What Do Executive Search Firms Charge?

Most of the people in my neighborhood have never used an executive search firm, they are doctors, teachers, dentists, college professors, and government workers. They work in organizations where it’s incredibly uncommon to use executive search firms.

Even in Washington’s huge nonprofit and association market, where the use of search firms is prevalent, some organizations choose to engage search firms very rarely. We regularly work with people who have never engaged the services of an executive search firm before. So naturally people have questions about who pays (the employer always pays), when the fee is due (it depends on the search firm), how much the fee will be (it depends on the search firm), what services are delivered (it depends on the search firm) and what replacement guarantee is in place if the placement does not work out (it depend on the search firm).

Let’s start with fees. Search fees vary widely depending on the business model the firm uses.

Retained executive search firms typically charge 25 – 33% of the estimated total annual compensation a candidate is expected to receive in their first year in the position. (Many search firms include first year commissions and bonuses in the estimated total compensation figure, but not the cost of benefits.) Some portion of the fee is always due when the search commences, but the final fee is often dependent on what salary the candidate accepts. So if a search firm charges 30% of annual salary and places someone earning $100k, their search fee will be $30k. But if that same candidate negotiates for a starting salary of $110k, or a salary of $100k with a sign-on bonus of $10k, the search fee would rise to $33k.  Additionally, some firms charge back their expenses to the client, so the total fee can easily rise to 35% of total annual compensation. Staffing Advisors is a retained search firm, but instead of tying our fee to the candidate compensation, we prefer to charge a simple flat fee with no charge back for expenses. We set our fee in advance of the search based on the level of effort we anticipate, and our fees are typically 15% of less of total compensation. Like many retained search firms, Staffing Advisors handles executive searches in a wide variety of functional areas (and not just Accounting, or IT, or HR). Consistent with most retained search firms, we offer a replacement guarantee of a full year if a placement does not work out for any reason.

Contingency search firms do not guarantee to fill positions, but if they do, their fees are often between 20 and 25% of annual compensation. Contingency fees are usually due only after the candidate starts work, so if nobody is hired, no fee is due. Some contingency search firms are even willing to negotiate placement fees, but negotiating lower fees can sometimes result in a lower level of effort being spent on your search and a lower chance of filling it. Contingency based firms tend to specialize in one functional area (like accounting). If a placement does not work out, contingency search firms typically offer replacement guarantees from 30 days up to six months.

Some firms take a hybrid approach of requiring some portion of the fee in advance, and making the remainder contingent upon the placement. They key for you as the buyer is to understand which business model best suits your needs. For more insight into the differences between retained firms and contingency firms, read Contingency vs. Retained Search, Common Fallacies.

All Recruiting Tactics Eventually Crash and Burn

A client calls me and says, “For the past three years our administrative staffing was pretty easy. We’d just hire people to temp. If we liked them we’d hired them.” I asked him, “If that’s working for you, why change it now?” He told me, “Well, as the economy keeps improving, we’re getting a smaller and smaller number of great candidates that way. I just can’t count on it any more.”

That’s the problem with recruiting–once you latch on to something that works well for you, it eventually peters out. Nothing works forever.

• Hiring administrative staff on a “temp to Hire” basis works well during recessions, until the pool of talent who is willing to temp starts to dry up. At any given time, only a small percentage of the workforce is willing to temp, but in a city like Washington, that pool can include some really terrific people. When the economy heats up, many of the best temps get hired full-time. When the best people get hired more quickly, the average person in the temp pool becomes, well … more average. The stars are fewer and further between. So using temp to hire as a recruiting strategy becomes dramatically less productive.
• Over the past ten years I’ve seen several job boards work really well … until they simply stopped working. They did not succeed or fail all at once. Each one spiraled up, did well for a while, and then became nearly useless six months later.  (It’s a good reason to beware of annual contracts with job boards).
• An employee referral network can work really well … until it stops working. Only a handful of employees typically provide the majority of the referrals, and once their network of friends is tapped out, the referrals dry up.

