Challenging The Orthodox: #2 Recruiters' Fees

A long time ago, back in the mists of time, an executive set up the first ever recruitment business and said, "What are we going to charge for our service? I know! We'll charge 30% of the successful candidate's salary." And so an industry standard was born.

I have absolutely no evidence to support this scenario, other than that it reflects the totally arbitrary nature of the arrangement. However there are two facts of which I am pretty certain:

FACT ONE: Recruiters are no more capable of producing a rationale for charging a percentage of remuneration as a fee for their work than....
FACT TWO: ....employers can produce a rationale for paying it.

Does it reflect the amount of work that goes into the recruitment process? No. For example, recruiting for employers who are lower quartile payers is often more difficult than for those who are upper quartile payers. But by linking fee to salary, the fee is automatically lower for what in theory will be a more difficult project.

A difficult job can take longer to fill. The recruiter's fee may diminish as a result, or exclusivity may be lost. In some cases, the harder you have to work, the less likely you are to get paid at all. Or, conversely, you may make one phone call to the right candidate and fill the position.

In which case, does the percentage model fee reflect the benefit that the client gets from the acquisition? No, because in most cases the employer has no way to measure the contribution an individual makes to the business. There is no ROI calculation.

Does charging a percentage have any rationale at all? Actually, yes. In theory, a more senior position should make a more telling contribution to the business, will be paid more, and thus will be more expensive to recruit than a less senior position. Intuitively this sounds right, but it is still difficult to prove with raw data.

Many recruiters, including me, have made good money over the years from the percentage model. But I can't help wondering whether that executive back in the mists of time didn't do recruitment a disservice by introducing this model. Why? Because it gave employers an excuse NOT to confront the really important question, that is 'What is the value of our human assets?', but instead, in the absence of a measure of value, a simple way of reducing the cost of its acquisition.

Even if you cannot point to an ROI figure for your recruitment, it is easy enough to argue that the return must go up if the investment goes down. Picking an arbitrary percentage figure with no business case for justification gave purchasers of corporate recruitment services an easy target to work on, and that figure was only ever going to go one way.

And it assumed that all recruiters provided the same service (because there was no measure of the quality of the service in terms of ROI), therefore good service equalled cheap service. There are good recruiters, and there are cheap recruiters, but they are not always the same thing!

Work on producing an actual value for human capital is long overdue (which Chairman has not airily paid tribute to "our most valuable asset" at some stage?). But work most definitely is going on - I refer you this article by Jeff Higgins which is a particularly well-developed example.

If such a standard could be achieved then it ought to be possible, amongst many other benefits, for employers to pinpoint which agencies/sources are producing candidates who contribute the most over time, and which agencies/sources provide the greatest ROI irrespective of initial cost.

By the same token, such data would allow agencies to point to real proof of success; provide a real measure of value add and a firm basis for premium charging; and help to marginalise the cowboys who undermine the market on both cost and quality.

Such an arrangement has great benefits for both employers and recruiters. If anyone out there has any anecdotal evidence of innovative fee arrangements, or companies using sophisticated HR data to value their human assets I would be interested to hear.