The Game of Recruiting: Incentivizing for Innovation

The Rise of Affordable AI : ChatGPT

With all the hype going on about the launch of ChatGPT by OpenAI . I wonder if #Recruiting is something that AI can replace.

When deciding if something is replaceable by AI, we typically refer to the notion of human touch. The saying is that "Jobs that require human touch won't ever be replaced by AI".

Recruiting, to my knowledge, was on the list along with artists, lawyers, leadership roles, and mental health specialists. In fact, here in the HBR article , we see that IT Recruiters rank top as the Jobs of Tomorrow under the People and Culture sector - roles ordered by the scale of each opportunity.

Pretty much still today, recruiting is perceived as an artistry for the exact same reasons why the role of a VC cannot be replaced by AI.

Recruiting involves skills like,

• Gut instinct - no amount of data, metrics, or qualifications can ever replace a gut feeling that a recruiter gets when he/she knows they found the right candidate for the person hiring. This skill can only be honed through years of experience and observations, not easily replicated systematically.
• Creativity - candidates are human too and our lives can live out radical stories. There's no scientific formula to see how and why person A might have an outstanding performance in one environment than the other. This is where creativity required to assist for these transitions become crucial.
• Human judgement - due to the growing interest for harnassing team's dynamics and creating a good culture-fit, finding a colleague who's nice to work with has become more important than ever before in today's corporate world. Recruiters are required to use their best human judgements to predict the candidate's fit to the company's culture - something not picked up in the resumes.

Rounding off this topic, one of the thought leaders in the industry, Tim Sackett, SPHR, SCP , released an article just 8 hours ago at the time of writing this blog, titled, "The Future of Recruiting Brought to You via A.I. ChatGPT" .

His conversation with ChatGPT went as shown below,

Tim : "What will the future of the job of a recruiter look like?"

ChatGPT :

" In the future, recruiters will continue to play a key role in the hiring process. However, the job of a recruiter will evolve and change over time. We can expect to see the following changes in the role of a recruiter in the future:

1. Increased Use of Technology: Recruiters will use a variety of technology tools to streamline the recruitment process. AI-driven recruitment tools, automated job-matching platforms, and video interviewing platforms will become more prevalent.

2. Greater Focus on Diversity and Inclusion: Recruiters will place a greater emphasis on diversity and inclusion in the recruitment process. They will use data-driven techniques to identify qualified candidates from diverse backgrounds.

3. More Strategic Role: Recruiters will take on more of a strategic role in the recruitment process. They will focus on building relationships with potential candidates and leveraging technology to find the best possible hires.

4. Increased Emphasis on Data: Recruiters will use data to inform their recruitment decisions and track the effectiveness of their recruitment efforts. They will analyze data to identify areas for improvement and make sure their recruitment processes are optimized. "

Summarizing the point, Tim says

"Recruiters of the future, with this extra capacity, will be able to spend more time with the best candidates. Also, AI will more consistently generate a higher quality of applicants for us to select from, as most bias will be eliminated and controlled for."

This upcoming landscape in recruiting, where each recruiter will have more capacity to expand their business into different sectors and sizes, will inevitably result to the evolution of their current incentive structure. Which leads to my next topic.

Current Incentive Structure for Recruiters vs To-Be

Recruiters are similar to being self-employed. These mini-CEOs are the people that live by the saying, "Time is money". Hence in order to incentivize the recruiters for their best performance, understanding their incentive structure is very important.

Retainer, the Trust

This is a base salary. A symbol of oasis, in the harsh desert of fighting for unpredictable placement commissions for individual recruiters. This for a recruiter can be a big milestone, a token of trust given by the client, as an outside extension of the client's internal team, to trust the recruiter with a fixed fee that the hired recruiter will deliver in the coming periods. Most companies understandably prefers to pay in arrears. Here the payment terms are in an executed contract where the recruiter sends an invoice on a monthly basis.

As for the client, the benefits of using Retainer are :

• Higher priority level
• Better quality hires, lower risk of bad hires
• May not be the fastest and the most, but certainly the best
• More proactivity and engagement
• More customized

Retainer uses trust as a mode of incentive.

Contingency, the Ambitious

This is what I call an All-in or Go-home model - the most prevalent incentive model of all. As a high-risk, high-return lover, I'd be taking this model had I been a recruiter. The client doesn’t pay you until someone is hired. No matter how much work you do, you don’t get paid until a placement is made.

