Fees show shift to greater flexibility

This is no surprise. Falling prices are a feature of all brokerage services and headhunting is no different, says Shaun Springer of headhunter Napier Scott.

He says that whereas 30% to 35% of first-year salary was a standard average fee a few years ago, today's norms are more like 25% to 30%.

Although, naturally enough, headhunters do their best to resist too much downward pressure, Tony Tucker, managing director of headhunter Executive Resourcing Group (ERG), believes the industry should not complain too loudly.

Previously an HR manager in investment banking, Tucker says clients used to get ripped off badly by headhunters, and even today, he says: 'I think as an industry we probably overcharge.'

So what are headhunters charging and what is a reasonable fee?

The standard model for many years was to charge a third of the first year's salary in three tranches: a third on appointment, a third on presentation of the shortlist and a third on completion. On top of this came expenses, often charged as an additional percentage.

While some firms, particularly large international search firms, still manage to stick to this model, most offer some flexibility. Particularly with the current tough economic climate, there has been a greater willingness to negotiate on fees or on terms of payment.

Thus it is more common for headhunters to charge, say, 30% of the fee up front, but then nothing else until completion, says Ruth Velenski, senior consultant with Penna BBM.

She says: 'Firms are also prepared to be more concessionary with fees. But we're talking about one or two per cent. Companies with integrity won't negotiate too low because it is hard to increase rates again later.'

Tucker at ERG believes a model that is more heavily weighted towards payment on success should prevail whatever the economic climate.

He says his firm routinely charges 15% to 30% of the fee up front and the rest only once an offer has been made.

'It keeps us very disciplined. If we're only paid on success, we can't afford for a search not to succeed.

'In the past two years we have completed every single mandate, with one exception in which the candidate turned down an offer and the client refused to go any higher.'

On the client side there have been two significant factors in driving down fees in recent years: the use of fee caps and the introduction of preferred supplier lists.

In the UK, say headhunters, caps are generally in the 150,000 (€240,000) to 200,000 range and it is rare now for fees to go above 250,000. In the US, meanwhile, fees twice that high are not uncommon. Springer at Napier Scott says the arrival of European banks in London has increased the downward pressure on fees.

The search industry has tended to charge less in continental Europe, so European banks were unwilling to pay high London prices.

Preferred supplier lists are a mechanism whereby clients can ensure speed and quality of service and get lower prices. Suppliers, such as headhunters, are pre-vetted and a small number are approved.

Only these firms are then invited to pitch for mandates. In return for a promise of a greater volume of work for these firms, banks demand lower fees and lower caps.

Expenses can be another sore point. Some firms charge a fixed percentage, while others itemise every courier and lunch bill. Tucker believes that only substantial expenses, such as travel, should be charged additionally, by agreement with the client.

'Normal expenses incurred in the course of a search should not be passed on. That's what the fee is for.

'When I was in HR I used to get charged sometimes for 3.50 for a courier round the corner and 50p postage. It's absurd,' says Tucker.

Something else that has been happening in the tighter economic climate is a greater use of contingency rather than search contracts. In contingency work, clients ask a number of headhunters to put forward candidates for a particular position.

This is done without a fee and agencies typically simply search their databases to see if they have any suitable candidates. Only if the client pursues a particular candidate is the agency paid.

Upmarket search firms have tended to be rather snobbish about contingency work, but many firms do both types of work.

In a tough economic climate, when headhunters are getting dozens of CVs across their desks every day, clients are more likely to give contingency a go before embarking on an all-out search.

According to Velenski at Penna BBM, there is an additional variation.

If clients want a search, but do not want to pay a retainer, her firm will consider doing the work, as long as it is on an exclusive basis and a cancellation fee is payable if the client changes its mind.

Indeed, flexibility and creativity have become the hallmark of pricing for recruitment services of all kinds.

The use of the internet, too, has changed the landscape somewhat, blurring the line between search, selection and contingency.

Fees certainly are not getting easier for headhunters and the eternal tension between clients who want to push costs down and headhunters who want to keep fees up, is set to continue.