It is said you cannot step into the same river twice–the river is always changing. In large metropolitan areas, the job market is the same way. You are no more able to predict what recruiting tactics will work for you than you are able to predict how much traffic you will see on your commute.

• Sometimes the law of supply and demand works for you, sometimes against you. You might run the same job ad on the same job board in January, March, June and October and receive a completely different number and quality of candidates.
• Sometimes your recruiting tactics have simply run their course. Maybe you advertised in print ads long after the best candidates went online, or maybe you advertised using online job boards when the best candidates went into social media. Or maybe you tried advertising on the latest, coolest, most modern thing, but you got there before the great candidates did.
• Or maybe you used the wrong tactic entirely. Maybe your ideal candidate is not going to respond to any kind of advertising, no matter where you put it.

But when your recruiting tactics are not working, you never really know why. So, all you can do is keep experimenting, keep trying new approaches, and keep monitoring your results, knowing that nothing good lasts forever.

Removing Bias (and Desperation) from Your Hiring Decisions

In a doomed attempt to save time, many hiring managers unwittingly make themselves both more desperate and more biased in their hiring decisions. When you prematurely narrow the number of candidates you are willing to interview, you set up the perfect storm for bias and desperation.  Here’s why.

The Washington DC metropolitan area has a great job market. As I said in The Washington Business Journal,  job seekers have the upper hand again. Mid-career professionals often receive multiple job offers and can afford to be choosy. This means that candidates who do well in their first interview with you often withdraw from consideration before you’ve even had time to schedule their second interview.

So, if you have not started your first round interviews with a field of at least six highly qualified candidates, you will probably find yourself coming down to the wire with only one viable candidate. That makes your hiring decision both simple and dangerously flawed. When you only have one person, your choice is either a) hire, or b) don’t hire. Really, the choice is a) continue doing two jobs, or b) get help from someone. So naturally most hiring managers a) decide to hire now, and b) live to regret it later.

A recent study suggests why you make better decisions by improving your frame of reference. Harvard Professor Iris Bohnet explains it this way:

“Our hunch is that the mechanism works something along the following lines: if you look at one pair of shoes, it’s hard to evaluate the quality of those shoes. You will be much more likely to go with stereotypes or heuristics or rules of thumb about shoes. But if you have several pairs of shoes available, you’re much more likely to be able to compare different attributes of the shoes.”

The Harvard study showed promising results in removing gender bias from hiring and promotion decisions, but the frame of reference principle applies equally well to other aspects of hiring, such as evaluating the competencies and cultural fit of the candidate.

Don’t set yourself up to make a bad decision. Do what it takes to assemble a robust slate of qualified candidates, you won’t regret it.

With Unemployment so High, Why Pay a Search Fee?

Bread Line Sculpture at the FDR Memorial

People who are unfamilar with the DC job market often ask why anyone would pay a search fee to find someone when unemployment is so high.

It’s a reasonable question, and saying “Good people are still hard to find” seems somehow incomplete as an answer.  So if you need to answer the question more authoritatively, here are the facts. 

While the national unemployment rate remains stubbornly high, the effect of the economic downturn is being felt very unevenly.  Some cities have much lower unemployment than others, some industry sectors are faring better than others, and unemployment rates vary dramatically depending on your level of education. 

So, in our typical searches we are looking for a candidate who lives in the Washington area, currently works in professional services (associations, nonprofit leadership, government contractors, or similar kinds of work), and most of our searches require someone who has a college degree.

Looking first at cities –local unemployment rates vary from 4% to 28%.  The Baltimore/Washington area has remained one of the strongest big city job markets in the country throughout the recession.   Our regional unemployment rates are currently around 6% and northern Virginia is even lower, hovering around 4.5%.  (If you recall, 5% used to be considered by economists to be “full employment” – where everyone who wanted a job had one).  (Sources:  http://bls.gov/web/metro/laummtrk.htm  and  http://policy-cra.gmu.edu/data/UnemploymentRate.pdf

But when you are recruiting, the real question is who you are competing with for the same candidate – are you the only employer in town with a good job to offer, are does everyone else in town want to hire the same candidate? So a useful way to visualize the difference between cities is this “Job Market Competition” chart from Indeed – a job board aggregator.  They list the number of unemployed people in a city relative to the number of job postings, and again, you see Washington/Baltimore among the most competitive job markets in the country.  Where a city like Miami may have 5 unemployed people for every 1 job posting, Washington has never varied from a 1 to 1 ratio throughout the entire downturn.

