What is a Fair Placement Fee to Pay Third Party Recruiters?

Doug Horn on July 30, 2014 1:46:00 PM EDT

placement_feeIf you’ve ever contracted a third party recruiter to fill a vacant position within your company, it’s likely you’ve asked yourself the question, “What is a fair placement fee?” While it may seem like a straightforward question, the answer is more complicated, as there are numerous variables that need to be considered in order to reach a reasonable conclusion.

First and foremost, you have to know what type of search you’re conducting. How important is this position? Are you looking for an entry-level marketing associate or the visionary CEO that will eventually take your company public? If it’s the latter, it will likely be a retained search, and you’ll have to be ready to open your wallet. If you aren’t willing to do that, you might have to just pray that Mitch the Intern has the requisite skills to lead your company. You’re paying for the recruiters’ experience and contacts, remember. They are much more well-equipped to find the right person in a quick, efficient manner than you are.

The placement fee for retained searches is typically 33.33% of the prospective employee’s annual salary. You will not be charged that all at once, but rather in thirds, with 1/3 coming at the search’s incipiency, 1/3 30 days later, and the final 1/3 either 30 days later or when the candidate is hired. There is generally little wiggle room with these fees, as the expertise required to find such qualified candidates tends to command the proverbial big bucks. Retained searches are rarer considering such senior positions do not open up as often as the more junior ones, so the high corresponding fee is not commonplace. Even still, you have to determine how worthwhile paying a third party recruiter a retainer is by figuring out just how much revenue, time, or even credibility you are losing by having such an important, high-ranking position sit on the shelf for too long.

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When searching for candidates for more easily fillable positions, you will likely be dealing with third party recruiters whose fee is contingent upon them successfully finding you a placement. In contingency searches, you will not pay the recruiter unless they find you a candidate whom you successfully hire. Before the search is initiated, you will negotiate a placement fee that you (hopefully) both believe is fair. Recruiters tend to start out at 33% of the first year’s salary, but you shouldn’t be willing to accept that unless you’re looking to lose your job. This is a negotiation, not a fixed price.

The goal, obviously, is to shoot for as low a fee as possible. If your company will be staffing multiple positions through the recruiter, it’s more likely they will be willing to come down on that price from 33% to around 25% or even lower. For one single employee, however, recruiters might be more stubborn on reducing the fee too much. Think about it like this: if you’ve enlisted the services of multiple firms to all compete to fill this position, how can recruiters confidently conduct their search if the fee is not substantial? They risk losing countless hours of work by competing with other agencies only to lose their bid, and as we’ve learned before, time is money. A retained search, in the eyes of third party recruiters, is a risk-management strategy. In the event they do not find you a competent employee, they will at least be earning something for their work.

Of course, the modern recruiting landscape is rapidly changing. In one of our recent posts, we talked about how companies like RecruitiFi, Hired, and Interview Jet give employers alternative ways of finding qualified, vetted candidates in quicker, cheaper ways. All three services are fee-based, but these fees are based upon successful hirings, similar to contingency searches. While these fees are higher than job boards (RecruitiFi – 14%, Hired – 15%), they are much less than those of traditional third party recruiters. Another service, RecruitLoop, charges by the hour, a radically different business model than the conventional one used by third party recruiters.

Ultimately, the placement fee you wind up paying will come down to the type of position you are looking to fill, your negotiation skills, and your willingness to try new services such as the four mentioned above. Hiring quality employees to help grow your company is not easy and is never cheap. To find your next rock star executive, you’re going to have to pay something, you just have to know what the price you put on having exceptional staff is.