The heart of the problem for financial services recruiters

Financial services recruitment firms are hurting.  It doesn’t take much to see why. Although some quiet financial services hiring is still taking place, ‘strategic tourism’ is off the agenda and therefore there's none of the recruitment that was previously driven by banks taking two year holidays in new areas. At the same time, staff turnover has generally halved – down from around 15% to around 8% according to one senior banker. And when vacancies do arise, banks are pushing to either fill them internally or to fill them directly – using their own in-house recruiters.

In combination, these factors are the cause of recruiters’ pain. However, the main symptom – and site of the current excruciation, is the breakdown of the traditional model of recruiters’ fees.

Search consultants and contingency recruiters

As is frequently and indignantly pointed out on these pages, there are two kinds of recruitment firm: retained search firms and contingency recruiters.

Search firms would prefer not to be associated with the word "recruiter," preferring the moniker "consultant." The search consultants are the self-declared McKinsey & Cos of the recruitment world. They have traditionally been paid for providing a considered service and are used to charging a retainer fee equivalent to 20% of first year compensation for the individual they place. This fee is deliverable in installments:  a first installment when the search firm is retained and given the mandate; a second installment when the search firm provides a shortlist of appropriate candidates; a third when the candidate is in the role and has stayed there long enough for that role to appear to be working out (usually a few months.)

Contingency recruiters are viewed with disdain by search firms. Contingency recruiters don’t get paid retainers. They don’t get a fee for providing a shortlist of candidates. They don’t ‘consult.’ They just send out their selection of resumes to banks – often on an ad hoc basis. And if one of those resumes leads to a hire, they earn a fee, although it’s unlikely to be much more than 15% of the candidate’s first year compensation.

This is how it used to work.

Meltdown

Now, the distinction between aristocratic retained search firms and plebeian contingency recruiters is blurring.

Both are being shunted into a squeezed middle.

The squeeze at the top   

At the top end, search firms are struggling against banks’ unwillingness to pay retainers in all but exceptional cases.

When retainers are issued, search firms are struggling again with the definition of first year compensation that underpins their fee calculation. In the past, first year compensation often included a salary plus a large guaranteed bonus. The fee of 20% would be chargeable based upon the full package: first year salary, plus first year guarantee.

Now, however, guaranteed bonuses have been all but eliminated.  And although investment banking salaries have been increased, the increase is far from sufficient to compensate headhunters for the loss of fees based on guarantees that were worth several hundreds of thousand – or even millions of dollars.

“We cap our headhunters fees per hire at £100k ($161,000),” explains one head of recruitment. “But our MD salaries are £200k ($323,000), and so headhunters rarely get more than £40k ($65,000) from us. They complain about this.”

Earning $65,000 in fees simply for placing one person in one role may sound great, but it’s less so when you consider that such fee-earning opportunities are now rare. They are also dependent upon a hire actually being made. In some cases, the role will be pulled or deferred before the new recruit joins – meaning search firms only earn a portion of the sum they were expecting.

“People are asking about cancellation fees,” says the recruitment head. “We’re like – what cancellation fees?”

Finally, in cases where new hires are still given guaranteed bonuses, guarantees are often verbal. In this case, banks are refusing to pay headhunter fees based upon them. They are also contingent upon a candidate’s performance.  When contingent guaranteed bonuses are issued, banks are refusing to pay the full fee until they know that performance conditions have been met. This can take ten months, or more. Search firms that were used to being paid immediately are being forced to wait.

The squeeze at the bottom

While the fee model at the aristocratic end of the financial services recruitment industry is breaking down, the fee model at the bottom end isn’t so hot either.

When it comes to ‘volume’ and junior positions, banks are trying to do an increasing amount of hiring themselves. More and more candidates are sending their resumes to banks directly. And banks are able to go online and to source their own resumes from resume databases or LinkedIn.

This is leaving the contingency recruitment firms in a difficult place. What’s the point of suggesting a candidate when that candidate is already known to the bank concerned, or can be unearthed with a quick search of the internet? No one is going to pay for that.

As a result, banks’ recruiters say contingency recruiters are being forced to up their game. “They’re being forced to headhunt,” says one head of recruitment.

Contingency recruitment is becoming about the punting of resumes from candidates not currently known to the bank concerned. However, while search consultants have traditionally been paid a retainer for unearthing these candidates, contingency firms are being forced to do so for free.

The end game 

The end game is all too clear. The top end of the market is condensing into a few search firms who can still persuade banks to pay retainers and 20% fees. The bottom end of the market is dropping away and being replaced by in-house recruiters and the eternally vilified RPOs, which provide outsourced recruitment services for banks.

The rest – and the very vast bulk of the market – is being left to a squeezed middle, which is being forced to put more and more work into finding fewer and fewer unknown candidates with less hope of ever getting paid. It all looks a bit bleak.