Recruitment fees aren’t often discussed or explained. The common understanding is that agencies charge hiring companies a contingency fee based on the first-year earnings of the hired candidates. Retainer fees come into play in specific situations, such as for executive-level searches or organizations that proactively remain in a constant hiring mode. While true, not all recruitment services follow these pricing models.
Historically, recruitment and executive search firms have used contingency and retainer pricing models, while hourly rates have been reserved for contract and staffing placements. Consequently, it may come as a welcome surprise that more recruitment and executive search firms are now changing their recruitment fees to an hourly rate fee structure.
So, does this matter to you as a hiring company? Beyond how you are charged, does this impact the services you are receiving? Do you know what you are paying for?
Keep reading as we explain the differences between these three pricing models and how they can impact your results.
Common Options in Recruitment Fees
The pricing model plays a crucial role in determining the type of collaboration between the hiring company and its recruiting partner.
Since the structure of recruitment fees sets the expectations and commitment for both sides, learning about the primary pricing models for talent acquisition services can help hiring managers make well-informed decisions.
Contingency fee structure
The contingency fee is one of the most common pricing models, where the hiring company only pays the recruiter once the available position has been successfully filled.
If there is no placement, there is no obligation to pay the fee.
The recruitment fees are calculated as a percentage of the annual salary for the position. In the United States, this type of collaboration typically runs between fifteen and thirty percent of the total first-year earnings of the newly hired candidate. However, the placement fee can go up to fifty percent for senior roles and other hard-to-fill positions.
For example, if a recruitment agency recommends a candidate for a position with a first-year salary of $60,000 with a twenty percent contingency fee, it would earn $12,000 upon a successful placement.
The annual salary in this model usually refers to a base salary. Nonetheless, in some instances, it may also include the projected earned commission. Therefore, be sure to check the fine print of the contingency agreement before signing on any dotted lines.
The contingency model has one major upside: hiring companies only have to pay once they have successfully filled the vacant position. Due to this factor, some HR professionals engage multiple recruiters to search for their ideal candidates, which can sometimes result in confusion.
However, just because this pricing structure has been working for several years does not mean it has zero drawbacks.
The first disadvantage of contingency agreements is that a recruiter could be working for multiple clients at the same time. These agencies can recommend the same candidate to different companies to increase their likelihood of earning a commission. In such situations, the HR professional or the hiring manager may not get enough time to review the credentials and work experiences of the candidates before their competitor closes the deal.
Moreover, if a company hires multiple candidates for similar positions, they will have to pay the same percentage of salary for each successful hire, even though they all came from the same recruitment firm. Meanwhile, the recruitment fees for senior management positions can also run very high, which can burden the company’s resources.
Retainer fee structure
In this type of pricing model, the recruiter is paid for each milestone. Though it is also calculated as a percentage of the first-year compensation of the hired candidate, the retainer model is usually more exclusive than a contingency agreement.
As per the structure of a retainer agreement, the hiring company pays the recruiter in two to three installments. The first installment is typically paid at the start of the project as a retaining fee, while the second installment is billed at the end of the shortlisting process. Meanwhile, the third and the last installment is payable after the successful placement of the candidate.
Suppose you are looking for a qualified candidate who can fill a position that has a first-year salary of $80,000. In this scenario, if your partner agency is charging a thirty percent recruitment fee, you will have to pay ten percent of the annual compensation as the retainer fee, ten percent after the shortlisting, and the final ten percent at the end of the hiring process.
In other words, you will be billed $8,000 at the beginning, $8,000 when you receive the list of shortlisted candidates, and another $8,000 when the position is filled.
The primary benefit of this recruitment approach is that it comes with a higher level of commitment. The hiring company pays a certain fee to retain a recruiter who shortlists the most qualified candidates for the available position. Instead of recommending the same individual to multiple clients, the recruitment agency only works with a single company at a time. This provides the hiring manager and HR professionals ample time to review each candidate without worrying about losing them to an industry competitor.
However, the recruitment fees for retainer agreements are usually higher than that of the contingency model. Since most companies use this structure to fill high-level positions, many recruitment services charge around thirty to thirty-five percent of the first-year compensation as their fees. Nevertheless, this figure can go as high as fifty percent, depending on the seniority of the role.
Hourly rate fee structure
The third – and probably the most beneficial – pricing model is the hourly rate fee. Though this approach is relatively new, it is quickly gaining popularity across the country due to its cost-effectiveness and great results.
In this type of agreement, the recruiter provides the hiring company with exclusive talent acquisition services without charging a premium fee. It is quite similar to the pricing model adopted by lawyers and attorneys, where the service provider charges the client by the hour for all stages of the process. For recruitment services, the process may include talent search, recruitment, interviews, and hiring, among others.
The hourly rate structure offers the best value to the client as the recruitment fees do not increase or decrease with each position. So, whether you are hiring for a position that pays an annual salary of $50,000 or $100,000, you will likely pay a similar recruitment fee for both, which means you will be spending way less on this pricing model than the other two. In fact, this model can reduce recruitment fees by as much as fifty percent.
Therefore, the most noteworthy benefit of this pricing model is that it allows hiring companies to secure the best candidate for their open position without spending tens of thousands of dollars in talent acquisition services alone. Moreover, you can hire multiple candidates for similar positions without incurring any additional costs since the recruiter will only charge you for hours spent during the recruitment process instead of a percentage of the first-year salary of each position filled.
It is also worth mentioning that recruitment agencies that charge hourly rates only work on a select few projects at the same time, which means you won’t have to compete with your industry competitors while looking for suitable candidates in the finite market. The high level of exclusivity and commitment between both parties ensure a flawless and efficient hiring process.
What Are You Paying For?
Hiring managers, HR professionals, and business leaders choose to work with recruitment services to find the best talent for their companies. While faster hiring is considered the main perk of partnering with talent acquisition services, beware that you may be sacrificing quality for that speed with contingency and retainer-based pricing models. Some recruitment firms maintain a large database of previously sourced candidates. That means that you may just be paying for access to a list of candidates with outdated qualifications and experiences or those who are no longer pursuing a career change.
Many hiring companies spend an excessive amount of money to gain access to the talent database managed by recruitment agencies. Yet, they still end up competing with their industry competitors over a small pool of suitable candidates.
Further, these firms’ contingency and retainer pricing models can be quite heavy on the pocket, especially for startups and mid-market companies with a limited budget. In such situations, choosing a recruitment agency with an hourly rate fee structure can be an excellent option, as you will only be paying for their expertise and guidance in the hiring process while gaining high-quality candidates.
What You Should be Paying For
When you partner with executive search firms with a solid track record, diverse portfolio of clients, and a commitment to providing profitable recruiting solutions, you pay for much more than talent acquisition. Instead, you receive a host of other incredible advantages that not only benefit the hiring managers but the company as a whole.
In simpler terms, you should be paying for a transparent hiring process, a high level of expert guidance, and complete exclusivity with your selected recruitment agency.
AEBetancourt is an executive search firm dedicated to providing our clients with the best human capital management solution in a timely and cost-effective manner. Our hourly rate fee structure also sets us apart from others in the field. Contact us for more information about our recruitment fees.