2005 - Headhunters’ fees
For years, headhunters’
fees and methods have been discussed guardedly,
with the kind of discretion displayed by canny
prospectors sifting for gold among the base and
semi-precious metals of humanity.
They know, and hope their clients
appreciate, that the sort of people who can transform
the ailing fortunes of a large enterprise are
thin on the ground.
How much should search firms
be paid for the people they find? How can we quantify
the value they add? How can the buyer and seller
arrive at a suitable fee? These are perennial
questions in the search business, rarely discussed
in open debate.
When Denise DeMan Williams, president
and chief executive of Branch International, a
US-based headhunting firm, decided, therefore,
to challenge the fee structure and service model
in a recent edition of Executive Recruiter News,
a respected industry newsletter, it was bound
to cause a stir.
“After 30 years in the
business, I have come to realise my profession
is broken,” she wrote. “Few in our
service business will admit it. We have image,
revenue, and our very existence to protect. Yet
it is our own clients who recognise that the system
we have co-conspired to create is one of the least
truly client-focused service industries in the
for-profit business community.”
Her harshest criticism, all the
more powerful in that came from within the industry,
was focused on the long-standing fee structure
that remains what she called “the religious
doctrine of traditional retained search.”
Fees tend to be based on a third
of the full year’s cash earnings of the
successful candidate, although sometimes the proportion
maybe discounted where there is strong competition
for an assignment. Capping fees at an upper limit
is also common for the most highly paid jobs.
In the retained system fees are also expected
whether or not the search is successful.
The classic payment terms demand
one third of the agreed fee at the start of the
contract, another third after thirty days and
the final third thirty days after that.
“So let’s be clear,”
wrote Ms Williams, “The customer has often
paid entirely for something they have yet to receive.
“Where is the sanity in
going to a high-end designer, purchasing a custom-designed
suit, making three payments as it is being completed,
and emerging from the transaction with nothing,
or, at best, an empty suit bag?” she asked.
Ms Williams maintained that it
was reasonable for a client to expect a post to
be filled by a headhunter at the end of a search.
Acting in the client’s best interest, she
argued, demanded that, if the retained firm could
not complete the assignment, it should partner
with a firm that could finish the job on a fee-sharing
Peter Felix, president of the
Association of Executive Search Consultants, believes
that such a commitment amounts to a contingency
arrangement - a fee system that is not supported
by retained firms.
“The retainer gives an
exclusive mandate to the consultant to represent
the client and to search the market on his behalf.
It implies strict confidentiality, professional
handling and feedback, sharing of market information
with the client and so on. It is, in our opinion,
the only basis upon which to conduct senior and
often highly sensitive assignments,” says
Pressure for contingency arrangements
has been a running sore in the retained search
market for some years. Moreover, fees have been
squeezed by discounting during the four-year long
recruitment recession - now easing - that was
regarded by many recruiters as the worst slump
in the history of the search industry.
“I think that many in our
profession would say that if executive search
is done well and truly delivers exceptional talent
to the client then it is cheap at the price. We
all know what impact a truly successful executive
can have on an organisation's health,” says
His view is supported by Joseph
Daniel McCool, editor in chief of Executive Recruiter
News, who points to the way spectacular increases
in the market capitalisation of a company can
result from a single high profile placement. In
2002 when Tyco International recruited as its
chairman and chief executive Ed Breen, then the
number two at Motorola, the company’s shareholder
value rose by $1.3bn.
“In that case, the search
consultants' fee amounted to one one-hundreth
per cent of the shareholder value generated on
that day alone,” says Mr McCool.
If a single search can move a
company’s share price by more than a billion
dollars it is no wonder that many headhunters
argue that their service is cheap in comparison.
But what happens if a job move
turns sour? Should headhunters be held accountable
for mistakes? This may explain why an enthusiasm
for taking equity stakes as payment for bringing
talent to a start-up companies during the dotcom
era did not persist to any great degree after
the downturn in technology stocks.
“A search in many markets
across borders will be more costly than searching
solely in the home market. Equally it is usually
easier to place someone in to a progressive company
than in to one that has run in to trouble. The
fee needs to reflect that,” says Ashley
Summerfield, a London-based partner of Egon Zehnder
“By fixing a fee up front
we are in a position to give advice and consult
without any suspicion that it might be in our
interests to put forward an expensive candidate.
In the percentage system there is a perverse incentive
to recommend someone who may not necessarily be
the best candidate.”
The irony of this system is that
it can mean that some complicated searches end
up costing a client more than a third of the first
“You are paying for the
time of high quality professionals. You are not
paying for an outcome. That said, we all know
that we will not get repeat business if someone
is not satisfied with the outcome so there is
every incentive to do the very best job we can
do,” says Mr Summerfield.
This point runs through most
arguments on fee structures, no matter where a
headhunter stands on the percentage/fixed fee
divide. Richard Boggis-Rolfe, chief executive
of Odgers Ray & Berndtson, admits that discounting
has entered in to search assignments, particularly
where firms are competing in a so-called beauty
parade. But he argues that it can undermine service
quality if a headhunter is hard pressed to make
an assignment profitable.
“I don’t believe
there is anyone who is completely inflexible,”
he says, “And I don’t think it is
unreasonable that a fee should be higher if an
appointment is made than if it does not happen.
But it should be realised that a search consultant
can really add value, helping a client understand
what is needed. Often we are dealing with a move
that can amount to the biggest professional decision
of someone’s life. That’s a big responsibility.”
The danger, according to Ms Williams,
is that these issues can be forgotten if a service
begins to be dominated by sales. “As a culture,”
she wrote, “We have made humans and serving
humans a commodity. Can anyone defend this?”
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