Retained Executive Search vs Contingency: What's the Difference?

Posted by Kurt Rakos on 9/13/22 8:30 AM
Kurt Rakos
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chosing the best recruiter contract

Finding and hiring the best talent is a high-stakes challenge for every organization. Whether you’re running a start-up, making your first serious management hire, or you’re a corporate recruiter, working on multiple open positions every week, filling an open job is not only time-consuming. It can be expensive, frustrating, and unpredictable.

Yet, every open job represents the future of your organization. Will this new person add long-term value – without too much short-term upheaval? Do they have the aptitude, attitude, and work style to gel with the rest of your team? By adding them now, do you move your organization closer to your vision?

If you’re trying to fill a key position, you’re hardly alone. Today, you’re competing with a growing number of organizations for top talent. Working with the right executive recruiter – aka headhunter – gives you a distinct competitive edge. Before choosing the right recruiter, it’s important to understand the various recruiting contract types that exist.

The following guide makes it easier to determine which contract type might be best for you.

First, a Few Words About Fees

While you probably already know this, it bears repeating: reputable recruiters do not charge candidates for their services. Never, not even the candidate who gets the job. Your recruiter is working for you. Their contract is with you, as are their allegiances. Not surprisingly then, you’re paying the fees.

But how are those fees structured? Many employers are unaware that there are actually three different types of recruiter fee structures. Take a close look at each one before you enter into any serious discussions with a recruiter.

Most headhunters will tell you that, in general, clients are happier with “Retained Contracts.” And, in general, that’s true. But a more accurate explanation is that the ideal contract for you depends largely on your circumstances and the specifics of the role you’re trying to fill.

Consider the pros and cons of each.

Retained Search Contracts and Fee Structures

With a Retained Contract, you are paying the recruiter for their work on filling your open position, even if you don’t end up hiring any of the candidates they present to you.

The fee is usually 30-40% of the open position’s annual salary and is paid on a pre-determined schedule. (Typically, 1/3 is paid up front, with the remaining 2/3 due within the following few months.) These are almost always exclusive contracts. In other words, your recruiter agrees not to submit candidates for your position to any other company and you agree not to assign the open listing to another recruiter.

The benefits of a retained contract are obvious: with this agreement in place, you unleash the full force of your recruiter to assess and rank all potential candidates, including your own internal staff. At SkyWater, we use a “Short List” process to rapidly and successfully identify the true finalists for a position. We look at organizational vision and workplace culture as well as job requirements. That allows us to sift through our vast networks of top talent, bringing in only those individuals who can hit the ground running and make a long-term, positive impact within your organization.

You may be looking at the guaranteed fee as an unnecessary risk. But consider what you’re getting when you sign this contract. When you enter into a retained contract with a reputable headhunter, you’ve hired a recruiting expert who will not only put their all into finding you the best candidate, they’ll be committed to making your team strong. You’re the priority, above any contingent searches. Keep in mind: reputable retained recruiters are invested in building a long-term partnership with you that will, in turn, result in your glowing endorsements of them to others. That’s how they became reputable in the first place.

Typically, the retained contract is ideal when focusing on C-suite and officer-level positions and other roles that are expected to deliver immediate lift and long-term value to the organization.  

Engaged Contracts And Fee Structures

For some circumstances, the engaged arrangement, a hybrid of the retained and contingent agreements, offers the best of both worlds. With fees ranging from 20%-35% of the first year compensation, these agreements require only a portion (usually 20%-30% of the fee) to be guaranteed and paid up front, with the remaining 70%-80% due only if you hire a candidate presented by the recruiter. With this guaranteed partial compensation, the recruiter is in a position to place your search above all contingent searches. Often, growing companies seeking to fill director or manager-level positions find that the engaged contracts are an excellent fit for their needs

Contingency Agreements and Fee Structures

Contingency agreements are exactly what they sound like. You pay the recruiter only if you hire a candidate they present to you. While it is also a percentage of the new hire’s first-year salary, the percentage amount may be less, likely 20%-30%.

This arrangement is absolutely not exclusive. Because you’ve only hired the recruiter on a contingency, you are free to hire many firms the same way. Some employers do this, hoping that it will spread the net wider and motivate each contingent recruiter to work harder and faster.

However, before you get swept away by the feeling that this is the ideal arrangement, consider the other side of the coin. Because your recruiter is working on contingency, they can be motivated to get as many good resumes to as many employers as possible. Credible, knowledgeable headhunters vet candidates for their contingent positions scrupulously, only submitting those whom they deem qualified. But less credible (or simply less experienced) recruiters may be tempted to toss every resume in every direction, hoping something will stick. As a result, instead of reviewing the shortlist of top-tier candidates, you will likely be sorting through a tall, mixed bag of resumes. And you will face that challenge without the undivided consulting attention of your recruiter.

With a contingency agreement, the commitment is simply not there, on either side. If, for any reason, there is a hiccup, change or delay in your internal hiring process, contingent recruiters simply can’t afford to hang in there, waiting on that open position. They need to move on to positions they can fill, for which they will earn compensation.

That’s not necessarily a bad thing. If the position you’re trying to fill is less senior, less specialized, with a bigger population of potential candidates available in your area, a contingency agreement may indeed be the right way for you to go. But, the higher level, more specialized a job gets, the more you’ll benefit from a professional recruiter with a keen eye for top talent and access to a strong network.

Making your decision

When you do decide that it’s time to bring in a professional recruiter, make sure you’ve done your homework on who’s out there, how they charge, and what they deliver.

Every hiring decision is an investment of your – and your team’s – time, money, hope, and energy.

When hiring a recruiter, consider the costs and the returns, both long-term and short-term. The right investment now will pay off for years to come.

At SkyWater Search Partners, we provide free initial consultations to all potential clients. Find out more about how we can help you build your team.

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