Commercial models in executive search

Commercial models in executive search are not just about billing.

The commercial model matters because it shapes incentives on both sides. The way a headhunting firm gets paid affects how much risk it takes, how much time it can invest in the assignment, and how strongly it is incentivised to get to a successful outcome. Clients therefore should not view fee structures as a legal detail at the end of the engagement letter. They are central to how the search will actually be run.

Why retained search requires upfront fees

As we discussed in the difference between contingent and retained executive search firms article, one of the key differences between contingent recruiters and headhunting firms, is that headhunting firms typically adopt a “retained” model.

This means that the headhunting firm requires money up front in order to mitigate the financial risk of each assignment. Because headhunting firms dedicate a lot of resources to each project, operating on a purely “paid on placement” basis doesn’t work for them.

Time-based retained fee models

But how does this retained commercial model manifest itself?

Headhunting fee models often vary, but there are two main types of retained fee structure that headhunting firms use, namely time-based and performance-based models. Time-based models might have a structure like this;

• 25% of the total fee due on project initiation
• 25% of the total fee due after 30 days
• 25% of the total fee due after 60 days
• 25% of the total fee due on placement

As you can see, the time-based retained model is very favourable to the headhunting firm, with the firm guaranteed to get 75% of the fee after 60 days. This model is typically found with large, multi-sector headhunting firms such as the “SHREK” firms. The nature of the model does present risk for clients, with arguably the headhunting firm not having enough of a financial incentive to drive to placement.

This is not to say that firms who operate with this model aren’t professional, or great headhunters. Indeed these firms often have to execute projects to a very high standard to justify their fees. These companies have hundreds or thousands of employees and have existed for decades – because they execute for their customers. Even so, this kind of commercial structure feels weighted in the headhunting firm’s favour.

From a client’s perspective, the main concern with this structure is obvious: a large proportion of the fee may become due before the role is filled. That does not automatically make the model bad, but it does mean the client should have a high level of confidence in the firm before agreeing to it. In practice, this model tends to work best where the search firm has very strong brand credibility, a clear track record and the client is comfortable paying for process as much as outcome.

Performance-based retained fee models

More typical is the performance-based model, which is typically used by smaller and mid-sized firms. A very common structure is based on “thirds”;

• One third of the total fee when the project is started
• One third of the total fee once a shortlist of candidates has been agreed
• One third of the fee on placement

The first third of the fee enables the headhunting firm to map the market, and conduct thorough market research through contacting lots of passive candidates. The second third is due once the client is happy they’ve met a suitable shortlist of candidates (this is usually once the search is mature), and the final third is due on placement. This model arguably cuts a fairer deal between both parties, protecting the headhunting firm financially so they can map the market, but also giving them a heavy financial incentive to get to placement.

This is often seen as a more balanced arrangement because it shares risk more evenly. The search firm still receives enough upfront money to commit proper resources to the assignment, but a significant part of the fee remains contingent on real progress and final delivery. For many clients, that creates a more comfortable alignment of incentives.

Fixed fees vs percentage-based fees

We’ve discussed the different fee models, but not the overall size of the fees. As you can imagine, this can vary a lot, and is also impacted by whether the fee is fixed or not. Contingent recruiters typically charge a percentage of salary while by contrast retained headhunters often used fixed fees that are based on the seniority and complexity of the hire.

Fixed-fee models do have some significant advantages – perhaps most notably they create better incentives than fee models based on a percentage of salary. If the fee is variable, the recruiter is incentivised to push senior, expensive candidates to enlarge their fee, whilst the client is incentivised to hire cheaply. This creates financial risk for both parties, and a fixed-fee model allows both client and recruiter to focus on finding the best candidate – relatively senior or relatively junior – without worrying about the impact on their fee obligations.

Some retained headhunters do use variable fee models based on the salary of the placed candidate, and if you are working with such a firm, make sure you are aware of the financial risks and perhaps try to negotiate a fair fixed fee model instead.

Why some executive searches cost more than others

CEO searches are often the hardest searches of all as they are the most significant hire for most businesses and suitable candidates are in short supply. As a consequence of their importance, CEO searches command the highest fees. For a large, well-known business, that fee could be many hundred of thousands of dollars. At the other end of the retained executive search spectrum, an important CTO hire for an entrepreneurial technology business might command a much more modest total fee of $50k in some circumstances.

Generally, search firms will charge more money if a search is more complex. Common causes of search complexity include;

• A very senior role
• A lack of supply of candidates
• A difficult-to-sell proposition to candidates
• An unusual location with little suitable local talent
• Roles that require looking internationally in foreign markets

A European company might need a very senior CFO to manage their IPO; yet the most attractive, proven candidates to do that are much more numerous in the US. Looking in the US could lead to a stronger hire, but also creates much more cost for the headhunting firm.

It’s also worth noting that for the most senior hires – e.g. high profile CEO hires – you need a headhunter who has the personal network and credibility in that circle. You can’t inmail Mark Zuckerberg on Linkedin and expect to engage him. These elite headhunters are few in number and command very high fees as they have access to the most senior candidates; something which most headhunters lack.

In the end, commercial models in executive search are not just about how a firm gets paid. They shape incentives, influence risk, and affect how much time and resource a search firm can commit to an assignment. Clients should therefore look carefully at fee structure, not just total cost, when deciding which firm to work with.

See also:
How Executive Search Works
Briefing Headhunters
“SHREK” firms