Business

Of all the vitriol directed at recruiters, the most anger is often reserved for the fees that recruitment agencies charge. Most agencies work to a contingency model, meaning they only charge a fee upon a successful placement. This fee is typically a percentage of anything from 10-30% of the salary that the employee is hired at. Working within IT recruitment, the most common percentage I saw was 15%. This means that a placement fee would be equivalent to the first 1.8 months of the candidate’s annual salary. “How can you possibly justify charging that”, the furious layperson cries, “when all you do is send a CV across?!”

This is a fair question, and it deserves a fair answer. Charging a company thousands of pounds for simply providing an introduction to a candidate does seem ridiculous, and, for those outside the process, it can seem that a huge amount of money is changing hands for very little work. How on earth can these fees be justified?

Estate agents:

To answer this, let’s compare recruitment agencies to another common agency model: the estate agency. Estate agents make their fee by charging commission on the arrangement and management of the sale of a property. This fee is typically a low percentage, made lower by the fact that most sellers will negotiate a sole agency agreement to get a reduction in fees. For the sake of argument, let’s assume a fee of 1.75%. If estate agents can work to 1.75%, why can’t recruiters? Well, firstly, houses are typically worth a lot more than salaries. The average house price in the UK at the moment is around £170,000. At 1.75%, that works out at £3010 in commission. The average UK salary is around £27000 – at 1.75%, that would be £472.50.

However, at this stage you may rightly say, “but if recruitment agencies typically work to 15%, then the fee for the average UK salary is £4050 – over £1000 more than the fee for the average UK house!” A fair point, and this is where an explanation of placement ratios comes in handy. The placement ratio is the number of roles worked on that are successfully placed, against the total number of roles worked. This varies depending on a number of factors, including industry, typical roles worked etc. Within IT recruitment, even a successful agency is unlikely to have a high placement ratio: the majority of the roles a recruiter works will not result in a placement. There are a number of reasons why this is, but a major cause is that clients will typically engage multiple recruiters to work on each role. It is not uncommon for a client to use six agencies. In contrast, in the UK, most estate agencies work to sole agency agreements, meaning that they are the only agent under instruction to sell the property. Sure, selling a property is a far more convoluted process than hiring a candidate, and a client can easily take their house off the market, but who is more likely to charge less for each job – the estate agent who will sell 6 out of 10 houses under instruction, or the recruitment agent who will only place 2 out of the 10 roles being worked?

The charges:

From this, we can infer that a recruitment agent’s fee is comprised of two separate charges; a charge for the time, expertise and effort put into the role, and a charge for the risk the agent assumes under a contingency model. Because there is a very high likelihood that the time and effort a recruiter puts into a role will not result in a fee and placement, then it makes sense that a recruiter has to charge a higher fee for a successful placement – simply because most of their work will not result in a fee. This contingency model is actually pretty unusual when you think about it; if engaged to work on a job, most types of agency get paid for their work regardless of the final outcome. For example, if you engage a digital agency to design a website, then they will get paid for that work even if you don’t end up using that website (for whatever reason). If you engage a business consultancy to advise your firm on strategy, and you fail to use their advice, you still have to pay them for it. However, if a recruitment agency finds three superb candidates for a role that they are engaged to work on, and the client decides not to hire any of them, the agency cannot present the client with a bill for time and services rendered.

Conclusion:

So, whilst an individual fee for a successful placement may seem excessively high, it has to be considered within context: in order to make that placement, the recruiter had to work a large number of roles which did not result in any fee at all. The second charge to answer, that recruiters do almost nothing for their fee, is easier to refute. Imagine the following scenario: a client calls a recruiter with a vacancy. The next day, the recruiter sends over 3 excellent CVs. The candidates are promptly invited into interview, all of which go well, but one is outstanding. He/she is promptly offered and accepts, and starts the following month. Seems easy, right? Well, what’s the more likely scenario – that recruitment is a really easy job, or that the recruiter used their expert knowledge of the industry to find the right candidates, their extensive network to find the best fits for the role, and their management skills to ensure a smooth and easy process, up to and including ensuring the candidate turns up to work on their first day? I’ll leave that to you to decide.\

[Image Credit: Shutterstock]


About Andrew Fairley

Andrew Fairley has recently completed an MA in Management with The York Management School, focusing on strategy, innovation, HR, and organisational behaviour, and has just begun a PhD investigating the UK internet startup industry. Prior to this, he spent 2 years as a Recruitment Consultant, working with clients from SMEs to blue-chips, sourcing IT staff.  You can find him on Twitter or LinkedIn.

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