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Executive Recruiters: Two Types, Depending on How They're Paid

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You couldn't be above, or even reaching for, $100,000+ and not already know a lot about executive recruiters.

Probably you've been placed in one or more jobs yourself by a "headhunter." And chances are, you've also used professional help in identifying people to work for you.

So, what can you possibly find out that you don't already know?

Plenty! Because we're going to look at recruiters from an entirely new angle...your self-interest And that's not the way they've been presented to you up to now.

There are, of course, two kinds: contingency and retainer. The difference is in how they're paid. The contingency firms get paid only if and when someone they submit is actually hired. And the retainer firms are paid for their professional skill and effort, regardless of whether anyone they provide is hired.

Even though the employer pays both types...and you never do...your self- interest is very different, depending on which type you're dealing with. And often that's not easy to determine. These days, both look the same and call themselves by the same names. Even more confusing, both types may switch their compensation method, when it suits their self-interest... not do so.

Moreover, it's not a matter of "good guys" and "bad guys." Your self- interest very seldom lines up with either type. So in this and later chapters, you and I will figure out:

  1. What's best for you with both types, and

  2. How to tell them person, on the phone, and on the Internet.

Even when a recruiter you've known for years shifts opportunistically from one mode to the other, you'll recognize that shift, and react accordingly.

But we won't stop at polishing your reactions. You're going to reach out to these people, and get them to do more for you.

When we're finished, you'll know as much about recruiters as if you'd spent a decade of your life working in their industry.

Understanding their hidden financial arrangements is the first step toward understanding all headhunters who come your way.

On the surface, contingency and retainer recruiters are far more alike than different. Both:

Fill executive positions. Recruiting is the same function, regardless of payment method.

Are paid by the employer. You won't pay either type.

Range in size from small, intimate firms to multi-city giants. You can't tell them apart by the number and size of their offices.

Have handsome quarters. Neither type has a monopoly on ambience.

Call themselves by the same names. "Executive Recruiters," "Management Consultants," "Executive Search Consultants."

Both types use all the same words. And the public calls both kinds "headhunters."

Keep vast numbers of resumes. Both will accept your unsolicited resume and both may keep it on file, along with the resumes of people they've interviewed.

Fill jobs from resumes in their databases and on-paper files. That's why they both maintain extensive records.

Telephone employed executives. When your phone rings, either type may be calling.

The fundamental distinction between the two kinds of firms is in how they're paid.

Contingency Payment

Contingency recruiters are paid by employers only if and when someone they submit is actually hired. They may just go through their information and send over a few resumes. Or they may do telephone investigation and persuasion to develop candidates, and then interview them, to screen a highly appropriate group for the "client" to see. Either way, these recruiters are operating strictly "on contingency"...on the chance that someone they submit will actually get hired. Otherwise, there's no fee. If the employer hires his or her in-law, a next-door neighbor, somebody who mailed in a resume, someone submitted by a different contingency recruiter, or nobody at all, the contingency recruiter gets nothing for his efforts.

Retainer Payment

Retainer recruiters, on the other hand, are paid by the employer regardless of whether anyone they submit is actually hired. They're compensated for their professional skill and effort. Like the doctor, who's paid whether the patient lives or dies, and most lawyers, who're paid whether their case is won or lost, the retainer recruiter is paid merely to attempt a solution. He or she is not required to achieve one. In-laws, neighbors, contingency-recruiter-submissions, mailed-in resumes, internal promotions, and positions left unfilled don't keep the retainer recruiter from being paid.

  • Does it sound like the retainer recruiter has the better deal?

  • Why doesn't every recruiter operate on retainer, rather than contingency?

  • Everyone always asks these logical questions.

Approximately half of the executive recruiting organizations in America today operate "on contingency," and the other half work "on retainer." With equal numbers on each side of the compensation issue, the answer certainly isn't that the contingency firms don't know what the retainer firms are doing. Indeed, many contingency firms also accept retainer assignments, and retainer firms sometimes glide opportunistically into the contingency mode.

Percentage fees are about equal for both types.

Clearly, which method of payment a firm chooses is not explained by the amounts involved, because fees for both are very similar. The leading retainer firms usually charge one-third...33.3%...of estimated first-year's compensation of the executive sought.

Most bill their "1/3 fee" in monthly thirds or fourths during the three or four months the search requires. If the search takes longer, there's no further fee. If, when the search is over, the recruited executive earns more than the early estimate, a final bill adjusts the fee upward. A few price-competitive retainer firms charge 30% and fewer yet charge 25%, but 33.3% is typical among top- ranking firms. A very rare few charge a fixed negotiated fee which may come to even more than 33.3%. Of course, during a recession all of those proud firms price-compete aggressively. All retainer firms allow cancellation of the project, which cuts off the billing. If termination occurs after the three or four months of billing, the recruiter keeps the full fee.

On the other hand, the traditional fee for a contingency firm is "1% per thousand, up to a maximum of 35%." This formula yields 35% of estimated first- year's income on jobs over $35,000 and 26% on a $26,000 job. Retainer recruiters hardly ever work on positions under $100,000, whereas contingency recruiters often do. During recessions, of course, fee-cutting abounds.
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