Success vs Retainer – a modern fairy-tale?

Alex R.

Success based fees or retainer – modern faily tales in recruitment

Friday afternoon, 12 August; Marketing director Peter M. glances at his watch in satisfaction. Only three hours to the start of his holiday, and Peter M. believes that he has just successfully completed an important recruiting task. For months, his boss, the managing director of the international group’s German branch, has been urging him to do more in the partner area to reach the figures for this year. Peter M. knows that all too well himself. But what is he to do? The area has mostly been on hold since his responsible manager Jochen W. switched into sales.

That was the situation in which Bernd V. called Peter M. a few weeks ago: Bernd V. – head-hunter and personnel consultant, specialising in just the industry Peter M. belongs to. They quickly agreed on a deal: Peter M. was to send a task description to Bernd V. that same day and Bernd V. would start looking. He does have a lot of experience in that industry, a large network and anyway – the fee at 36% of the annual salary would only be invoiced once the new employee signed his contract.

Peter M. was happy: Things were finally moving, and he’d only have to spend money if it was successful.

A few days later, Bernd V. got back to him: He was able to present a top candidate and would submit the short profile at once. Peter M. would have preferred detailed documents, the original CV and the most important certificates, as well as several candidates for the sake of comparability. However, Bernd V. made it seem urgent. The candidate – Greatguy K. – had already received a contract from another company (which happened to be a competitor known to him) ready for signature. It was very urgent to employ this great man. Peter M. agreed. Greatguy K. really did turn out to be a good man for the task, though he had had much more responsibility with his last employer. Peter M. didn’t find it strange, therefore, that K.’s salary expectations were far beyond what his predecessor Jürgen W. had earned (and that hadn’t been little).

Peter M. therefore made it clear when talking to Bernd V. that Greatguy K. was very suitable for the job in technical terms and based on his experience – but not at that price. He wanted Bernd V. to present other candidates. The next weeks followed a pattern for Peter M.: Bernd V. elaborately informed him about all the many applicants he had looked at in Germany (“spared neither expense nor effort”) on the phone, but that they were far from reaching the quality of Greatguy K. and that he didn’t want to waste Peter M.’s valuable time.

On the other hand, he had been “listened around” and found that other companies were paying salaries to managers of that kind that did come close to the demands of Greatguy K. He, Peter M., therefore shouldn’t be making such difficulties. He thought that Greatguy K. was suitable as well. He should offer him a contract that met his demands. After all, Greatguy K. had already refused some lucrative offers from other companies, since he would like working for Peter M. and his renowned company.

Peter M. was experiencing more and more pressure: internally due to the lack of customer acquisition and support; externally from the partners who had been without a contact for months and demanded that contractual obligations were met. Bernd V. also kept repeating like a mantra that he should match the demands of Greatguy K. and, last but not least, Greatguy K. called several times to announce that he was about to sign the competitor’s contract – of course at the conditions of Greatguy K. Last night, Peter M. again met Greatguy K. in the office after he returned from his business trip at around 9 PM, and they negotiated until 11. He moved a little in Greatguy K.’s direction (since he had no other options) and they agreed to sleep over the result in order to put it all in writing today (also under the pressure of M.’s holiday starting).

Peter M. was unable to get much sleep. He (almost) was still in bed when Bernd V. called his home number. He was already informed of the prior night’s result. Peter M. just wanted to start his holiday, and if Bernd V., who knew the industry so well, was so much in favour of Greatguy K., it was hard to refuse to come to an agreement. Now it is done: Greatguy K. has signed the contract, after it was once again improved for him. He will take up his work on 1 September.

Bernd V. immediately faxed his fee invoice, which Peter M. sent to accounting for immediate payment. Now it is time for his holiday, which will be shorter than expected since Peter M. wants to be back in the office on 1 September to greet Greatguy K. and to introduce him to the company and his tasks.

1 September: Peter M. returns from his holiday relaxed and in the best of moods. In the corridor in front of his office, he meets his boss, who shares the latest news from the company with him. Finally, the way to his office is clear, where Susi S., his secretary, is already waiting for him. Peter M.’s quick “Is Greatguy K. here yet? Send him to me right away,” only results in a shy shake of Susi S.’s head: “Greatguy K. called yesterday afternoon just to say he wouldn’t start working for us. He found something else that was more interesting to him.” Peter M. thinks he’s caught in a nightmare. He runs to the phone and calls Bernd V. He gets a very short answer. “Since you only accepted Greatguy K.’s demands in part, you had to expect that someone else would do better. You have only yourself to blame for the situation. That isn’t my fault. And regarding my fees: we agreed on complete payment at signature, and the contract was signed.”

