What is a Retained Search Agreement?
A retained search is an agreement where an employer pays a fixed fee to a recruitment firm for the services of that recruitment firm to undertake a search and recruitment project of one or more positions and billing arrangements and timeframes are fixed for that project. This form of agreement is the most formal and formalised option available for recruiting. The advantage of such an approach is the comprehensive involvement of the recruitment representative as a key consultant in the employment process to the employer . The employer is free to either follow that advice at all times or choose to only take the advice it agrees with.
While a retained search agreement is an agreement where a fee will be payable to the recruitment consultant irrespective of whether or not a successful candidate is appointed from the search and recruitment process, fees are typically based on a percentage of starting salary for new hires, existing salary packages for internal transfers and scaleable fees for senior or executive roles they help you fill.
Components of a Retained Search Agreement
Like any other contract, a retained search agreement should be carefully drafted to include all essential terms and conditions, including the scope of the search (i.e., the position to be filled), the process to be followed (in-house vs outsourced, recruiting sources to be contacted, etc.), a timeline for the search process (including the search method, interview process, reporting between and among the parties, candidate evaluation and presentation to the client, etc.), and the basis for setting or measuring the fees including the scope and basis for shared costs. Other terms to consider include confidentiality, history and experience of the recruiter, in-house and outsourced processes and resources for finding candidates, interview process, compensation and expenses, and so on based on your specific needs and priorities.
Benefits of Retained Search to Employers
Employers can utilize the retained search on multiple levels. Economically, retained search may seem to cost more money to the employer. The fees are often higher than those paid under a contingent search. But with virtually every job site available for job postings today, it would appear that a retained search is not necessary. Yet there are advantages to a retained search for both the employer and job candidate (the client) that may not be obvious initially.
From an employer’s standpoint, the quality of candidate is not to be overlooked. The retained search firm will identify candidates with specific skills and backgrounds. The retained search firm sells itself at the outset with a client most often on the basis that the firm can find a limited selection of "A" candidates. These "A" candidates are not the 100 resumes that may be reviewed in a contingent search. These "A" candidates have the specific background, skills and experience levels with likely cultural fit for your organization to succeed.
Unlike the larger "job shop" contingent search firms, where the more resumes that are provided, the more money that is made (factoring in the lower percentage fees agreed upon because of the sheer volume), a retained search firm relies on analysis, research and focus to make the search successful. Instead of the search firm being reactive to a resume submitted by an unqualified candidate, the firm is proactive on behalf of the client in identifying candidates who are the proper fit. The retained search firm is highly incentivized to produce top candidates. The firm’s success is tied to the success of the client.
In addition to providing top candidates through its focus and research, a retained search allows the search firm and client to work strategically together. This relationship between the client and the search firm can be a great benefit to the client. A retained search firm is privy to information that might not be able to be shared with a contingent search firm. This includes client discussions regarding comp, other candidates being considered, and internal politics. Because full transparency is prevalent in a retained search relationship, the search firm feels like part of the team.
When to Use Retained Search Services
Companies should utilize retained search for senior level positions and/or when an especially broad search is required. Senior level hiring, such as Chief Executive Officers, Chief Financial Officers, Managing Directors, Senior Managers, and Vice Presidents, should be handled as a retained search. To demonstrate the need, non-technology senior level positions often receive thousands of online applicants yearly, while technology-oriented executives might receive hundreds of applicants. Having a retained search will enable a company to be certain that it hires the absolute best candidate for the position.
In addition, if it is unlikely that your direct competition will be in the market for the same type of position, the retained search method is preferable. For example, a bank might not be in the market for a Chief Risk Officer, but a hedge fund or asset-management firm probably will. Since two or more competitors may apply similar means to find qualified candidates, the retained search method would allow a bank to offer a much greater level of privacy from the very beginning of the process.
Even if other companies in your industry are likely to seek the same candidate, a retained search is still useful. With retained search, you will have only one exposure to a candidate. When the candidate meets with other companies, they will have at least one other exposure. Having multiple meetings will create a level of familiarity with other company representatives and a much higher chance of the candidate going to another company for the position.
With retained search, you will be absolutely certain that you are receiving best candidates because the recruiting firm acts as a buffer between your company and the greater marketplace. You will know that your recruiters have not both contacted the prospect without your knowledge, thus ruining your ability to hire a qualified candidate. You will also know that the search firm is not working on commission, assuring that your firm receives the highest level of personal service. Retained search firms also guarantee their candidates for 12-months. If the placement does not work out, the search firm will conduct another search under the same contract, with no further monetary contribution on your part.
Key Pitfalls and How to Avoid Them
While retained search agreements can be beneficial to all parties involved, pitfalls can occur during the lifecycle of the agreement if certain issues are not addressed. Common pitfalls include:
1) Compensation Disputes. The type of compensation offered can drastically change the direction of a search. If the compensation is higher than the typical salary for the position of candidate, the search will focus on a higher market sector. If the company determines that the compensation is too high during the course of the search, it may widen the search and increase costs. The agreement should clearly define how compensation is determined, as well as any restrictions such as not looking at rival companies or other companies in the same field. The agreement might also include language about the revenue growth rates among the companies being considered for the position. By broadening the search, the company may re-create the very issues that prompted the retained search.