With contingency search assignments, the fee is typically a percentage, 20-25% of the employee’s first-year salary.

For example, you agree to a contingent search agreement for a $40,000 position with an 18% fee. Assuming you fill the position, you would earn $7,200 when the candidate is hired.

There's one catch to this though. Even after a successful placement, meaning candidate signing the contract, the fee is only wired if the candidate stays in the job for a certain period. This is often 60 or 90 days, depending on the requirement.

Althought the most prevalent, the downside of this is that since a client can have multiple agencies trying to fill in the role, there's less sense of urgency on both sides, resulting to :

• Recruiters giving less qualified candidates
• Less customized experience
• Less information goes to the candidate about the client for the fear of competitors
• Less incentive leading to less motivation

Clearly, contingency uses greed / ambition as a mode of incentive.

Flat Fee, the Fairness

This isn't used often since for many recruiters, flat fee often means lower income.?You might agree to use a lower flat fee instead of a higher percentage fee if the client agrees not to offer the job order to anyone else. Hence this is for an exclusive agreement, leveraging the incentivising model than guarantee is better than getting nothing if you don't present the winning candidate. Even rarer, recruiters might charge an hourly, daily, or weekly rate. Requiring exclusivity and a guarantee, flat fee uses fairness as a mode of incentive.

Engagement Fee, the Greed

Sometimes just referred to as a retainer, engagement fee is a hybrid of retainer and contingency. It works very similarly to retaining a lawyer. It is a payment made in advance for the one specific future placement. Many call it the skin-in-the-game incentive model. For example, if you’re hiring a retained headhunter to work for a position with an estimated salary of $100,000, that’s a $20,000 fee.

If the retainer is 1/3 of the $20,000 fee, you’ll pay roughly $6666, which would then be deducted from your final invoice.

Many retained firms ask for 1/3 of the fee upfront, another 1/3 if the placement hasn’t been done at 60 days and the final 1/3 once the placement is complete. If for some reason the firm doesn’t fill the role, you put it on hold or you find someone on your own, you’ve lost that money. Companies stray away from this model.

However, by asking the client to equally have the "skin in the game", recruiters are incentivized for the right reasons. Here, engagement model uses greed / ambition as a mode of incentive, even more so than the Contingency I believe - because the recruiter is asking for the upside with a guarantee with a benefit of a retainer. There might be many other reasons than a person's ambition that leads to this incentive model, such as limiting resources and other external factors, but clearly as a client, you are being appealed with a greater degree of delivery and higher expectations as the recruiter is essentially asking you to put money down that you won't get back.

*Contract Placements

This is in the case of contract staffing. The recruiting firm handles payroll and all employment tasks on behalf of the client who wants to hire contract (not full-time employees). You bill your client for the employee’s wages, plus extra to cover the cost of your services. Contract bill rates are calculated by multiplying the employee's hourly rate by a markup multiplier (usually 1.5 or 1.6).

So, how will the current incentive structure evolve in the coming decades?

Take a look at my Greed-Trust chart below :

The yellow is an estimated size of how many self-employed recruiter contracts are being done- contingency being the top.

Conclusion

Going back to Tim Sackett, SPHR, SCP 's point that "Recruiters of the future, with extra capacity, will be able to spend more time with the best candidates", thus being able to expand into different sectors, sizes, and scopes, I predict the followings :

• a shift of the Trust people moving into the Greed arena. We will probably see more champion recruiters and agencies that will set new standards using the latest tech and leverage their innovations to generate more upside.
• continued reduction in the flat fee structure demand as we anticipate to see higher quality applicants. Why get paid by the hour if my success rates get better with tech?
• the rise of Engagement fee. As the recruiting game becomes less of a quantitative, spray-and-pray model business, the demand for fee structures that provide both the guarantee (retainer) and upside will be more prevalent. Ambitious recruiters will no doubt want to secure a predictable income for the long run once they feel competitive enough.

A chart that looks more like this :

As I wrap up this series, it's been fascinating to learn about this industry.

More and more I began to believe that there will come a point when recruiters and VCs will work together to create startups and M&A deals by winning the battle for the best talent. VCs and recruiters willing to transplant new DNAs and thoughts into their current structure will once again lead with innovation and set new standards.

Always welcome thoughts and comments!