Search Firm Fee Structures
Unless you’re an insider to the executive search profession, it can be difficult to ensure the terms of engagement are in the best interest of both the firm and the client.
First, it is important to recognize that contingency vs retained search is more about sourcing, process and client management than about fee structures. Read my blog Retained or Contingency to learn more. In this article, I’m addressing retained fee structures.
A win-win fee structure ensures that both the search firm and client are committed to the project and excited about their partnership. While it may seem advantageous for a client to negotiate the lowest possible fee, this strategy can backfire. If a firm has similar searches at different clients and some candidates would qualify for either, the firm would present the candidates to the client paying the higher fee first. The low-fee client may not see that talent unless the first client determines the candidate isn’t a fit.
I am in favor of fees based on the first year’s base salary and target bonus. If there is history of substantial volume, then I believe the percentage should be in the 25-30% range; otherwise, I support the standard retained rate of 33%.
I am less likely to use or recommend a search firm that charges blanket administrative fees. The big five (Korn/Ferry, Heidrick & Struggles, Spencer Stuart, Russell Reynolds and Egon Zehnder) are more likely to add this fee on top of the retainer and in addition to documented expenses. When the search market is strong, this can add much as 18% to the fee. It’s rarely clear what these charges cover; in my opinion expenses not easily documented and client specific are the costs of doing business. If the larger firms are not willing to forego the administrative fees, consider using a boutique firm.
On the other hand, a search firm should charge for client-specific and documented expenses including overnight mail or courier services, outsourced research, video conferencing, meals with candidates, travel for interviews, etc.
Any engagement letter (contract) with a search firm should identify off limits, both client and firm defined, as well as candidate ownership. The firm’s candidate ownership should be married to their placement guarantee which is usually one year from the signed offer letter.
I support a fee schedule based both on deliverables as well as time periods. Many would argue that this isn’t pure retained search, and they’re right. Be that as it may, a fee schedule where the first retainer is due at search kick-off ensures buy-in from the client and reduces the firm's risk of expending resources for an uncommitted customer. The second retainer should be due after 60 days providing the firm has presented a slate of qualified and interested candidates. The final fee should be due upon a signed offer letter. While this structure isn't purely retained, I would argue that it is best for constructing win-win engagement terms.
There are many nuances to search firm engagement terms; this blog touches the surface. If you’re about to embark on a major search, it may behoove you to enlist the help of an expert.