Next, looking at industry sectors  – The Washington area Professional and Business Services sector is our fastest growing market, adding more jobs during the past year than any other segment of our local economy.  (Source:  http://policy-cra.gmu.edu/data/JobChangebySector_Metro.pdf).  People who work in the professional services sector are among the most employed people in the region, and their job opportunities are expanding. 

Finally, looking next at the candidate population – the national unemployment rate varies from 4.4% for people with a college degree to 14% for people who have not completed high school.  So again, our ideal candidate is statistically, least likely to be unemployed. (Source:  http://www.bls.gov/news.release/empsit.t04.htm. For an even more graphic illustration of the disparity between education levels see this New York Times interactive model: http://www.nytimes.com/interactive/2009/11/06/business/economy/unemployment-lines.html)

In summary, we are competing for candidates in the hottest major job market in the country, in the fastest growing sector of the local economy, for people who statistically have the lowest level of unemployment.

If you do not engage a search firm, and do not have a skilled recruiter on staff, your primary way to reach candidates is to run ads on job boards - competing with other organizations for the very few qualified local people who are actually checking the job boards.  This approach often drags on for months, with no certainty of reaching a successful conclusion.  

Instead, when you engage a search firm, hundreds of qualified, local candidates are contacted immediately.  Many of the people contacted would never have heard about the opportunity otherwise.  With a robust outreach strategy, you can usually have someone hired within one or two months, and the entire cost of the search can be paid for with the salary you saved by having the position vacant for a couple months.

That’s why we’ve never been busier, even though the national unemployment rate is still so high.

Job Market Trends in Washington DC

I was recently interviewed by Joe Coombs, the Workplace Trends and Forecasting Specialist for SHRM.   We discussed the job market, supply and demand for labor … all my favorite topics.  Read the interview here.

Sharp Rise in Senior Staff Turnover Reported

CEO Update recently reported on a trend we’ve been talking about all year – the spike in executive turnover at associations and nonprofit organizations across the Washington metropolitan area.   They reported that the number of open positions posted with them is ”greater than 2008, 2007, 2006 or any other year we have tracked.”

Back in January we predicted that the local job market would be a big game of musical chairs this year, driven primarily by executive turnover. 

In August we observed that top candidates were on the move in larger numbers, and that we were seeing a spike in candidates who were receiving multiple job offers.   As you may recall, on the strength of that trend we declared the recession over  (at least as a retention tool) a full month before the economists made it official on September 20th.   (Then again, in their September announcement, they said the recession actually ended in June 2009 … so just give me 15 months and I’ll predict what happened today). 

No matter how you look at the data, this is certainly a good time to look for a job if you are an association or nonprofit executive.  Not looking?  Then now might be a really good time to update your executive succession plans and rethink your retention strategies, because your best people are getting calls.

You Can’t Always Get What You Want

Mick Jagger and Keith Richards got it right.  You can’t always get what you want.  Especially in hiring.  Especially now.

Right now (in the DC job market) candidates are gaining the upper hand.    Want proof?  Look at the number of top performers who left your firm for another job.  Next look at the number of candidates you want to hire who have multiple competing job offers – that’s the best way to measure who has the upper hand in your industry.  

So if you are like most DC employers, here is what you can expect with this market shift:

• Your perfect candidates will turn down your job offer to take some other job more often than you’d prefer.  
• More first round candidates will surprise you and decide not to proceed into the second round interviews.  
• Your new hires might even call you before their start date and tell you they accepted a counteroffer from their current employer.

What to do about it?  Like most business risks, you can “buy insurance.” 

