Some things you may not know about how “success fee” models work… and where they fail.
“If the recruiter is good at their job, they should always be fine getting paid upon placement. There should be no risk there for them.”
“It’s the most incentive aligned model. They place someone, they get paid. If they can’t find me a good hire, then they don’t get paid.”
If you’ve ever said or heard statements like this, you’re in for a shocking surprise! In fact, the best recruiters typically only work with upfront, retained payments. So what’s the disconnect from these statements?
First, what is a Contingent Recruiting Contract?
If you’re not deep in recruiting lingo, a Contingent recruiting contract is an agreement between an employer and a recruitment agency where the agency only gets paid if they successfully fill a job opening with a candidate who is hired by the employer. In other words, the recruitment agency's fee is contingent upon the successful placement of a candidate.
Under a contingent recruiting contract, the agency typically earns a percentage of the hired candidate's first-year salary as their fee. This type of contract is popular for employers because it minimizes the upfront financial risk, as they only pay the recruitment agency when a suitable candidate is found and hired.
However, it’s important to note that contingent recruiting has a couple major downsides for employers:
- Lack of Commitment by Recruiter - Since there’s no upfront commitment by the employer to hire anyone for the role, recruiters often treat these searches as “optional” to fill, rather than a “commitment” to fill. That is, since the employer doesn’t commit anything to the recruiter, the recruiter often doesn’t commit anything to the employer. This can lead to longer time-to-placement.
- Candidate De-Prioritization vs. Another Employer - Contingent recruiters work with multiple employers at the same time. If these other employers sign different fee levels with your recruiter for similar roles, all else equal, the recruiter prefers to give their best candidates to their highest paying employers. So, negotiating fee levels downward in contingent contracts often deprioritizes the best candidates from being referred to you first.
- Reduced Quality of Candidates - Signing multiple contingent recruiters working on the same job opening can result in a less committed search process from any of them and therefore potentially lower quality candidates. This is in contrast to a retained search, where the recruitment agency is paid a retainer upfront and works exclusively on the job opening, often providing a more thorough and dedicated search for the best candidates.