Are You Laughing to the Bank or is Your Recruiter?

Are you laughing to the bank or is your recruiter?

I have already left the recruitment industry but am still getting requests for help or opportunities constantly. I decided to write this piece because in just the past week I’ve had 3 people ask me for advice regarding their potential career moves.

I take pride in having been an honest recruiter and perhaps my continued relationships with my candidates is testament to that. I worked with a team that ensured we did what was best for the candidate. I believe most firms agree that that’s the most sustainable and effective way to prosper within this industry. It has however become blindingly apparent that the recruitment world is a darker place than they would let on.

Now I am in no way bashing any firm or the industry in general, recruitment will forever have a special place in my heart. Unfortunately, the fact is, no matter how ethical a recruitment firm aims to be, there are black sheep everywhere.

Story time.

One of the candidates, "John", a Head of Department, who is currently being underpaid, was approached by a recruiter for a position in another organization. Below is a snippet of his inquiry. (I’ll respect his request to remain anonymous)

"Anyway buddy, I wanted to ask you, for e.g., when we have a job role which offers 15k as basic, however, a person who earns 7k applies for the role, can he ask for 10k? Or is it only the standard market rate of 20% increment he can ask for? Because what I think is that if the role is actually for 15k and if the 7k individual takes up the role, he will be working a 15k role whereas he is only paid 8.4k the most. Just wanted to ask you with regards to this."

This candidate did his research and the market rate for positions at that level usually pays $15,000/mth. However, this recruiter insisted that the market rate is a 20% increase in his last drawn salary and that was all he should expect. I explained briefly to this candidate what I will discuss below and this was his reply.

"I had a chat with a recruiter recently, she said that asking for 10k is too much and its standard 20% increment from what i am earning. However, i didn't argue with her. Now i can understand why they mention that. Also, the risk of you questioning back is that, they close your profile and look for someone else. Unless I am the next best thing. I've always laid low, but I've been achieving every place i go to. "

Have you found yourself in such a position?

You know you can provide so much more value but are at a recruiter/hiring manager's mercy because you simply don't know how to react?!

Here’s a behind the scenes peek into the industry that very likely dictated the quality of YOUR LIFE – for better or for worst. There will be two parts to this piece, this will draw back the curtains so you can get a better understanding of how the industry works and the following piece will give you some tips on how to deal with the 'shadows' lurking in the corner.

There are generally 2 models – Mark-Up and Billing Model. Do take note that different geographies have different terms or practices, this is but my attempt to simplify in Lehman's terms some of the mysteries behind the recruitment industry 

Mark Up Model

[Salary Rate] x [ % Recruiter’s Fee Markup (usually 15-25%) ] x [ Payment Period ] = [ Recruitment Firm’s Profit ]

This is usually the case when you are offered a permanent position but is used for contractual positions as well.

So let’s say you have been offered a permanent role paying $15,000 a month.

Salary Rate
[$15,000/month]
Amount to be paid to the candidate (can be calculated by year/month/hours)
x
Mark up
[20%](usually 15-25% but can go as high up as 40%)
Paid to the staffing agency (Inclu. Overhead, mandatory employer’s taxes and the profit factor)
x
Payment Period
[12 months]
This is usually agreed upon between the firm and client (usually a year for permanent or through the contractual period)
=
Recruitment Firm’s Profit
[$36,000]

This [$36,000] is generally what the firm charges their clients (your potential employer). The markup covers overhead, mandatory contributions,taxes and the Profit Factor. The recruitment consultant then gets a percentage commission from this amount.

Under this model, it’s quite perceptible that the higher you are paid, the more a recruiter earns. No conflict of interest here ! Yay... For now.

Billing Rate Model

This is where things get a little more interesting. Unlike permanent positions where the higher your salary, the more the recruiter earns, contracting allows for some of the ‘darkness’ I mentioned earlier.

Bill Rate Model

[ Agreed Monthly Bill Rate ]= [ Monthly Salary ] + [ Benefits and Mandatory Contributions ] + [ Recruitment Firm’s Profit ]

Don’t understand this? Don’t worry, Brandon will explain ;)

[Agreed Monthly Bill Rate] is basically an agreed fixed monthly payment a recruitment firm bills a client. This payment will include:

1. Payroll (Your monthly salary),
2. Employee Benefits [Medical card, allowances, paid leaves etc)
3. Government mandated contributions (Taxes, provident fund contributions etc)
4. Recruitment Firm's Profit

So for the purposes of comparison, let’s say that the contract position you are applying for pays $15,000 and the agreed upon bill rate is $23,000.

Agreed Monthly Bill Rate
[ $23,000]
=
Monthly Salary
[ $15,000]
Assume you're lucky enough to meet an 'ethical?' recruiter who gives you what the job pays
+
Benefits and Mandatory contributions
[ $5,000] (Hypothetical fixed cost figure)
+
Recruitment Firm's Profit
[$3,000]

Everything here seems legitimate up to this point. A $3,000 profit over a payment period of 12months is ($3,000 x 12) $36,000. (Similar to the mark up)

When then do situations as mentioned above by "John" occur?

Agreed Monthly Bill Rate
[ $23,000 ]
=
Monthly Salary
$15,000  [ $8,400 ] ($7,000+20%)
Lets say you are earning $7,000 now, why do SOME recruiters insist on a 20% raise?
*Hint* Profit Profit Profit!
+
Benefits and Mandatory contributions
[$5,000]
(Hypothetical fixed cost figure)
+
Profit
$3,000  [$9,600]

GET IT NOW?

If the contract period is a year, that's a ($9,600 x 12) $115,200 profit compared to the $36,000 in the Mark-Up model (or if you are working with an honest recruiter dealing in the Billing Rate Model) for the same $15,000/mth salary position!

Companies hire contractors for a multitude of the reasons, but recruitment firms sell these staffing solutions because they are afforded the flexibility to "Sell" lower wages for their own increased profit margin. So next time you find yourself in a salary negotiation situation, you will at least know the game recruiters play! Stay tuned for my next article where I'll be sharing useful salary negotiation tips so you earn what you deserve !

In the meantime, Have you experienced something like "John" ? Tell us all about it Like/Share/Comment !

“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” - Sun Tzu