Is this greatly exaggerated, an exception, showing that there are always some black sheep everywhere?!

No, this case is authentic. When a recruiter works only on the basis of success, only success counts, no matter what. When the fee is a percentage of the new employee’s annual salary, it’s “person against cheque” – the candidate’s quality doesn’t matter. Random hits are at the focus.

100% success – a trump card for clients?

Without doubt, there are some arguments that support success-based recruiting in certain situations and under specific circumstances – strictly from the point of view of the client:

There is the always-cited argument of low financial risk for the client. In addition to other aspects supporting this, which will be explained below, the above practical example shows that this is only superficially correct and in particular focusing on a very short-term viewpoint. Even if Peter M. will get back at least part of the fee paid after many weeks of disputing with Bernd V., he will have to invest in recruiting again, he has lost time, which negatively impacts turnovers, and he has to expend more time.

Second, a recruiter working 100% on the basis of success must be extremely result-oriented. He has a high own interest to conclude a contract between the client and candidate as quickly as possible. This, too, superficially is a very positive aspect from the client’s point of view.

As the above example shows, unfortunately this is often to the detriment of a wide selection. To reach the goal more quickly and with the least possible effort, few candidates, or only one candidate at all, are presented to the client. They may be a good choice for the job to be filled, but the unpleasant feeling that a broader selection of presented candidates might still lead to a better choice remains. If the recruiter exerts a lot of pressure that all the financial and other contractual demands of the candidate be met, every client should figure out that the consultant’s own interest is predominant.

A third often-used argument to support awarding the order based on success from the client’s point of view is the time factor. This means the fear that the recruiter charged will otherwise take the 1st and 2nd payment and do nothing or very little, which is fatal in case of time-critical recruiting. At first glance, this argument is hard to refute. However, the law of the market applies here. No reputable recruiting agency in Germany can afford to live off of first and second payments without filling positions to the client’s utmost satisfaction. The German market is too open for that. News like this get around quickly, and word of mouth is more necessary to us than most other industries. Apart from this, a client can influence rate design in such a way that the incentive for successful filling of the position, and therefore the 3rd payment, is a financial one as well.

Last, the argument often cited by clients that the personnel market for qualified employees was so empty that quality demands couldn’t be too high anymore: The most important thing was to get someone to fill a vacancy at all. If a company just wants to have some available person, all they need to do is place a job ad in the relevant press. One of the main reasons for filling jobs through recruiting is to find candidates who are not currently looking for a change, but who would match the searching company due to their quality. Convincing those takes a lot of know-how and market knowledge in the respective industries, the largest possible networks within the search target group and high quality awareness as well as a very good reputation when approaching them – aspects that speak against searching only on the basis of success.

Regional habits and the German market

However, we also want to tell you about the regional habits that are taking a hold here in the scope of increasing globalisation of German markets. In particular companies from English-speaking countries, first of them the USA and UK, generally do not use partial payments at all, but recruit only based on success. However, it must be observed that recruiting in those countries is performed in an entirely different environment. Some factors are the entirely different rules in employment contracts and labour law, including much shorter periods of notice and connected employment periods that can be just a few days long. This necessarily leads to much shorter recruitment processes (as short as 1-4 weeks), which turn division of fees into instalments into no more than administrative busy work. Therefore, these countries usually do not make any pre-payments. The German market shows different conditions, so that strict adherence to these habits will always be problematic. The HR officers in German branches of such global companies have gradually developed an understanding of this – as we know from our daily practice. They usually cannot prevail, however, which puts limits on globalisation. The consultant’s CONS are the client’s PROS.

Therefore, personnel consultants also have a lot of arguments against purely success-dependent compensation for personal acquisition, not only from their point of view and to their benefit, but primarily to the client’s advantage:

Very often, awarding of personal acquisition orders based purely on success also is not connected to an exclusiveness agreement. The personnel consultant will not be the only one to get the order. The consequences are disastrous: potential applicants will be confused if several consultants contact them about the same position. Now more than ever, as applicants virtually must be convinced to switch in many areas and industries, this procedure is a severe obstacle – no matter all the psychological experience of the consultant. Additionally, this procedure can also have a harmful effect on the ordering company.