• You buy insurance when you start with a big candidate pool of 6 or more people. 
• You buy insurance when you keep the interview process moving quickly for all the candidates and don’t prematurely lock in on just one person.
• You buy insurance when you think long and hard about making a really competitive offer to the person you want. 
• You buy insurance when you stay in touch between making the job offer and when the new hire starts. 
• You buy insurance when you make sure they feel welcomed during their first few weeks.

No, you can’t always get what you want, but if you try sometimes, you just might find you get what you need .. but just in case, buy insurance.

The Job Market Is a Big Game of Musical Chairs

Robust economic growth and job creation is a wonderful thing, but 2010 is not very likely to look that way.   Yet I still firmly believe (and wrote in our job seeker blog) that 2010 looks good for job seekers in the Washington DC metropolitan area and probably in lots of other areas.  Why?

Churn.  Turnover.  The 2010 job market (for skilled professionals) is going to be one big, global game of musical chairs.

Let’s play it out:  One person (call him Adam) gets fed up and quits, or retires.  The second person (call him Bob), sees Adam’s job and says to himself “Hmmm, that sounds better than my terrible job” so he quits his job and takes Adam’s.  The third person (let’s call her Carol) says “Wow, that open job Bob used to hold (that made Bob miserable) is actually a big step up for me and I’d be happy to have it.”  And so on, Dave takes Carol’s job, Erin takes Dave’s job, Fred grabs Erin’s old job and so on.  Play this out and millions of people quit their current job to accept a new (to them anyway) position … but in reality no net new jobs were created.

This is a fantastic time for employers to trade up from lazy, disgruntled Adam to hard-working Bob, or from hard-working but dim-witted Bob, to witty and intelligent Carol, or from high-maintenance Carol to steady competent Dave.  In fact the resignation of every average (or misfit) employee is a gift to employers.   Over a year ago, I wrote about what a golden opportunity a recession provides employers.  You can trade in disgruntled mediocre performers and hire top performers.   Few employers took advantage of that opportunity in 2009, but with the turnover in 2010, everybody has a fresh, new opportunity to make trades.  The key to success, of course, is to use a better hiring process than the one you used when you hired average people in the first place.

Full disclosure here:  Churn is also a gift to executive search firms like ours, who are starting to see business increase, despite a lack of overall job creation.  In my more jaded moments, I acknowledge the harsh reality that search firms earn most of their fees from churn – to make a decent living in the search business we don’t need net new jobs created, we just everyone to change jobs.   (NOTE: I am, EMPHATICALLY, NOT talking about the people WE placed into jobs – we really want them to be happy and we NEVER recruit them away from where we placed them.  In fact we obsess over our long term retention rates).   We are also NOT talking about retention rates at our current clients, all through 2009 we were warning our clients about the looming turnover crisis and sharing information about how to retain their top performers.  In fact, we devoted half of our November newsletter to that very topic.

But … if you are not yet a client of ours  … we’d be delighted to show you a better hiring process, and help you trade-up when your average people quit … even though we’re kind of busy with all these new searches right now.

Why the Right People Are Still Hard to Find

Have you tried to fill a position lately?  Were you disappointed by how few good people applied?  Many people are surprised that good candidates are not lining up around the block to apply. 

In a recent article in Human Resource Executive Online, Wharton Professor Peter Cappelli offers some insights into why it’s still difficult to find qualified workers for many positions.  He says:

“There is no shortage of people with the appropriate education credentials for any jobs I’ve seen. The skills that are in short supply are work-based skills, the kind that are only learned on the job: Experience with these vendors, knowledge of these work practices, an understanding of this industry.

A generation ago, these jobs would have always been filled from within, typically as the result of formal development programs. Now employers want to hire these people on the open market, in other words, from their competitors.

But when everyone wants to do this — poof! — such candidates are hard to find.”

I’ve mentioned before that we don’t have one big national economy, but rather 366 metropolitan economies – and the DC metro area is pretty healthy.   In fact hiring in the DC area remains stubbornly difficult for many firms,  particularly now,  when HR staff is spread thin and budgets for recruiting are so limited.

