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Contingency Recruiters vs Retained Executive search?


It's sometimes difficult for the clients to understand the difference between recruitment, executive search, and headhunting. The result looks the same - they hire a candidate introduced by the service provider. However, the devil is in the details.

"Executive search (informally called headhunting) is a specialized recruitment service which organizations pay to seek out and recruit highly qualified candidates for senior-level and executive jobs (e.g., President, Vice-president, CEO). Headhunters may also seek out and recruit other highly specialized and/or skilled positions in organizations for which there is strong competition in the job market for the top talent." This is the definition on Wikipedia, while in the industry there are nuances between these three.

Headhunting is literally "hunting for a head" of a specific professional, who can be identified by the client or by a headhunter. It's a typical case for the top positions in highly competitive industries or niche markets, where you can count the candidates on one palm or if the client wants a specific executive to join his team. The headhunter becomes a mediator between the parties. Prior to that, as a private detective, they gather all available information on the candidate - his/her career aspirations, the potential for promotion or relocation, personal relationships within the current organization, loyalty, family situation, hobbies, etc. to come up with the negotiation strategy to convince them to make a move. There is no room for mistake!

Such projects can get quite intense for all the parties involved due to the high stakes and the various interests involved. A good example is shown in the Danish thriller “Headhunter” (2009) inspired by a true story of the search for the CEO of Denmark's largest shipping company and oil empire.

Overall, the contractual relationship between the client and the recruitment firms falls into two broad categories based on the fee structure and the approach towards the execution of a search assignment:

  • Contingent recruiters are paid upon successful placement (success based)

  • Executive recruiters work on a retained basis and are paid with a typical split of a fee in three parts

The fees typically represent a percentage of the anticipated annual compensation of the executive.

It looks like the same trade, but the business model, hence, the approach is totally different.

Contingent recruiters are taking large volumes of assignments trying to find a quick match leveraging on large databases (typically internal), and screening those who applied online, e.g., active candidates. They may also engage outsourced research firms with larger databases or cheaper costs. The focus is on the efficient recruitment process, and the main KPI is "man-hours per $." This may compromise how the candidates are treated, e.g., some of the KPI's for contingency consultants is to work on 7-10 roles at the same time, which is quite intense, and not to spend more than 20 mins interviewing a candidate if it's not the right fit for the current role.

Another critical point is that with such a business model, recruiters cannot commit to close the assignment. Instead, they work hard for a week or two, and if the client doesn't like the candidates are moving on to the next job. The clients, especially in Asia, are used to this and engage a few recruiters to work on the same assignment, to keep them competitive. Sometimes, they give exclusivity for one of the providers for 7-10 days.

This creates a vicious cycle and hurts both sides. The search turns into a basic CV filtering and quick candidate phone or face to face screening (if at all) as there is a fear of competition registering these candidates earlier. The customer gets frustrated by going through many not qualified profiles. One of the clients shared with us that he was getting a lot of not suitable candidates and felt like the recruited used him for technical due-diligence on them for his own good.

It makes sense to use contingency recruiters for the lower level roles where the candidate flow is in excess, or if there is an urgent position. The fee is between 12-18% of annual gross salary.

The executive search industry has largely started as a by-product of management consulting after World War II and has since grown into a global industry with annual revenues of over $10 billion.

Executive Recruiters/Executive Search Consultants, moved away from a transactional approach and often called leadership advisory firms, adding value as long-term partners with a broader perspective. Even clients with relatively sophisticated in-house recruitment functions appreciate external expertise on a range of issues such as onboarding, benchmarking, coaching, attraction & retention, talent pool development, etc.

Such firms always work retained as they invest a lot of time, even at a discovery stage to understand:

  • Client organisation, its culture, its long-term strategies, and short-term objectives, priorities, and expectations

  • Discuss key competitors and understand customer strategies as well as organisation structure

  • Understand what are the expectations of the candidate and the role of the position in the organisation

  • Develop the candidate profile considering responsibilities and cultural sensitivities

  • Develop and agree on a search strategy

  • Discuss client and candidate communication approach

If there is an understanding of clients' business and agreement on the realistic expectations and adequate compensation from the client’s side, a contract is signed, and the first invoice equivalent to a monthly expected salary is issued.

