As talent war resumes, recruiters jump hoops to earn their fees

The U.S. executive-search business is reviving after three years on life support. But fierce competition and fee cutting during the recession have changed the dynamics between recruiters and their corporate clients.

Leading U.S. search firms are celebrating their first annual revenue gains after three years of losses. U.S. professional fee revenue for the 25 biggest firms grew 20% in 2004 over 2003, the first such increase since 2000, reports Hunt-Scanlon Advisors, a research firm in Stamford, Conn.

Still, those firms' $1.135 billion in 2004 domestic revenue remains far below the high watermark of $1.720 billion set in 2000. "We are still about two to three years out from reaching that apex" again, increasing pressure for lower fees and more services, says Scott Scanlon, Hunt-Scanlon chairman and CEO.

It once was standard for retained-search firms, which generally fill upper-level jobs paying at least $200,000 annually, to collect retainers even when they didn't complete an assignment. (By contrast, "contingency recruiters" fill lesser-paying jobs and get paid only when positions are filled.) During the heady job market of the late 1990s, retained recruiters could count on fees averaging about one-third of a candidate's first-year compensation.

When the job market dried up, recruiters reduced fees, agreed to delay payments until they met certain performance targets and provided additional services. Now, corporate clients are making those recessionary changes permanent -- largely by holding recruiters more accountable and sometimes linking fees to targets. The new practice of paying retained firms' "contingent" on a performance goal has been dubbed a "container" or "retingency" arrangement.

"We're now applying the same rigor and discipline to search as we do to our other big corporate initiatives," says Eric Elder, senior vice president of executive recruiting for Bank of America Corp. in Charlotte, N.C. "We have managed the number of failed searches down to practically zero."

Mr. Elder says he and colleagues have become "maniacal" about receiving weekly progress reports from search firms. The big bank only works with its established list of "preferred provider" recruiters. Hiring managers get this high-quality list along with the firms' prices, success rates and other quality metrics. In the past, Mr. Elder notes, "a search firm could utterly fail in a search in one function, then four weeks later, get contracted to do a search in a totally different part of the organization."

Charlie Polachi, president of Polachi & Co. Inc., a boutique retained-search firm in Sherburne, Mass., says its payments now sometimes depend on a client receiving a list of potential candidates, a catalogue of interviewed candidates, a candidate receiving an offer or other progress goals.

Clients of Diversified Search Cos. want better service and better understanding of their businesses, says Judith von (cq) Seldeneck, CEO of the nation's 18th largest retained-search firm by fee revenue in 2004, according to Hunt-Scanlon. The Philadelphia firm sometimes receives less than the standard fee. "We aren't going to work for 20%, but we aren't always stuck in the mud at 33.3% either," says Ms. Von Seldeneck, also head of the Association of Executive Search Consultants in New York.

Many of her firm's rivals also negotiate lower fees these days. In 2004, U.S. retained-search firm fees averaged about 25% of first-year compensation, Mr. Scanlon estimates.

Another factor driving the trend: Human-resources executives are sharing more information with each other about search-industry practices. About 70 of the largest U.S. public companies belong to the Executive Search Information Exchange (ESIX), a forum that some formed in 1996. Exchange members meet 11 times a year to discuss issues related to search practices and the group conducts surveys about fees and other significant measures, such as completion rates, says David Lord, its facilitator.

Companies increasingly give internal heads of recruiting more responsibility to manage the quality and cost of recruiters' services, says Mr. Lord, president of Executive Search Information Services, a consulting firm in Harrisville, N.H. "They realize they may be spending $5 million to $25 million or more on search," he says. "If they sense that the process isn't very efficient, there are other costs, like a failed search or bad hire at the executive level, that make it a huge issue."

Colgate-Palmolive Co. negotiates search-firm fees and sometimes requests a flat payment, says Patrick Feehan, director of global staffing for the big consumer-products concern in New York. Flat fees typically reflect a new executive's expected earnings; he thinks about 29% to 30% of such pay would be fair. With a flat fee, a search firm no longer can boost its usual payment by negotiating higher remuneration for the successful prospect, Mr. Feehan observes. "You take the fee out of play."