When a hiring manager receives a fee proposal from a recruiting agency, the first thoughts are, is this fair? Is this normal? (Am I being taken for a ride?) As you might expect, there is no easy answer to that question, it depends greatly on the context. We’ve put together a comprehensive writeup on the merits of the main search fee models for permanent placements: contingency, retainer, and the newer hybrid model, container, which you can reference here. There are also other fee structures for other types of placements, such as contract work and staffing, or under the RPO model. But how much will you actually be paying your recruiting agency under each model?
The fees for permanent placements under the contingency, retainer, or container fee structure are calculated as a percentage of the first year base salary of the placed candidate. Most typically this amount includes any sign-on bonuses but excludes any performance bonuses or equity grants. The range for this percentage is pretty broad. Some percentages can be as low as 15% in light industrial or clerical or as high as even 50% of the base salary for executive recruiting. More typical is in the 20-35% range. So, for a hire accepting an offer that includes a base salary of say $150,000, at let’s say a 25% percentage, the fee would be $37,500.
As we discussed in our previous article, the fees can be charged in any number of configurations, from zero upfront and fully contingent and due upon placement, to some upfront and non-refundable and the rest spread over the course of the engagement, depending on the fee arrangement. It would be highly unusual to see a recruitment fee required to be fully paid upfront. Even under exclusive retainer arrangements, the fees are typically earned upon the achievement of articulated milestones. Typical payment structures for permanent placements would look something like this:
- 100% due upon placement
- 1/3rd due upon engagement start
- 1/3rd due when the first candidate enters the final round (indicates that the search is working)
- 1/3rd when the candidate starts
- Non-refundable deposit paid upfront, typically $5,000-$15,000
- Remainder due upon placement
Whatever the distribution of payments, the percentages generally fall within the range above.
It can get a little more interesting when the base salary is a more variable element of the compensation package. You can see this in commission-based sales roles. In some cases, primarily in some start-ups, compensation can be weighted toward options for stock in the company, or even in NFTs or cryptocurrency. In those cases, a reasonable fee based on comparable industry base compensation will typically be negotiated before the search commences.
Some of the elements that can affect the percentage charged include:
- Seniority of the role to be filled
- Scarcity of the skill set required to succeed in the role
- Number of roles contracted for with the recruiting agency
- Exclusivity or non-exclusivity of the search
- Experience, expertise and reputation of the recruiting agency
Higher seniority roles, as well as roles for which the talent pool is unusually small for the number of open positions, require a greater investment on the part of the recruiting agency in terms of time likely to be spent and the seniority/expertise of the recruiters spending that time. That kind of devotion of resources will tend toward more upfront or guaranteed fees paid before placement, and a higher percentage of base salary, as the firm is foregoing other opportunities and therefore taking on more risk that these efforts might not be compensated for at all. Likewise, roles that have a larger and less specific talent pool require less risk on the part of the agency.
That said, exclusivity can also be seen as a factor that leads to a lower percentage charged. For although exclusive searches are often reserved for the more difficult searches, and tend to go hand in hand with retainers paid before placement, and are also overall higher fees, the exclusivity serves to lower the overall fee because it lowers the risk to the agency. For searches on the lower end of the spectrum, with broad talent pools and less risk for the agency, introducing exclusivity sometimes allows an agency to charge a lower fee. Similarly, where an agency is handling a number of roles for a hiring company, a lower percentage can sometimes be charged, especially when combined with some degree of exclusivity, as these factors can reduce the risk to the agency.
No surprise that proven recruiters in their respective areas of expertise will likely quote a higher percentage, as their services are in higher demand and they will need to ensure they are devoting their resources to where they can add the most value.
Fees in Recruitment Process Outsourcing (RPO) tend to be billed at an hourly rate, typically ranging from $100-$200 per hour. At Rocket, we believe it is important in structuring fee arrangements that clients and agency incentives are as closely aligned as possible. Therefore, we recommend a structure that combines an hourly fee with a smaller placement fee once a role is filled (typically $2500-$5000 per placement). Placements can happen right away or they can take more time, so this structure encourages an environment in which both parties can feel confident in the relationship.
In terms of staffing, an agency will charge a bill rate/per hour to provide candidates for the duration of a particular assignment. This bill rate will include the employee pay rate/per hour, employer taxes and service fees, and employee benefits, such as health insurance and holidays.
A good rule of thumb is that the bill rate should be 30-50% higher than the pay rate. And yes, you should absolutely ask and know the pay rate of the employee.
But at the end of the day, just knowing the percentage of the fee tells you precious little about whether or not it is a good value for the money. We’ve written a great article which you can reference here, about how to evaluate a recruiting agency you are considering hiring. Cost is one important criteria but should not be the only criteria.
Rocket pairs talented recruiters with advanced AI to help companies hit their hiring goals. Rocket is headquartered in the heart of Silicon Valley but has recruiters all over the US & Canada serving the needs of our growing client base across engineering, product management, data science and more.