2) Candidate Communication . Retained search firms are notoriously in the dark when it comes to the day-to-day activities within the hiring company. The retained search often provides a company its first foray into the retained search process. As a result, there may be an uneven understanding of how decisions are made and how and when information will travel between parties. Retained search firms often promise a timeline for completion. While this is a goodwill commitment, it is rarely honored. Formal updates may occur monthly, but the process itself may be subject to delays. For employers, it is important to know what constraints are in place prior to beginning a retained search. Finding out that a firm is unable to meet on short notice may delay the process. Consumers of retained search services can ensure that both parties are on the same page by clearly defining the scope of the search and establishing expectations at the outset. By delaying the search process, the company can determine if the compensation matches the position being sought after and whether it is willing to make sacrifices in order to achieve its goals.
Negotiating a Retained Search Agreement
Once an employer has made the decision to work with a particular search firm, it is not unusual for them to seek to negotiate the terms of the agreement. As a general rule, one should be cautious about unnecessary amendment of a written agreement, as this can bring about unforeseen problems down the road. The preparation of a checklist or solution list at the outset can be very helpful. Thus, once an agreement is signed and a retainer is paid, a bidder may not be in a position to negotiate every point. However, there are a number of points on which one should be prepared to comment. Some of the key points to bear in mind when negotiating a retained search agreement include:
Scope of Work
When analyzing a schedule of proposed work, it is critical to determine whether the recruiter is going to talk to only those people selected by the employer, or is going to seek input into the search from industry professionals who may not be known to the employer. As a general rule, an executive search firm will want to interview as many people as possible to gain a thorough understanding of the role and its requirements, and to find the best candidates.
There is also a difference between the search for a specific individual, a firm under which a group of individuals have a collective role, and a broad search (e.g. an entire function or business unit). In other words, are we looking for a sole general manager, or an individual who can lead an entire business unit or function? The extent of the search, the sophistication of the client, and the relationship with the search firm should all be examined when determining the appropriate scope of work.
Fee Schedule
Typically, the fee schedule calls for a placement fee based on a certain multiple of the hired employee’s first year’s earnings. The fee can be negotiated according to the position, the region, or the recruiting difficulty. The fee may also be a percentage of the compensation component only, or the entire compensation package including stock options, bonuses and other benefits.
In addition to the normal placement fee, it is sometimes necessary to pay a retainer. These are usually due on signing, at the point of an essential milestone, and at the successful conclusion of the project. The earliest retainer should be small, as search firms will be motivated by the likelihood of their fees outweighing the retainer. The minimal retainer can also help preserve cash in the very early stages.
The retainer can be calculated on many bases using different measures of compensation, which can make them difficult to compare across different firms. The most common way to calculate the retainer is until the compensation has been identified (for example, the recruiter wants first month’s base salary). If the employee is terminated before having worked a year, the employer is often required to return the retainer. When an employee leaves, the retained search firm will contact the same people again to see whether they have changed their minds. This can be quite annoying to a prospective employee who is contacted repeatedly even though he or she has turned down the position.
Measuring the Success of a Retained Search Agreement
How can an employer tell if its retained search consultant is performing well? That’s the million dollar question, and one we have been asked many, many times. There are probably as many different ways of measuring performance as there are types of retained search searches. However, here are some of the metrics we have used, and think are effective ways of evaluating success:
- Review Requirements / Needs Analysis. When you meet with your consultant for the first time and discuss the company/organization needs, how thoroughly did you and your consultant analyze the requirements for the new hire? Did you feel good about your meeting and discussion at the end? Did you feel your consultant understood everything? Or did you leave feeling you were not talking about the same position?
- Sourcing. Did the consultant source a diverse group of candidates? Were there several who were clearly high performance people at target companies? Does the consultant understand the qualities/characteristics necessary for success as described and analyzed in Section 1?
- Presentation of Candidates. Are the candidates presented thorough and complete? Does the client feel that the presentation includes all of the information they need to evaluate the candidates and make a choice? Does the written presentation include background checks (i . e. social media searches) and are the choices explained thoroughly so the organization understands why the individual will be best?
- Process / Follow-Up. Does the consultant communicate regularly with the organization and provide a roadmap for the process? Is the process on target with promises made? This is how the consultant is evaluated by the organization. The consultant should proactively communicate with the organization and be able to bring any issues to the forefront individually or collectively (i.e. addressing an issue with a candidate or presenting other candidates).
- Feedback. Typically, consultants ask for feedback after several candidates are interviewed. The organization can give feedback to the consultant throughout the process regarding satisfaction with candidates.
Another way we measure success is by having the consultant complete an evaluation form after he/she has met with the chosen new hire. The form is filled out by the consultant and includes topics such as their impressions of the company/organization, the process, the candidates and the quality of the hire.
Essentially, the methods used to measure performance and success of a retained search agreement will vary by organization, but it’s a necessary step to ensure everyone is getting the most out of the arrangement.