What Should I Pay a Recruiter?

Q: When working with a recruiter to hire for VP Engineering, etc. jobs, what are the standard terms I should expect in the recruiter’s contract?  Should there be a time duration in which the new employee should stay with my company prior to the recruiter getting paid?

Todays answer is courtesy of Seth Levine, one of our partners.

A: (Seth) Maybe it’s collusion or maybe the industry has just done a nice job of towing the line, but overall I think you’ll find a great deal of consistency in the terms that most recruiters will offer you. 

Standard recruiting fees run 30% of a placement’s first year salary.   This should NOT include any variable pay, but may include either guaranteed bonuses or up-front payments (you will, of course, try to negotiate these out).  You should expect to pay a retainer in the range of $30k (you may be able to break this up into multiple payments).  You should absolutely expect to get a “guarantee” on the placement that will run between 90 and 180 days – you won’t get your money back, but the recruiter will find you a replacement candidate if their first candidate doesn’t work out (note: it’s important to find a recruiter who is really going to see your project through – they are essentially working for “free” if their first placement fails and your relationship with the recruiter and their level of integrity is what keeps them working hard to find you a match).

For more senior searches (CEO and possibly COO) and particularly when working with a higher profile search firm the fee is often higher (40% is common, sometimes rising as high as 50% for a high profile CEO search).  For lower level searches (say for engineers) you might pay a bit less (and in some cases can negotiate a fixed fee per engineer rather than a % of salary – especially if you use the same recruiter for several positions).

Good recruiters should spend the time to understand your business, its culture and your specific position needs before really digging into their search.  You should also expect (demand) that they perform a detailed screen on each candidate (i.e., your recruiter should only be presenting you with highly vetted candidates).

  • I’ve used recruiters occasionally in the past. Naturally there are legitimate but perhaps vague concerns about “level of integrity” (which some would claim is an oxymoron in that industry). Ignoring that, the question I never resolved is about alignment of interests.
    How do you set things up so the recruiter’s interests are aligned with yours?
    The recruiter wants to place people. They’re sitting in the middle trying to sell the potential employee on the company and trying to sell the company on the potential hire. They’re not really working in your interest or in the interest of the potential hire, and it’s important to stay aware of this. Sure, it’s not a black and white thing, and if there’s repeat business there’s more chance of alignment (but even so, I know of some really ugly recruiter behavior). I don’t think this is an easy one to solve, at least for a small company that doesn’t have its own HR department and in-house recruiters (who can be aligned by virtue of exclusivity, stock, and accountability etc).
    If we could figure out how to solve the alignment of interests problem, we wouldn’t mind nearly as much if recruiters acted unethically, right? 🙂

    • Andy

      Terry, Sounds like despite your experience of working with recruiters you like most hiring managers miss the point completely. You’re struggling with how to align the interests of your firm with the recruiters interests, and stating that the recruiters interest arn’t with the company or candidate, which is a gross misunderstanding. I take it from your intial comment about the whole industry lacking itegrity comes from perhaps some bad experiences you may have had in the past. To explain things better let me add the following- A smart recruiting firm is always interested in the goals and succes of his clients. The more successful a company is, the better the people they get onboard that add to it’s success directly relates to the company’s grow and revenue, which in turn relates to how many people they will or will not hire. If a good working relationship is established and the recruiter fills “holes” with great people and the if the manager goes back to the recruiter again, and again then we get repeat business. The whole thing is very karmic actually. The problem lies in that managers unwillingness to partner or give exclusivity to one trusted recruiting partner, or for that fact to give any trust- or even simply to just give a recruiter more than 30 sloppy minutes on the phone with a cookie cutter explaination for a role that will potentially make a huge impact on the organization. I think you’ll find if you can build a relationship with a recruiter and treat them just like any other business partner you’ll find you get better ROI…and by the way most recruiters work contingent in the first place so you are asking them to be loyal to you when you haven’t put any real skin in the game (exclusive, retainer, etc). It never cesses to amaze me of how poorly communicated this entire topic is on both sides. needless to say I think the whole industry has become so transactional its a huge disappointment. And honestly in house recruiters don’t necessarily get you the best candidates(for a lot of reason too long to list here.) -Andy