Reputable personnel consultants consider themselves bilaterally profiting partners, with open communication and integrated consulting (not only) in personnel matters beyond pure recruiting. This, too, causes them to invest a lot of time in a search process in the early phase (company analysis, market analysis and research, position analysis, environmental study, requirements catalogue, ideal profile, etc.), to achieve the optimum.

Working based on success only, in contrast is a classical buyer-supplier ratio, which is not aligned with a long-term relationship, and certainly not with any kind of entrepreneurial partnership. Therefore, it is also not surprising if the same applicant is offered further on the market by the same consultant. The personnel consultant becomes a pure recruiter. The client could have the same service more cheaply.

Seeing personnel consultancy as a partnership means that the consultant considers himself the customer’s representative. The reputation and trustworthiness with which the consultant appears on the market is transferred to the client accordingly. Market appearances of the consultant aligned only with quick performance of an order usually oppose this. Reputable personnel consultants consider it their obligation in return for prepayments to keep the client informed of any aspects that have come up in the scope of market activities for recruiting.

It may be harder than ever in many areas/industries today to find qualified applicants who are interested in the offered new position. Nevertheless, it should remain the highest principle of any consultant to present a minimum number of accordingly qualified candidates to his client in order to permit optimal selection. In spite of intense exchange about the hard and soft determining factors between the client and consultant, there often are still some differing ideas about the final suitability of an applicant for a specific position. Purely success-related recruiting limits this effort from the beginning, and even more so if lack of exclusiveness means that another consultant may be faster (more successful), which would mean that one gets nothing.

The question of the consultant’s position is often disputed when talking about the subject of “compensation”. We consider it our obligation to consult in matters of compensation – both when discussing the vacancy before the order is placed, and again in the scope of specific contract negotiations with the applicants.

In this context, it may be of benefit to agree on a fixed price in the consultancy order. There is no reason to not pay this in instalments either then.

If there are no prepayments, it is tempting to keep the entire process of search and selection as low as possible in terms of effort. If the consultant and client are partners, however, the search quality and correspondence of the applicants with the search profile will be at the focus. This is ensured by the mutual efforts of integration of the new employee and his permanent placement in the company, (e.g. by intense support by the consultant during probation). In the scope of this kind of trusting relationship, the matching guarantee provisions on the consultant’s side are quite common. When working purely based on success, success is – as the name says – the only thing that counts.

Are Clients looking for transparent processes

When talking to customers about their experiences with recruiting, one will often hear that the consultant’s activities were no longer transparent once the order was placed – which would as a result keep the client from taking any influence any more. Again: If a success-dependent customer/supplier relationship is used for recruiting, the law of action and design is left to the supplier. Based on a partnership, in contrast, and after financial prepayments, the client has the right to learn what his partner is doing with that money. “Soft skills” are more important than ever now. Applicants who meet the technical requirements are common enough today, but they often do not fit the company: they are not team-oriented enough, too dominant, etc. In order to assess these factors, the client must include the requirements in an early stage. These are aspects that are usually not reflected in any job or task description. This is very time- and cost-intensive, but strongly affects success and applicant quality.

The more often a company cooperates with the same consultant, the more optimally can the entire process be designed. Many decisive facts, in particular also most soft skills, are increasingly better known. Therefore, a client generally must be interested in long-term cooperation. When working based only on success, short-term “success” is predominant. The target set by this kind of consultant is “fastest possible signature” instead of “happy customers, employees and applicant”.

Quality is the key term in this context – quality in all respects: quality of the applicants, quality of the search, selection and acquisition process, quality of integration, quality of applicant support, of the client, the new employee, the company. Prepayments in recruiting are directly reflected in quality and prevent expensive wrong investments, since they are directly sensible or necessary. The investments generally should be too high for a company for pure recruiting.

Peter M. has learned his lesson. He takes his phone and calls Rainer T., the company’s HR manager, asking him to schedule an appointment between them and a personal consultancy right away. “But it must be one where we and the applicant will be A-customers. I want quality. No compromises!”

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