The Search Dilemma - Contingent vs Retained

Building a company like rings on a tree

Many factors come into play when you consider what a successful company entails, like building a viable product, generating demand, and creating a great culture for employees, but talent is perhaps the greatest differentiator from good companies to great companies. The reality is that a great company is built upon great talent, managed first by the Founder/CEO, followed by his/her founding team. The vision and the culture is set from the top, and the high expectations of hiring will be managed directly by the Founder and its founding team.

Like rings on a tree, the company grows one by one and the interview process is often managed directly by the Founder. The only problem is, when growth occurs at an accelerated pace (such as when funding occurs), this process isn’t scalable anymore. The Founder won’t always be working IN the business - he/she will need to start working ON the business to ensure its growth and success. This is often a good time to consider engaging with external recruitment services and researching what services to consider based on the type of hire(s) you’re making.

Typically, search firm agencies offer two types of search models - “Contingent” and “Retained.” They’re both vastly different in how they work so you’ll want to understand each before making your decision.

Contingency Search Model

Contingent search typically applies to job searches that are below executive level and work exactly as they sound - you don’t pay unless we fill the role. Their model is dedicated to volume vs detail. As a result, the client / company often engages with multiple firms all offering the same contingency models, trying to fill the same job, which seems like more value for the least amount of risk.

Search firms that offer the contingency fee model do not have the ability to invest too much time on any role - the faster they fill the role, the quicker they get paid (if at all). Considering they don’t earn any money unless a hire is made and they’re competing with other agencies that are working on filling the same role(s), they are motivated by volume (quantity of submissions) and speed (the quicker they fill the role, the sooner they get paid) which is not an ideal way to fill more senior level roles that have higher leadership and fiscal responsibilities. As well, if you negotiate for a lower fee than average with the agency, you risk having the firm submit better candidates to clients paying higher fees.

The contingency model works best for junior (individual contributor) roles that need to be filled quickly, and / or for volume (multiple open roles at once).

Retained Search Model

Retained search typically applies to executive level roles that require a dedicated firm to commit to filling the role, focusing on confidentiality and exclusivity. Executive firms will focus on a robust and rigorous process that entails a deep dive into researching marketplace data, conducting psychometric assessments, and taking the time to find the best technical and behavioural fit for the company. This requires committed effort by reducing volume (not just putting bums in seats) for exact fit (targeting the ultimate top candidates which often take about 90 days to fill). By paying a retained fee to fill the role , the executive search firm has the ability to vet for the right candidates based on quality, not just volume. They are motivated to fill the role seeking candidates that are passive (not looking) and often in high demand. Executive recruiters are often those who have the gravitas to “speak executive” compared to more junior recruitment consultants.

The retained model would work best for roles at leadership / executive level, managing a team and will have a high fiscal responsibility (greater risk profile).

The fee structure for a contingent vs retained search looks something like this:

Contingent Search Fee = Typically about 15-25% of hire’s annual base salary with a 3-month guarantee.

Retained Search Fee = Typically about 25-35% of hire’s total cash compensation (annual base pay and bonus) with a 6-12 month guarantee.

The fee difference isn’t drastically much higher when considering the job levels (non-executive roles vs executive positions) but some clients find it difficult to see the value beyond the numbers.

When Considering Making an Investment into Retained Search

Retained search isn’t for everyone and every role. Some companies may not be ready to invest in a process that is more rigorous, requires more participation and combines science (diagnostic testing) and art (interviewing). I use the word “invest” because there is a cost difference in price, time and energy. Likely if your company hasn’t engaged in a retained search before, you will probably not understand the cost difference and hesitate to try one. Keep in mind that if you’re attempting to fill an executive seat at a company, it will require a deeper discipline that you may not be used to but consider the risk... 

Executives have big shoes to fill. Considering the consequences of a catastrophic mis-hire, the CEO and the Board cannot risk placing the wrong person in an executive role. Anyone who has experienced a mis-hire at their company before will understand the costs and pains of replacing one, which may include the following: A significant termination (exit) package; placing the departing executive’s team goals on “hold” until a replacement is made; finding an “interim” leader to manage the team until a replacement is found; dealing with the negative PR from the media and current clients. This doesn’t even include any litigation costs that the company may incur from the departing executive. The cost of a mis-hire is catastrophically significant for any company.

Considering the effort and time that’s required to fill an executive role, working with a retained search firm often becomes a personal, collaborative process where they essentially become your partner and a real extension of your business. They dive deep on understanding the context of the search, the culture of the organization and the values of the leadership team. As in most things in life, you really do get what you pay for and in the case of hiring (or replacing) an executive, you’re probably looking for deep commitment and a real understanding of your needs.

The Internal Talent team

There is a third model, and that is the internal talent acquisition / HR team at a company. Having worked in HR and Talent from corporate to early stage startups, I’ve directly faced the challenges of hiring for volume against time and money. In my experience, the greatest challenge I saw working at multiple companies at all levels was the ability to focus time and energy on finding the right candidates for leadership roles. 

Typically an internal TA (Talent Acquisition) specialist working full time will be working on an average of 7 to 10 open requisitions at one time. In a normal day, a TA might be busy meeting with the following: Working with multiple hiring managers and stakeholders; gathering job requirements; drafting job descriptions; posting jobs; sourcing candidates; booking interviews, declining candidates; providing status updates; updating ATS (Applicant Tracking System) software; sending out offer letters; attending team meetings; onboarding new hires; updating hiring KPIs; managing direct reports (if they’re in a management position) and engaging in their company culture activities. They are often strapped for time, diluting their efforts to heavily focus on the true effort needed to manage executive roles. This is why most companies often engage with external recruitment firms even when they have internal talent teams in their company.

Do Your Due Diligence

Having options for recruitment is good, but you’ll want to do your due diligence and consider your options wisely to make the best decision for the type of hire you’re making. Not all agencies work the same so you’ll want to research who to work with carefully. Ask for referrals, investigate which companies they’ve worked with and find that distinctive value that means most to you. Meet with the person who you’ll be working directly with and ensure there is positive alignment.

Once you’ve selected the firm that can exceed your expectations and place that exceptional hire for you, you’ll likely build a trusting relationship with the firm and the consultant that will result in a mutually valuable relationship.