The Economics of Recruiting: Traditional Agency vs. HeadRace

The Economics of Recruiting: Traditional Agency vs. HeadRace

Blog Posts
Alex Davis
6.6.22
·
5 min

The recruiting industry has been slow to change, if at all, over the past 20+ years. Small, medium, and large recruiting agencies have compensation and incentive structures that accrue outsized wealth to the equity partners, while leaving a comparatively smaller piece of the pie for everyone else. Given how difficult recruiting is, this disparity in earnings in addition to the stress of meeting goals results in significant turnover at agencies. 

What if there was a new operating model and compensation structure that gave all of the hard-earned dollars back to the recruiters who do all the hard work? Well there is now, and it’s called HeadRace. 

Traditional Agency Economics

For recruiters who have been in industry for some time, this overview will be very familiar, but for the uninitiated, here is a brief overview of how the recruiting agency economics work.

For a given search agreement, fees paid to the agency are calculated as a percentage of the placed candidate’s first year cash compensation. While fee percentages vary based on the role type, seniority, and industry, typical fee percentage ranges are usually between 20-35% of the candidate’s first year cash compensation. So, if an agency places a candidate with $200k first year cash compensation and the search agreement stipulates a 30% placement fee, the recruiting agency will earn $60k in fees ($200k x 30%).

While a bit oversimplified, typical recruiting agencies have 3 categories of employees: recruiters, equity partners, and back-office/support staff. Your recruiters are those with ~1-10 years of experience, equity partners are recruiters who have worked their way up the ladder at the agency and participate in the remaining profits of the firm, and the back-office/support staff include legal, finance, accounting, human resources, and other standard G&A functional areas.

Continuing with our example above, the recruiting agency successfully placed a candidate with first year cash compensation of $200k and earned a 30% placement fee on said placement, resulting in $60k of fees paid to the agency. Now this is where it gets interesting. How do the $60k of placement fees get distributed? Without going into the specifics of thresholds, team structures, and quotas (will be discussed in a separate article!), let's continue with our framework of 3 categories of employees at the agency: recruiters, equity partners, and back-office/support staff. 

The typical allocation of the placement fees is structured as follows. Between ~20-50% of fees are paid to the recruiters, ~30-50% is used to compensate back-office/support staff, and the remaining dollars are paid to the equity partners. To keep things simple, let’s assume it is split evenly between all 3 constituents, meaning each category of employee gets 1/3 (~33%) of the placement fees. So that means the recruiters earn $20k (1/3 x $60k), back-office/support staff also earn $20k (1/3 x $60k), and the equity partners earn the remaining $20k (1/3 x $60k).

So of the $60k placement fee, the recruiters only keep $20k – just 1/3 of the total amount! In our opinion, this seems misaligned and inefficient on a number of levels, but the main one being that the recruiters typically do all of the work – from opportunity sourcing, to negotiations, to candidate sourcing, and candidate placements. Seems a bit lopsided, right? We think so too. We are building HeadRace to address exactly this – to better align internal and external incentives among recruiters, and to most efficiently allocate costs within the recruiting industry – giving more back to the recruiters who deliver the best results to companies.

HeadRace Economics

Our business model is premised on leveraging our proprietary software to deliver the mission we set out to do: putting more of the placement fee dollars back into the pockets of recruiters. How do we do that? Well, in order to deliver on that statement, we need to reclaim the dollars spent on back-office/support staff and earnings to equity partners. Let’s first discuss how we remove the expense of back-office/support staff.

HeadRace is a technology business with an outstanding team of software engineers, product management, and design leaders, who have worked tirelessly to build a suite of tools that automate the back-office services that traditional agencies rely on using people to execute. Our software allows us to manage legal contract creation/signing, customer invoicing and collections, and finance/tax record management. So continuing with our example from earlier, we are already able to reclaim the $20k paid to the back-office/support staff. So now the recruiters go from earning $20k in the traditional agency model, to earnings $40k. That’s double what they made beforehand, and at zero extra effort to the recruiter.

Now let’s explain how HeadRace disintermediates the equity partners at the traditional agency. In addition to offering proprietary software, HeadRace at its core is a marketplace matching independent recruiters with the world’s most innovative companies looking to hire great talent. Because our business is a marketplace, we effectively crowdsource the opportunity sourcing (business development) efforts, making it incredibly easy for recruiters to find new roles to work on. So instead of having to go out and spend substantial time, energy, and money to drum up new business, our marketplace brings high intent roles right to the recruiter. 

In the event a recruiter finds a role through the HeadRace platform, HeadRace will charge a small commission (calculated as a percentage of the placement fee) to the recruiter, for providing the matchmaking service. When HeadRace connects a recruiter with an opportunity at a new company, HeadRace will take 20% of the placement fee. So keeping in line with our math from above, on a $60k placement fee, the recruiter would now take home $48k (80% x $60k), 2.4x what they would earn at an agency. And this is all at no charge to the recruiter. There are no access fees, administrative fees, subscription fees, or anything – the platform is 100% free to use for recruiters. 

However, HeadRace also offers a unique value proposition to recruiters who already have existing client relationships. If a recruiter joins HeadRace and brings their own clients and roles to the platform, HeadRace does not charge anything to the recruiter. Recruiters can operate on the HeadRace platform at no cost to them, without paying any fees to HeadRace for business they bring themselves. So continuing with our example above, if the recruiter invites this company to HeadRace and works on this role, they would earn the full $60k, 3x what they would earn at an agency.

While this seems like a massive step up in recruiter earnings potential (and it is), we believe this is what an efficient market outcome should drive. Our model is innovative but in reality the structure we implement just reclaims earnings for recruiters that they really deserved to be earning all along. 

Final Thoughts

In summary, the HeadRace platform allows recruiters to build their own 100% recruiter-owned brands and reclaim 80-100% of the placement fees they generate. Conservatively, recruiters can 2x their earnings and in many instances we’ve seen recruiters more than 3x their earnings at an agency.

If you’re a recruiter and are interested in learning more, please email us at grow@headrace.com.

By
Alex Davis

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