There are solutions to your hiring challenges, but it won’t be easy, and what you did to recruit people five years ago is less and less likely to work today.

Are Job Boards Dead, or Are Your Job Ads Just Deadly Dull?

Look around and you’ll see quite a bit of debate about the ”death of job boards.”  Many question the hefty prices they charge, saying that  free is the wave of the future for job boards.  Some question whether they attract great candidates - here, here, here and here for example.   I’ve certainly been bitterly disappointed by the performance of some job boards in Washington, feeling my money was completely wasted. 

Similarly, candidates often feel like their time is wasted reading job boards.

But the great job board debate often overlooks one big thing - the ads themselves. Rarely do I see recruiters ask a different question.  “What would make our recruitment advertising more effective?”  

Recruitment Advertising Executive Jeff Perry just did that in his post on ERE.  Here are two key points:

• Five times more people read the headline than read the ad – meaning, your lead-in matters.  Jeff says you have about 10 seconds to capture your reader’s attention (but I think he overstates that by about 9 seconds)
• Think about what the tone of your ad conveys about your company – serious, committed, playful, creative -what?  (Just a guess here, but right now, it probably conveys that you are pretty dull because you are probably using the soul crushing language of the job description).

Job boards are not dead (not yet anyway).  While many are simply awful, we have a few that we find are consistently cost effective.  I know for a fact that you can judiciously use job boards to your advantage for very cost effective recruiting.  You just can’t be dull.

For more on what you can do, see my previous post bad ads attract bad candidates, and the companion post: good job advertising gives you leverage. 

What has your experience been?  Have you given up on the job boards entirely or are they still working for you?  Inquiring minds want to know.

The Coming Flood of Goverment Jobs

According to an article in Forbes, by 2012, the federal government needs to hire 273,000 new people just to keep up with turnover and mission critical hiring.  Where are all the jobs?

• 54,000 positions in medical and public health
• 52,000 positions in security and protection
• 31,000 positions in compliance and enforcement

But even after all this hiring, the total size of the federal workforce in 2012 will still be smaller than it was in 1967.  (I think all those Inc 500 fast growing government contractors in MD and VA might have something to do with that).

Obviously, this will have a profound positive impact on the DC economy and job market.  Over the past year, we’ve written a series of posts about hiring in DC and the massive impact of federal hiring. If you want some perspective, check them out.

Hiring in Washington DC

New clients often ask me why recruiting great people in Washington DC remains stubbornly difficult.   One of my favorite job aggregator sites – Indeed - explains why in a very simple graphic that compares unemployed people relative to job postings.   (9/15/09 Note:  Indeed updated this chart recently).

Washington and Baltimore have 1 job posting for every unemployed person.  This is the best performance of any major city listed.  Other cities,  like New York have a ratio of 2 unemployed people for every job posting.  But poor Detroit comes in last with eighteen unemployed people for every job posting.  

The graphic illustrates that recruiting is essentially a local business.  Hiring difficulty varies widely from city to city.

By the way, it’s also a good reminder, that if you want to hire better people (at least in Washington), you have to write a better job ad.  Something I have been ranting talking about for quite some time.

Stop Thinking About the National Economy

Thinking about the national economy is, by and large, a waste of time (unless you are Ben Bernanke, or Tim Geithner, in which case, please stop reading this blog and get back to work!)

The Brookings Institute suggests we do not have some monolithic national economy, but instead really have an interconnected group of 366 metropolitan economies.   It makes sense, as this is exactly how staffing actually works.  At it’s core, staffing is a local business.  The labor pool, the jobs, the pay, what’s considered a good job, what’s considered a good commute – all this varies widely by region.  Ignore it at your peril.  The national unemployment rate is irrelevant in hiring.  Nurses might be in oversupply in one region and there might be a nursing shortage elsewhere.  Whether you are hiring  20 construction workers in Miami or 2 Mechanical Engineers in DC,  the local  economic situation matters more than the national numbers.  This is why we are seeing a talent migration to Washington DC, which has one of the strongest regional economies in the country.

