Most of the people in my neighborhood have never used an executive search firm; they are doctors, teachers, dentists, college professors, and government workers. They work in organizations where it’s incredibly uncommon to use executive search firms, or recruiters of any sort.
Even in Washington, DC’s huge nonprofit and association market, where the use of search firms is prevalent, some organizations choose to engage search firms very rarely. We regularly work with people who have never engaged the services of an executive search firm before.
So naturally people have questions about:
- Who pays the fee (the employer always pays).
- When the fee is due (it varies by search firm).
- How executive search firms charge (it varies by search firm).
- What services are delivered and what is involved in the hiring process (it varies by search firm).
- What replacement guarantee is in place if the placement does not work out (it varies by search firm).
Retained Search Firm Business Model
Let’s start with fees. Executive search fees vary widely.
Typically, retained executive search firms charge the employer between 25 – 33% of the estimated total annual compensation a candidate is expected to receive in their first year in the position. (Many executive recruiters include first year commissions and bonuses when estimating total first year compensation, but do not include the cost of benefits.) For retained search firms, some portion of the fee is always due when the search commences, but the final fee is often dependent on what salary the candidate ultimately accepts.
So if a search firm charges 30% of annual salary and places a new employee with a salary of $100k, their search fee will be $30k. But if that same candidate negotiates for a starting salary of $110k, or a salary of $100k with a sign-on bonus of $10k, the search fee would rise to $33k. Additionally, some firms charge back their expenses to the client, so the total fee can easily rise to 35% of total annual compensation.
Staffing Advisors is a retained executive search firm, but instead of tying our fee to the candidate compensation, we prefer to charge a simple flat fee (with no charge back for any expenses except out of state travel). We set our fee in advance of the search based on the level of effort we anticipate, so our fees are not tied to salary but they roughly average around 20% of total base salary.
Like most retained search firms, Staffing Advisors handles executive searches in a wide variety of functional areas (not just Accounting, or IT, or HR.) Contingency based search firms tend to specialize in one functional area.
Most retained executive search firms offer a replacement guarantee of a full year if a placement does not work out for any reason (our replacement guarantee is 18 months).
Contingency search firms do not guarantee to fill positions. But if they do, these firms charge often between 20 and 25% of annual compensation. Contingency fees are usually due only after the candidate starts work, so if nobody is hired, no fee is due. Some contingency search firms are even willing to negotiate placement fees — but keep in mind that by negotiating lower fees, it can sometimes result in a lower level of effort being spent on your search and a lower chance of filling it. Contingency based staffing firms tend to specialize in one functional area (like accounting). As for the replacement guarantee, contingency search firms typically offer replacement guarantees from 30 days up to six months if a placement does not work out. Longer guarantees are uncommon.
Some firms take a hybrid approach of requiring some portion of the fee in advance, and making the remainder contingent upon the placement.
The key for you as the buyer is to understand which business model best suits your needs. Each model has it’s benefits and downsides, so you should know ahead of time what exactly an executive search firm can really do for you.
For more insight into the differences between retained firms and contingency firms, read Contingency vs. Retained Search, Common Fallacies.
Here’s our latest thinking on the services a modern executive search firm should offer.
Hopefully you found this post useful. If you did, you are welcome to learn more about the executive search and hiring process in our Resource Center, or download our free guide to evaluating executive search firms below.