speculative sendouts. Most recruiters do a mix of both to try and optimise their coverage of the market and introduce meaningful people to the right company.
Without prior-agreement, the employer can consider any speculative introduction as free. Most employers will recognise the introduction in some form, but this is becoming a messy part of the market. Many recruiters will SPAM out resumes to every employer they can think of in the hope that one lands. Often the recruiters do so without permission of the people involved. This creates a reputation fallout for the recruiters, employers and can send the wrong impression about the professional to the market. When the recruiter discovers the client has hired the person, they will attempt to claim a fee.
I encourage all employers to refuse to pay for any speculative introduction of a resume if the recruiter doesn’t confirm interest and agree something in advance of sharing the resume. By paying fees for SPAM, employers indirectly encourage a behavior that violates personal data-protection. We can do better.
The majority of my work is on some form of mandate. I do make speculative introductions to clients that I know well. I will only provide resumes if the client requests further details. I also make free speculative introductions of people I know well who are out of work or whom I want to help along under the IbackU program.
If the employer is interested in speculative introductions, I recommend putting in place some kind of agreement which governs speculative resumes which are hired at a fixed rate. This kind of structure will reduce the mess around the edges.
Refundable and Non-Refundable
Any fees paid to recruiters can be governed by some form of refund clause or be non-refundable. I encourage employers and recruiters to balance the refunds against the outcomes required.
As it is generally difficult to get money back from a recruiter, I recommend instalment payment schedules over refund clauses. This allows payments to be made according to agreed targets or commitments. At the point of each payment, the employer will be comfortable with the work delivered up to that point.
Ownership and Hands-off
Whenever a resume is introduced by a recruiter to an employer there is a period of ownership where the recruiter will claim a fee if the person is hired. The default market practice is 12 months.
Some employers will require different structures of ownership. Ownership can be limited by location or region, specific to a single or set of roles, or entity. Recruiters will try to define ownership as broadly as possible.
I recommend making ownership subject to the freshness of the relationship with the recruiter, person and employer. If the recruiter hasn’t been involved after speculatively sending in a resume 6-months ago, it doesn’t make sense for the employer to pay them a fee. If the recruiter has continued to follow-up, keep-in-touch and manage concerns on both sides, even after 18 months, the recruiter is owed a fee.
Ownership rules like the other aspects of recruitment agreements can be used by recruiters and employers to encourage positive behaviour. Through the right incentives, we can make recruitment better.
Recruitment work is almost always guaranteed. Between 5 to 10% of hires fallout within the first 6-months, so recruitment agreements normally offer one, three or six month guarantees on hires staying with the employer.
Employers can request discounts if the opt for no-guarantee placements. Recruiters can offer much longer guarantees of one year or more. The risk to guaranteeing a placement longer is limited. Recruiters don’t like longer guarantees as there are concerns about being locked into a “bad” employer long-term. There is a general feel within recruiters that long guarantees make the relationship one-sided to the employer.
I prefer longer guarantees tied to the needs and concerns of the hire. If the employer needs the person in the role for at least two years, that should be part of the project. Recruitment fees can always be broken into instalments, split up and structured differently depending on the needs of the role and employer and potential concerns with the person themselves.
By structuring guarantees properly, employers and recruiters can build better long-term relationships and be more involved in the post-hire performance of the people hired.
The secret to recruitment fees is the diversity of levers that employers and recruiters can use to create a relationship which produces long-term, value. Present market practices are inefficient and don’t incentivize the right behavior. We must do better.
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