Recruiters can be just as prone to gamble on a surging stock market as everyone else. They never used to be. For decades, search fees were paid only in cash. But then came the Internet and its "dot com" mega-million-dollar deals in the late '90s.
Recruiters saw venture capitalists and investment bankers making gigantic on-paper fortunes by getting hold of founders' or very-early-stage stock in hot new start-up companies. So-in a chorus-they said, "Let us in on the action!" Needless to say, they got burned!
All recruiters-retainer and contingency-were willing, and even eager, to help a fledgling company conserve its cash by taking all or a part of their fee in stock, warrants, or options...negotiating a separate and different deal for each young company based on its circumstances and perceived potential.
Indeed the very largest retainer-compensated firms acquired vast reams of paper in lieu of cash. Some even added venture capital activity as another part of their ongoing business. Those attitudes and activities fizzled in the dot com meltdown.
Suffice it to say that "approximately one-third of annual compensation" is still the jumping-off point for negotiating a search fee with a top firm. Cash, not paper, is preferred medium of exchange.
Recruiters choose retainer or contingency status, depending on whether or not they want to be obligated.
The reason a recruiting organization chooses one payment method over the other is the degree of commitment it's willing to undertake. The retainer recruiter promises to search diligently-even exhaustively-for qualified candidates. The contingency recruiter does not.
A retainer recruiter accepts full payment for doing a successful search as his three- or four-month billing cycle elapses. Having taken the money, he's under a heavy obligation. He's been paid for success. So he'd better come up with it. Otherwise his reputation and the future of his business will suffer. Even if the client is capricious in rejecting candidates, or makes unrealistically low offers, or in any other way fails to recognize good candidates or drives them away, the retainer recruiter must try to deliver the desired result to someone who's already paid for it.
The contingency recruiter, on the other hand, has no such problem. His or her "client" pays absolutely nothing for effort, nothing for candidates...unless and until someone the recruiter submits is actually hired. If, what the employer wants proves difficult to find, or hard to deliver at the intended salary, the contingency recruiter shifts her attention to an easier target.
Here's the contingency recruiter's philosophy, as summarized to me by one of the finest people in that field:
"I don't mind if I don't get paid for every speck of work I do. I can fill three easy ones, John, in the time it takes you to do one hard one on retainer. And at the end of the year, I'll bet I count up as much or more money than you do. And everybody I collect from is somebody who actually got an employee from me. I tried retainer, and I stopped. When you accept a retainer, the employer thinks he owns you. I value my freedom!"
Touche! The point is well taken. After 30 years as a retainer recruiter, I agree. "Three easy ones" can be done on contingency as quickly as one "hard one" on retainer. However, retainer assignments tend to be at higher salaries, so fees tend to be higher. What makes the "easy ones" less difficult is that they're usually at a lower level, where both the number of openings and the supply of good candidates are more numerous.
So who knows who's ahead on total fees at the end of the year...retainer or contingency recruiters? Both types have coexisted for 60 years, and the industry today is split about 50 / 50. Chances are, we'll have both types for many years to come.
Now you know the two payment methods, and why a recruiter chooses one or the other.
As we'll see later, your self-interest is different with each type. Therefore, it would be convenient if each would stick to his or her chosen method.
Unfortunately, some recruiters of both types switch back and forth.
You can probably guess why some recruiters sometimes shift gears.
Contingency firms also accept retainers.
Many contingency firms "also accept retainers," or "also do search" (meaning the same thing). The idea is to get the employer to pay a fee for the firm's attention, and thus nail down more time and effort than his or her opening would otherwise merit under the "easiest-first" priorities of contingency operation.
There's also another interesting wrinkle when a contingency firm accepts an optional "retainer." Normally the contingency firm is one of many such firms "working on" the employer's "listing," and must race the others to fill it. The retainer arrangement gives the firm an "exclusive" on the job, and a respite from the race. Nonetheless, being accustomed to focusing on openings that are easily filled, the contingency firm may still balk at giving too much time to a resistant project "on retainer."
The solution: accept retainer payments during several months of exclusivity, and afterward, if the job proves hard to fill, merely refund all or most of the retainer...thus pleasing the "retainer" client with the firm's "honesty," while winding up no worse off than if the same work had been devoted to the opening on a non-exclusive contingency basis. Such a refund is never made by a true retainer recruiter.
Retainer recruiters sometimes "lob one in" on contingency. Occasionally, a retainer recruiter may volunteer a candidate without being paid on retainer to look. But not often. And only under cover of an excuse (more about this later).
The reason for the retainer recruiter's furtiveness about his or her rare grab for a contingency fee is that, if it becomes known that he's willing to provide candidates without being paid to find them, then clients will ask for more "freebee" candidates, rather than pay the customary retainer.
Since retainer payment is more stringent and prestigious than contingency, the contingency recruiter can accept retainer assignments without jeopardizing his or her contingency status. On the other hand, the retainer recruiter cannot toy with contingency activity without endangering his or her retainer status.