The research stage takes about a month, and depending on the role the long-list may cover from 30 up to 100 candidates for the global searches. It takes time to establish a quality contact with a high profile busy executives without rushing them into meeting a client and immature decisions. The base for the digital research is a targeted competitor market mapping which is then complemented by direct search, including sourcing for recommendations from the network to reach out to passive candidates which are always of the best quality as they are busy working, not searching for the next assignment.

The current trend is to select on a future promise, rather than past performance, which takes a blend of science and art, together with psychology.

Executive search firms have leverage when accessing a client's direct competitors and are using an intuitive approach while digging deep into less obvious sectors often with parallel functional disciplines, based on their expertise of completing many searches before. They may come back with unexpected discoveries that can make a radical difference to your company.

The client may expect verbal and/or written reports on the progress which will give a comprehensive understanding of the market. After the research stage is over, the consultant will conduct in-depth personal interviews for high-level assessment, followed by a more comprehensive evaluation of the shortlisted high potential candidates. The final output to the client is a confidential candidate report an extensive professional background and the comments on the individual strengths and weaknesses for the position, verification of credentials, etc. If the client uses psychometric assessments, such results to be provided as well.

We usually provide three confidential profiles of the best candidates from the shortlist. If the discovery stage was thorough, and the client had a clear picture of what they need, then after a few rounds of interviews, one of them gets hired. If none of the shortlisted candidates satisfies the client, we will define the next steps together based on the long list containing the full industry research. Usually, it's about adjusting professional criteria or compensation. The second invoice, equivalent of the expected monthly salary is issued after this round and a significant part of the consultant' work is done.

When the decision about the hire is finalized, we discuss the approach to the in-depth and comprehensive background and reference check. In addition to the one done by the consultant and, sometimes, by the internal recruiters, some clients also hire independent firms providing tailored background check solutions, like Mintz Group. This is crucial for the board member roles, and executive level hires, and we can not stress enough the importance of social media and press check.

A thorough background check by specialised firms

If the background check is successful, the consultant facilitates the negotiation process working as a team with the client’s recruiters and executives, preparing a job offer to pre-close the candidate before sending a formal letter and avoid last-minute surprises. Once it’s signed, the consultant helps with an employment contract negotiation - it’s easier for the consultant to explain what is the standard industry practice to avoid a direct discussion with the employer, which may cause a lot of tension and break the deal. We also prepare the candidate for the resignation process, making sure there will be no change of heart at the last step and then share a signed document with the future employer to cement the official dates.

A good consultant will stay in touch with both the client and the candidate for 3-6 months, to make sure the communication goes smooth and the on-boarding is successful. Sometimes, newly hired managers and executives benefit from the support from external coaches during this period to help with transition and adjustment to a new work environment. In most cases, the coaching is sponsored by the employer as a part of the integration process.

Once the candidate starts with a new employer, a final payment, which is a difference between a full fee of 25-33% of annual gross salary and previously invoiced amounts, is billed. Usually, the consultants’ fee includes everything which is a part of the the package. In today’s world, the best candidates are willing to take equity and lower their fixed income, so it’s only fair for the consultant to be rewarded for that.

David Choe

Heard of David Choe?

In 2005, internet entrepreneur Sean Parker, a longtime fan of David asked him to paint murals in the interior of Facebook's first office, and in 2007, Mark Zuckerberg commissioned him to paint more for their next office. Although he thought the Facebook business model was "ridiculous and pointless," Choe chose to receive company stock in lieu of cash payment of $ 60 K. His shares were valued at approximately $200 million on the eve of Facebook's 2012 IPO.

The last, but not the least, is the value a good consultant can provide in sharing with the client on how attractive the employer brand is based on the feedback from the industry professionals. Even one search can make a significant impact in improving it, especially when the company is going through a transformation, or change of the executives and there is a lot of anxiety and rumours on the market.

Here is the document with a short summary about these approaches issued by Association of Executive Search and Leadership Consultants.