The Future of Recruiting Post FTC Ban on Noncompete Agreements, including 3 Predictions

Its June 2024 which means we're nearing the end of the 120-day notice period on the FTC’s ban of noncompete agreements. As a student of the recruiting industry and practitioner of the craft, I believe this rule change will be transformational and predict it will change the work as we know it. Before getting into that, you should know that I love recruiting. It may be odd to hear adoration for such a checkered trade, but it’s true. Recruiting, in my estimation, is a beautiful and, at times, lucrative combination of strategic communication, business acumen, energy, psychology, pageantry, and brokerage. I tried to think of a comparable line of work and came up blank (please comment if you know one). While remarkable in all these ways, recruiting can also be deplorable. Spammers, scammers, and that rotten feeling that the person claiming to "have your best interest at heart" is just in it for theirs. But alas, I love what I do, so it is with delight that I learned of the FTC’s ban on noncompetes and am confident it will have a positive impact on our industry.

I fundamentally believe that people are logical and do what they perceive to be in their best interest. This means that by removing the legal implications for leaving, I expect recruiting leaders and individual producers alike to reevaluate their options and respond to the market's revised incentives. While the implications are many, here are three seismic shifts that I expect are already underway and will materialize in the near future.

Compartmentalization of the Big Box

Despite a handful of these companies being household names and the majority being publicly traded, market leaders from a revenue standpoint, the end of noncompetes is an existential threat to the operating model of big box recruiting companies. Since the 1980s they’ve operated on an “upline” revenue model. Most commonly associated with multi-level marketing, uplines concentrate activity across the broad bottom of an organization and distribute profits progressively to fewer and fewer individuals at the top. Turnover, incessant outreach, and the veneration of the outstanding few who, if you play your cards right might someday be you, are hallmarks of this structure. Well, with noncompetes eliminated, the “outstanding few” just became the most “feasible foes” as their books of business could easily transition into a boutique search firm’s P&L. It’ll take a little time, but non-producing leadership will reorganize workflows to disseminate revenue across more individuals, implement automation wherever possible, and promote high performers away from client work as a hedge. They’ll do this out of obligation to their shareholders and because their mandate is a simple one, make money.

Squeeze of the Middle Market Firm

In every city in America, there are a handful of local search firms who are exceptionally good and well connected. Having worked closely with a few of them and built relationships with some of their leaders, they almost all sprang up in the last 10-20 years as reactions to big box recruiting and usually bear monikers associated with founder surnames, local landmarks, or Greek virtues. Their missions tend to be pure: provide exceptional client, candidate, employee experience, and stand by your work with an eye for your long-term reputation. These folks, who I identify with by the way, have a deep understanding of the industries they serve, specialized recruiting processes, and tend to deliver a quality service to smart clientele. Revenues range from $5-30M and their compensation plans are usually livable. Unfortunately for the future of their owners' distribution checks, middle market firms are deeply dependent on their managers and teams. As such, to remain viable ownership will need to increase commission payout percentages and/or offer profit sharing + equity to secure key players. I think 60-80% commission rates, which are common practice in real estate, will become the norm for middle market recruiting. If those numbers gave you heartburn, see my third and final prediction.

Rise of the Shingle

As commissioned earners, hardboiled recruiters love to highlight that they “eat what they kill.” In truth, the maxim really should read “eat [part of] what you kill.” With the noncompete handcuffs now removed, discerning recruiters will have to determine why they’re giving up part of their pie. Now, there really are a multitude of reasons in support of this: liability, overhead, economies of scale, teamwork, just to name a few. Moreover, advocating for a higher commission and partnership track within a well run firm has always struck me as best practice. Even so, one of the biggest limitations to taking advantage of one's freedom is the perception that one doesn’t have it - “I wanted to move out of this town but my family’s here,” “we were going to start a business but then the third kid came along,” “I always thought I'd do my own thing but never found the right time,” to illustrate. The removal of noncompetes is legally significant but I think it’s psychological impacts may prove more meaningful because it eliminates such a daunting answer to the question: “why not?” Small teams will break off and reemerge as partnerships, individuals will become LLCs, and our industry will become more varied in the post noncompete landscape.

I read the FTC's ban and wrote this piece with nothing short of giddiness, that probably shows. I wanted to speak directly to my recruiting friends, colleagues, and leaders who I feel deeply connected to and who, I imagine, had mixed reactions. My goal was to lend what may be missing context to anyone who’s thinking hard on this matter and wondering why the ground beneath them doesn't feel quite the same. I realize that there are parts of this newsletter that read a bit, shall we say "punchy," but I want to be clear in stating that I share this in celebration of competition.

The performance, skill, and stamina required to eke out just a little bit of success in recruiting is remarkable. Its also what makes the industry special, people with no experience or just a clear-eyed grasp on life: car rental clerks, table bussers, retail workers, have as much chance of making it as Harvard graduates or management consultants. This purity of sport is what we lose when we fight internally, take credit for the work of others, or delude ourselves into thinking we deserve anything more than what we get. I want to thank the FTC for their ruling as it will force us to compete for what many of us already claim to be… the best.

Feel free to give me a ring 312.544.9237, or drop me a note [email protected] if you'd like to explore any of this further.

Illyrian Group #andsowegrow #kosovobpo