    • Speaking for myself, I never forget that the client is the party that engaged me and the one paying the fee. u00a0Of course, I want to ensure that the candidate has all the information needed to make the right decision and is being treated fairly by the client, but if your goal is to retain the person long AFTER the hire, then you WANT me to do this.nnThe best way to get a recruiter to provide the best service possible is to treat him or her as a valued business partner. u00a0And of course that means working with someone that can serve in this capacity and probably means you will need to pay a retainer or at minimum an exclusive arrangement. u00a0And you can check references to ascertain integrity. u00a0Integrity is key.

  • Jason

    I think one of the things that we do is make sure that they know that this isn’t a “single shot game.” We have other companies, etc., and they should “behave” properly.

  • The advantage to using recruiters is gaining access to a pool of candidates that you might not see otherwise. I agree that the recruiter’s interest is not really aligned with yours (I speak from experience as a recruiter in a past life) – but I think that can be managed by taking a bit broader view of how they are aligned. If you pick a recruiter that is focused on your market segment(high tech for example)and your geography, then you have alignment around the recruiter’s goal of repeat business, not from you, but from the pool of prospective customers you are a part of. They need your hire to be successful so that you become part of a set of references is the market they are addressing.

  • I’m a headhunter. We looked at all the business models for paying recruiters (HR departments, contingency, retained) almost 25 years ago and decided that they were all badly flawed, so we developed an hourly-fee model which, at long last, puts eveyrone on the same side of the table.
    HR Depts: in the absence of performance measurement (fills, time to fill, cost per hire, productivity of hires, turnover, etc.), recruiters end up getting compensated for getting along. Many embrace the myth of difficult recruiting: “Filling this job is very hard; I need to send it out to a vendor. Oh! It’s not filled??? It’s the vendor’s fault.”
    Everyone still likes the recruiter and the recruiter gets another raise, having been incentivised no farther toward taking ownership of getting the recruiting done and done well.
    Contingency: The recruiter is only paid if you hire someone from them. This motivates them to do whatever it takes to get the hire including lying, cheating and stealing. Thus their reputation for shady business practices. They are driven to them by how the money flows. Then, those practices having become the norm, the profession attracts folks who like to do that. And round and round it goes.
    This is not to say that some contingency practitioners are not honorable; some are. But they money pushes them away from being so.
    Retained search: I have yet to meet a retained firm that rewards its players for good service rather than revenue generation. I worked for one years ago who clearly viewed the customers as unfortunate obstacles between him and his money.
    But, on the other hand, we just referred one of our clients to Heidric and Struggles for a search we could not do as well as they. H&S did a bang up job pretty quickly. Our client is ecstatic. H&S costs an arm and a leg but was worth it in this case.
    If there are rules, these are they:
    1. character matters and trumps the business arrangement
    2. don’t nickle and dime a GOOD search firm. They need to be enthusiastic about your search and that will be difficult if they are making half of what they get for other searches.
    3. character really matters.

  • This is good. It’s always refreshing to find people that “get” us. (speaking as a recruiter)nnI do think that startups should seriously consider working with recruiters on either a retained or contract (pay as you go) basis to get the best service. u00a0nnOne of the reasons I moved over to retained search from contingency was my propensity toward truly partnering with the client and investing a lot of time and energy into understanding the client and finding the right match. u00a0Actually, I did this as a contingency recruiter as well but too many variables can be at play with a startup hire (or a hire inu00a0anyu00a0environment with a lot of change and ambiguity) so that all that hard work can go down the drain without any compensation.

  • Jeff

    Don’t pay over 20%.

  • Nadellienn Arandia

    This post is beneficial to both employer and
    employee under the management or who has a recruitment agency partner like naperville staffing agency, it would make both parties understand how much percentage
    should be given to a recruiter, so that it will be clear for them that all
    parties are given a percentage that is equal to their rendered services