How Firms Charge for Search AssignmentsRecruiting firms bill their work in two distinct ways. Contingency firms are paid only when their client's position is filled by an executive identified by the recruiter. If another candidate gets the job, the recruiter gets nothing. Retainer firms, in contrast, are paid regardless of the outcome of the search. They may be hired to work on a specific assignment, or they may be put on a true "retainer" to work on assignments on a continuing basis, but in either case, they will submit invoices regardless of their rate of successfully closing searches.
The most common approach to fees is to charge a percentage of the new executive's first year compensation. For many years, the benchmark has been either 30 or 33.3% for searches performed within the United States. Fees of 35% or more are sometimes charged when the search has to be international. Sometimes, recruiting firms will offer discounts from these percentages in return for a guaranteed volume of assignments. At least one Top 20 retainer firm offers retroactive discounts when annual billings hit certain pre-defined targets.
Percentage-based fees are used about 80% of the time. Alternatively, some recruiters bill based on a fixed fee for the assignment. This approach is becoming more common for the most senior management positions with very high salaries. Recruiting a top-notch CEO who will demand a million-dollar package of salary, bonus and options is certainly a challenge for executive recruiters, but clients tend not to be happy about paying $300,000 when the "search" involves only the handful of executives who could step into the position.
Occasionally, recruiters will work on some other basis, such as hourly rates for time spent, or even (with some venture capital backed start-ups) for equity instead of cash. But the percentage model remains the standard approach in the profession.
Timing of Payments
Retainer firms have varying policies concerning when they submit invoices. One common method is to bill one-third at the outset, one-third a month later and the final third a month after that. Or the first invoice may be sent after the first month's work. Or the firm may use fifths, with a fee due every month until the full amount is paid or the search is completed. Sometimes, the final slice is paid only when the position is filled. "Con-tainer," as this fee structure is known, is a hybrid of retainer and contingency billing.
Almost all firms bill for the expenses they incur while working on an assignment. Typically, including telephone, travel, and meals while interviewing candidates, expenses can range from 5% up to 20% of fees, and even more for some complex international searches. In general, clear policies should be agreed upon up front. We recommend that clients monitor expenses carefully but also bear in mind that being too aggressive could inhibit recruiters from making sufficiently thorough efforts on the assignment.