At some point in its history, the executive search industry made a (perhaps not so) brilliant decision to categorize firms by their fee structures; Retained vs. Contingent.
While it’s true that Retained and Contingent firms charge their clients differently, there are also big differences in process that make Retained search much more typical and appropriate for C-Level and VP Level roles, while Contingency lends itself much better to roles below the VP level.
I will lay out the differences between Contingency and Retained search and hopefully provide some clarity around what you are really getting when you hire a retained executive search partner.
When you hire a Contingency search firm to help fill a position, you only pay the firm if they provide a candidate you actually hire. Any and all fees are contingent upon a hire taking place.
Contingency search fees range from 20-30% of the first-year salary of the candidate hired. Typically, contingency firms are clustered into specialties like Information Technology, Accounting and Finance or Engineering. Contingency firms typically work on roles anywhere from entry level to Manager/Director level, but they rarely work on Vice President to C-Level roles.
The reason behind the specialty clustering and the level of positions hired is driven directly by the contingency fee arrangement. Contingency recruiters know they will only be paid for a small percentage of the job openings they take on. When I worked at a contingency firm early in my career, I would work on anywhere from 10-20 clients and 50-70 job openings at all times. When I sourced (recruited) a candidate interested in making a move, I would send their resume to multiple clients for consideration. If the client had an interest or need, they would interview the candidate and potentially make an offer. Approximately 20% of these would end in a hire, my firm would charge a fee and I would receive my commission.
This model is why being a specialist and clustering makes so much sense. The firm I worked for specialized in Information Technology. We worked hard to identify and recruit every programmer, database analyst, network analyst, etc. in our market. If we determined a good candidate was open to move, we would flag them in our database of candidates. When a client called with a new job opening, all we had to do was search the database, make a few calls and start sending out resumes.
As you can see, success in contingency recruiting is primarily a numbers game – the more candidates you send out, the more placements you make. Therefore, it doesn’t make sense to spend a great deal of time sourcing any particular job opening. The best method is to recruit a few qualified candidates, send them out quickly and move on to the next job opening. In this way, the contingency model places speed over quality. While contingency firms may conduct interviews of their candidates, they are not specifically recruiting for you, they are recruiting for a whole host of customers with similar needs.
This works fine for mid-level positions – if you need a programmer or accountant, you need to see relatively qualified people quickly. If you are filling positions in a larger company, you may have 10, 20 or 50 similar openings every year.
When it comes to entry and mid-level positions, having relationships with talented contingency recruiters is critical. A good contingency recruiter should be able to provide a few solid candidates within a week or two. The cost is definitely justified if you can hire good people into these roles quickly. And, as the client, there is little risk, as you don’t pay unless they produce.
Unfortunately, for higher level positions, like a Vice President or C-Level opening, the contingency model presents some true drawbacks, such as:
- At the VP or C-Level, making the right hire is much more important than hiring quickly. The wrong hire as an executive level is incredibly costly and can set the company back for years to come. When evaluating executives, the leadership ability and cultural fit become much more important. Because contingency recruiters general work on speed and number of placements, they do not gain much experience evaluating these additional components. They are typically screening primarily for technical skills, like engineering ability, programming ability, etc.
- Because a contingency recruiter doesn’t know if they will actually be paid on your search project, it does not benefit them to spend a great deal of time on any particular job opening. Vice President roles by their very nature are much more specialized, which means they need more time and attention. Despite the fact that a VP position may bring a higher fee (because it carries a higher salary), a contingency recruiter knows it is more efficient to fill two or three roles in their typical wheelhouse, as opposed to spending additional time on a VP role where they might not get paid anything. Unfortunately, when a client hires a contingency firm for a VP-level job, they are often sent a few candidates immediately, plucked from the firm’s database. If the client doesn’t hire one of these candidates, the recruiter disappears, moving on to positions that have a higher possibility of closing. There is no real incentive for a contingency recruiter to spend extra time on difficult to fill positions because there are plenty of others available that will fill more quickly and easily.
Retained executive search firms represent a much smaller segment of the search industry, with contingency firms outnumbering retained firms 10 to 1. True retained firms focus solely on positions at the most senior level – generally roles requiring $200,000 and up in terms of annual compensation. Fees are typically 30-35% of first year annual compensation. Retained firms generally break this fee into thirds – one third when the project kicks off, one third in the middle of the project and the final third when the project is complete. A retained search generally takes 90-100 day from start to finish.
