One of the first thoughts most executives have when engaging a retained executive search firm is, “how much is this going to cost?” While retained executive search fees tend to cost more than contingency fees, or even managing the search in-house, the return on your investment far outweighs the increase in spend.
When considering a retained search firm, there are four areas you’ll want to ask about.
The fee structure of a retained search is similar to a contingency search in that it is typically based on the first year compensation of the executive. That’s where the similarities end. Contingency search firms typically charge 20-25% of the first year annual salary of your new hire and are paid only after they have completed the search.
Retained search firms fees are typically 30% – 38% of the first year compensation of your new hire and they begin to be compensated as soon as the agreement is signed. To get to that 38% number, the larger firms tack on to their base fee an administrative fee equal to 10-15% of the fee. To see the difference in services offered by retained firms, you can read our article here.
As noted above, the first payment is made at the outset of the search. In most cases that is the first third of the total payment. The second payment is either time based, 30 days after the first payment for example, or is event based after the shortlist of candidates has been identified. The final payment can also be time based or provided on project completion. If a search is cancelled by the company, the payments are non-refundable.
A couple of notes. First, with a retained search, if the company cancels it for any reason, any payments made are non-refundable. Second, some smaller retained firms use a flat fee structure. These fees are also paid in three increments and carry the same non-refundable policy. They do however, allow you to know the exact amount the search will cost in the event there is some variability in the amount the new hire could require.
The guarantee comes into play in the event the hire doesn’t work out. Most contingency search firms will provide a short guarantee of 90 days or less. Most retained search firms will offer a year guarantee as well as onboarding support to ensure the hire is able to acclimate to the company culture.
Off Limits Clause
The final area to discuss is a non-solicitation clause. This prevents the firm from contacting your employees for other searches. This is important to keep your executive team together over time. Most reputable firms have no problem with this policy. However, if the firm is highly specialized in a single industry it can work against them since a large pool of talent is off limits to them.
When compared to legal fees or consulting fees, executive search fees can be downright affordable. Hiring the best possible candidate for an executive level opening provides ongoing value to the organization in leadership, strategy, personnel, sales and decision making; which all impact the bottom line.