Every day this week I talked to a local employer who had run ads to find candidates, but still had not found the ideal candidate for an open position.   A strong local economy like DC, can be really irritating if you thought hiring was going to be easy.

Why is the DC Job Market so Irritating?

Employers - here’s more bad news:  The DC job market is showing signs of returning to “normal.”  While hiring for some jobs is easier now, “normal” for DC means that employers will have an increasingly difficult time finding highly qualified people to fill every critical opening.   

The daily drumbeat of bad economic news that has pummeled us all since November is slowly letting up.   Government recovery plans are taking shape, and government money will soon be flowing (yea!)   Layoff notices are not coming quite so quickly.   And a once in a generation hiring opportunity is slowly beginning to slip away from you.  You are now missing one of the best chances to upgrade your workforce that you may ever experience.

I know hiring managers find this hiring difficulty both astonishing and really, really irritating.  They want to upgrade to better people, they really do, but most just don’t know how.   HR professionals (who are often short-staffed themselves) are hearing managers bitterly complain about their internal recruiting efforts:   

“Are you kidding me?  In the midst of the worst recession in twenty five years, we can’t find better candidates than this?”

“I can’t believe I have to pay a search fee in a recession?  Seriously.  Where are the good people?”

“Are you telling me that we received 300 resumes from our ad on Monster and only three are worth interviewing?”

So why didn’t this huge financial calamity, this Near Great Depression, this global fiasco make hiring easier for ALL of us here in DC? 

Well the recession did make hiring easier, if you were looking for people to work in Detroit.  Or if you were looking for construction workers, auto workers, or Wall Street types.  But you aren’t looking for those people, now are you?  No, you are looking for the same skills everyone else is, and those skills are still in relatively short supply, because very few firms in our area had big  layoffs of people with really hard-to-find skills.  (Circular logic, I know, but it’s still true.)

So what evil forces are conspiring against your recruiting efforts?   Why are you still missing out on this once-in-a-generation hiring opportunity? 

First, don’t confuse national unemployment rates with local unemployment rates.  We are deeply fortunate to work in the strongest job market in the country - our unemployment rates for most occupations never really spiked.  But to take it a step further, don’t confuse the macro unemployment rate with the number of highly qualified job seekers who have the skills you need to thrive in a recession.   It’s a darn shame that thousands of unemployed auto workers don’t make it easier for you to hire your next CFO, but they don’t.

 Second, “post and pray” job advertising does not work any better now than it did before - you just get 300 desperate unqualified people instead of 100 or 150.  Sure you get a few gems in there, but not as many as you would expect, given that everyone tells us this is the worst economy they have ever seen. 

But the biggest reason you are not seeing great people lining up to take your jobs, is you haven’t thought enough about who you want to hire yet.   When you post a job without first taking the time to think hard about it, everybody who reads your ad can tell right away.  And the person you want?  That hard charging, no excuses, high achieving, go-getter who gets results in a recession?  They are results oriented, so when they know you are not seriously thinking about your business, they do not even apply.

In the past few weeks I have had a dozen clients tell me the same thing, almost verbatim:  ”We’ve been trying to hire someone on our own for several months now, and with the economy so bad, I really expected we would have filled it, but all I’m doing is sifting through resumes and nobody jumps out at me – I just don’t have time for this and I can’t afford to leave this critical position unfilled any longer. 

Hey DC, welcome back to your “normal” irritatingly familiar ways.

100,000 New Federal Jobs

A recent Washington Post article suggests that between 100,000 and 250,000 people will need to be hired by the federal government to fulfill the demands of the President’s ambitious budget.  White House budget director Peter Orszag was quoted as saying:

“in several key areas — from properly auditing contracts to providing quality medical care to veterans and reducing errors in Medicare and other programs — investing in skilled professionals will not only pay off over time but also immediately deliver better service to taxpayers.”

The Department of Veterans Affairs expects to hire 17,000 people by year end.  And with a proposed budget increase of 10%,  the Social Security Administration expects to hire people in field offices, hearing offices and teleservice centers.

Bring on the federal hiring blitz!