The Truth about Headhunters

When the phone rings and it's a headhunter on the line, your first thought is probably not "What is this person's business model?" Whether this is the right time to look into a job opportunity and, if so, whether this particular one could work for you, are understandably top of mind.

But the way a recruiter does the job and gets paid is worth paying attention to, because it could affect your willingness to work with that recruiter, the way you will be represented in the job market, and ultimately the chances of landing that new position, if that is what you wish. "Any time you're talking about your career, it's imperative to know the people you're dealing with and what their practices are," said Richard Dowd, president of Dowd Associates Executive Search in White Plains, N.Y., which specializes in finance jobs.

There are two broad categories of executive searches: retained and contingency. In both cases the hiring company pays for the service, but a headhunter performing a retained search gets paid regardless of whether the open position is filled, while one doing a contingency search is paid onlywhen it is filled. Most recruiting firms do one or the other, but some do both, depending on client preference.

Other differences between the two business models abound, but sorting them out is tricky, in large part because of pervasive rhetorical sparring between the two sides over which is the better approach and why, conspicuously marked by generalizations that apply to some players but not others.

C-Suites versus Cubicles

Certainly it is true that retained firms tend to work on higher-level searches — for CFOs, vice presidents of finance, controllers, and treasurers — while contingency firms more often fill mid-level positions such as accounting managers and staff accountants. "If you're the CFO of a public company, the likelihood of contingency firms turning up appropriate opportunities for you isn't that great," said Dowd, whose firm does retained searches.

Contingency firms acknowledge that is generally true but note that some clients simply prefer the contingency model, either because they don't want to pay for an uncompleted search or because they think having multiple firms compete on searches produces the best results. "I've done searches for all levels of employees, including CFOs," said Tom Gimbel, CEO of The LaSalle Network, a Chicago firm that performs contingency searches, primarily for finance professionals.

At the same time, Gimbel said, it's a mistake to assume that all retained searches are for C-level and other top positions. An often-spoken rule of thumb is that retained searches are used for jobs paying $250,000 a year and up. But, Gimbel told CFO.com, "There are a lot of one- and two-people shops out there that have some good relationships with companies and will do retainers for any amount of money."

Turning over the Stones

Another difference is that the average retained search is generally considered to be more extensive. Because such searches bring big fees — the industry standard is one-third of first-year compensation for the job, including salary, performance bonus, and signing bonus — retained firms can afford to painstakingly research the market and vet candidates, often using in-house research departments. Contingency firms usually charge between a quarter and a third of first-year compensation, but since their searches are typically for lower-paying jobs, they earn far less per search.

"The retained process is more rigorous," said Barry Bregman, financial services partner at New York-based CTPartners, a major nationwide executive search firm that does retained searches. "That's really what the client is paying for: greater rigor, due diligence, review, and analysis of the market and the individuals in it."

Not necessarily so, according to Don Patrick, owner of the Norcross, Ga., franchise of international search firm Sanford Rose Associates, who does both contingency and retained searches. "What I do on contingency is not really any different from retained," he told CFO.com. "It's just depends on which pricing model the client prefers."

Retained searches appear to be more rigorous because they are slower, Patrick suggested, because the hiring managers for high-level positions are usually top executives such as chairmen and CEOs. "When you're dealing with senior management, you're often dealing with egos and power plays," he said. "That slows things down."

What Sticks

Related to the topic of thoroughness of search is perhaps the biggest bone of contention, which involves, well, spaghetti. As in: many contingency firms "just throw a lot of spaghetti at the wall to see what sticks," Lorraine Hack, a partner in the financial-officer practice at Heidrick & Struggles, told CFO.com in January.

The implication is that instead of doing a disciplined search for the right person to fill a job, such firms flood their clients with choices, delivering as many candidates as they can find who could possibly be a fit, as well as sending a résumé to many different potential employers. "From a candidate's perspective, there's a trade-off between your résumé being distributed on a controlled basis vs. a high-volume basis," said Bregman.

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