While contingency firms continuously recruit high demand candidates and then work to find openings for them, retained search firms work in the opposite direction. Retained search firms work on behalf of their clients to conduct a specific search for an open role. While the idea of an up-front fee can create anxiety for some potential customers, it is important to understand that the retainer secures the firm’s time and resources. If you need to hire a high-level leader, you need an experienced team dedicating time exclusively to your project. The retainer ensures both parties have a stake in the outcome and avoids a situation where the recruiting firm simply gives up and moves on to other (easier) projects.
A strong and experienced retained search partner will spend considerable time on the front end understanding your company, your culture and the unique aspects of the open position. Because retained search partners only work at the most senior level, not only do they know the qualities or a strong CFO, COO or other executive, but they also realize every company has different needs in regards to their leadership roles. This is dependent on the size of the company, the industry and the strategic direction of the business. Experiences retained search firms are astute at teasing out and understanding these components of your business and incorporating them into the search process.
After partnering with you to gain this deep understanding, they will identify appropriate candidates in the marketplace (locally, regionally, nationally or internationally) and recruit specifically for your open role. A retained firm uses a direct recruiting method, reaching out personally to qualified candidates and describing your company, your strategic growth plans and how this role fits in. The great majority (95%) of candidates contacted will be currently working in other companies: retained firms do not rely on job postings or job boards to generate interested candidates.
Those candidates who express interest will go through a thorough vetting process including phone screens and in-person interviews, conducted by an experienced search consultant. From here, they will narrow down the field to a short list of highly qualified candidates – generally five to six.
This short list of well-vetted, highly-qualified candidates will then be presented to you for interviews to be conducted on your side. The best retained firms will also support you through this part of process, coordinating interviews, providing interview questions, facilitating discussions after the interviews and the like. They will also manage the short list of candidates through the process to ensure those candidates are kept informed and stay interested in the opportunity until you make your final decision.
When an ultimate finalist is chosen, the search consultant will guide you through the negotiation and offer process. Finally, many retained search firms will provide assistance with on-boarding and assimilation for the new executive, as it is critical that any new leader transition well into the company and existing corporate culture.
A Few Words of Caution
As in all industries, the majority of players in the executive search space care deeply about their clients and want to do a good job. However, there are those few who take short cuts, and even a few who are deceptive or even unethical.
- Beware the Contingency firm that says “sure, we can work on retainer.” It is very likely they have little to no experience with senior level roles. While getting the money upfront sounds great, they will quickly be in over their heads and will likely flounder. Ultimately, you will suffer as the candidates will not be up to par and timelines will not be met. You may end up with nothing to show for your upfront investment.
- Beware the Retained search firm that reports having done 500 successful searches in the last two years. Most retained search consultants can handle about 15-20 searches per year, maximum. If the team is only five to seven people and they claim to have done 500 searches, they are primarily conducting contingency searches.
- Beware the Contingency firm who says they are qualified to handle a CFO position because they are specialists in finance and accounting, or the firm that says they are adept at COO roles because they specialize in operations. C-Level and Vice President roles are very different from lower level roles and require a different level of expertise and attention. Having multiple lower level candidates in your database does not make you an expert at higher level roles.
- Beware of any retained firm who sells speed. The retained process takes time to complete for a very good reason. Most of the candidates will be working for other companies and VPs are very busy people. It takes some time to reach them, receive a resume, set up a screening interview, etc. If a recruiter says they can provide candidates a few days to a couple weeks for a Vice President level role, they are simply dipping into their database hoping for a quick placement.
To Summarize: Contingent vs. Retained
Use a quality contingency firm when you have lower to mid-level openings you can’t fill on your own. Contingency firms are primarily built around speed, but a contingency firm will also do their best to present qualified candidates and not waste your time in meaningless interviews. You should expect to pay between 20-30% of first year salary when and if you hire an appropriate candidate. If you are using a reputable specialist firm, you should see qualified candidates in a few days or weeks.
Hire a retained executive search partner when you need a Vice President or C-Level leader. Retained recruiters partner with you and work directly on your behalf to find a unique and highly qualified executive for a critical leadership role. The process takes a little longer and will cost you a little more, but you can rest assured you have the very best fit for your company in the end. You should expect to pay 30-35% of the first year’s overall compensation, with a payment of one third of the total upfront. The entire process takes about 90-100 days – half of this time is dedicated to the search firm’s recruiting, sourcing and vetting, and the other half to your interviews.