There are three types of outsourced recruiters, and their differences rest on the fee arrangement.
Contingent: A recruiter working on contingency is paid no money until the job is filled. Although you pay nothing upfront, you may get inundated with candidates. The recruiter may take a shotgun approach because he wants to fill the job as quickly as possible.
Retained: You pay the recruiter an upfront fee based on the salary level of the position you’re trying to fill. You usually pay one-third at the beginning, another third at an agreed upon landmark in the process, and the remainder when someone’s hired.
Contract: The recruiter works on a straight hourly rate. This approach, also called “rent-a-recruiter,” can be abused if you don’t place controls and constraints on the number of hours.
Some recruiters also offer “talent management” consulting. They will evaluate the whole life cycle of hiring, career advancement, and firing at your company. Then they will make recommendations on such human resources concerns as how to make your company more attractive to high-quality talent or how to increase your retention rate.
For contingency and retained searches, fees are based on a percentage of the candidate’s first year’s compensation. That typically ranges from 20 percent to 35 percent, but it’s rising as the smaller working population creates scarcity in many professions.
To avoid nasty surprises, make sure you understand what “compensation” includes. Is the commission based on the salary only? Or is it a percentage of the salary plus commissions and bonuses?
Contract recruiters usually charge an hourly rate ranging from $75 to $150 an hour, though the rate may be as low as $25 per hour in some low-wage parts of the country. Contract recruiters claim that this hourly billing arrangement usually costs much less (closer to 15 percent of first-year compensation) than other types of searches.
To ensure that you can control costs with a contract recruiter, you should negotiate an upper limit to charges based on how many hours the recruiter thinks the search will take.
Whatever your arrangement with a recruiter, you should always ask for a guarantee. Good recruiters want to cultivate you as a regular client and are happy to offer a guarantee. Typically, they will replace the person for free if he or she leaves or is fired within the first 30 days of employment. If he leaves in the second or perhaps even the third month, they conduct another search for half price.
If you’re a good client and bring the recruiter a lot of business, they may be willing to both lower their rates and/or extend the guarantee. On the other hand, if new hires that the recruiter places at your company regularly quit after just a month or two, the recruiter isn’t likely to want your business.