Revenues are at risk when recruits fall out

Hiring an investment banker or fund manager can be expensive and when the process goes wrong it can lead to bitter disputes.

Headhunters typically charge 25% to 30% of guaranteed first-year pay for finding the talent, which can mean them being owed hundreds of thousand of pounds. Hirers are sometimes unwilling to pay.

The latest dispute over a bill concerns RAB Capital, the Aim-listed hedge fund, and Durham Consultants, a small headhunter with offices in London's South Kensington. Durham is suing RAB for its alleged failure to pay fees of more than 200,000 following the placement of a fund manager.

David Durham, managing director of the headhunter, said the hedge fund's refusal to pay came as a surprise.

He said: "We've never had to go to these lengths to be paid before."

A spokesman for RAB Capital said: "This is a matter that is being dealt with in the courts. We are disputing the claims made by Durham Consultants. It is not appropriate for us to comment on this litigation."

Recruiters said disputes over payment were not unusual. They usually related to the early departure of the recruit or claims that the recruiter was not responsible for the hire.

Hugh Andree, a director at WoodHamill Executive Search, a financial services headhunter, said banks' contracts with recruiters often specified that if a new hire left within three months the fee should be refunded or a new search made for free.

Andree said WoodHamill recently conducted a complementary search after a hire it placed lost his temper and abused a trader and human resources officer.

He said problems also arose if people left because of the company's shortcomings. "They might be sold a role that doesn't exist, or join a business because they want to work with a particular line manager only to find that person leaves and they're reporting to someone else with different ideas," said Andree

In this situation, Andree said WoodHamill would not back down. "Our response is that we did the search, spoke to 50 or so candidates and persuaded that person to join

"Our terms and conditions cover this kind of situation and we will usually stand our ground," he said.

However, he said the increasing hegemony of a few large investment banks made it more difficult to assert those terms and conditions.

Other recruiters agreed. One large US bank demands that all recruiters on its preferred supplier list sign an agreement to reimburse fees on a sliding scale. If an employee leaves within 30 days, fees must be repaid in full, falling to 60% for up to 60 days and 30% for up to 90 days.

Leaving covers everything except redundancy. The recruitment firm forfeits its fee even if the bank fails to honour its side of the bargain by, say, imposing a different role on the new employee. The other main source of discord concerns responsibility for introducing a candidate.

Shaun Springer, chief executive of search firm Napier Scott, said disputes arose when one recruitment firm submitted a curriculum vitae previously presented by a rival.

He said: "Some say that whichever firm sent a CV first should be entitled to the fee. Others say a recruiter is only entitled to the fee if the candidate is hired within six months of the CV being received, and only then if they're hired into the role it was submitted for."

Andree said this could be used by banks to build their own candidate database. "Some banks ask you to send in candidates' CVs on the understanding that if the candidate is not hired within six months you won't receive a fee and the CV becomes their property. We might as well hand them access to our database," he said.

Some banks accuse recruiters of shady practices to extract a fee where none is due. The head of recruitment at a US bank in London said cowboy recruitment firms adopted a spray-and-pray method.

He said: "They send CVs hoping that, if one is acted on, they will be able to extract a fee, even if the candidate's employment is the result of a properly mandated search conducted by a rival. It's annoying: we are deluged with CVs all the time."

It is to avoid such problems that banks are centralising recruitment and stipulating terms and conditions.

If they do this too aggressively, however, they risk upsetting relationships. Jonathan Baines, a director at Whitehead Mann, said he had yet to experience a dispute over payment in 18 years of trading.

He said: "Banks are good and fair payers and a pleasure to do business with."