This article was first published October 21, 2015. Its content has been updated to provide relevance but some data may no longer be accurate. Visit the eBoss Recruitment News index page for the latest industry insights.
Which charging model should you choose for your agency? Most recruiters will have asked this question at some point. The complexity of the question rests on the fact that there is no single correct answer.
Every agency is free to decide the model and the prices that they’ll charge. This often comes down to which clients they serve, and the types of role they aim to fill. In fact, some agencies will use one pricing model for one client, but a completely different model for another. And this is absolutely fine. Deciding which is the best model for your agency can take time and a bit of lived experience. But, usually, the option you settle on is likely to be one from the following list.
Top 5 Charging Model options for Recruitment
Your choice of fee structure will be dependant on many factors including: client base, placement type, and industry or sector. But, as a general rule, the two main charging model options for agencies are the retainer and contingency methods.
1. Retainer Model
Under the retainer model, you charge an upfront fee to your client in return for conducting a talent search. Because the retainer represents a guaranteed payout, your client will often only be working with your agency. It means that you will likely be the sole recruiter responsible for providing candidates and filling a role.
Retainers are ideal when you are already have a very close working relationship with your client. This type of recruitment may involve a significant amount of collaboration, and you may work together to decide on methodology. Typically, your agency will present the client with a shortlist of candidates. Every candidate should have the ideal skills and salary expectations. Your client is likely to control the interview process, and they will choose the successful candidate.
What should you charge for a retainer? Many recruiters set their placement fees at somewhere between fifteen and fifty per cent (15-50%) of the candidate’s annual salary. This can work out as a princely sum for your client. However, for complex placements or for highly skilled roles it can nevertheless provide a substantial cost saving in the end.
Retainers can also be structured to provide better affordability. Fees may also be charged in instalments: an initial instalment as an upfront fee; a second instalment for the shortlist of candidates; and a third upon the successful placement.
This method can be used for one-off assignments or for clients who have a continual need for permanent employees. In this situation, consistency is key. Your agency should have an established process for locating and supplying a regular flow of candidates if you are considering pitching a retainer agreement.
2. Contingency Model
Under a contingency model, you supply your service for free until one of your candidates has taken a position with the client.
Just reading that sentence should alert you to the nature of the contingency model. It is a high-risk, high-reward play for recruiting. Usually, your agency will face plenty of competition to supply the right candidate in the fastest time. You’re competing against client’s in-house HR team, direct applicants, and other agencies.
Your client may see the benefits of this option because it means they avoid paying out for unsuccessful applicants. Contingency structures are also good for clients whose vacancies have proven hard to fill. This fee structure allows them to appoint many recruiters and have as many people as possible working on the case. At the same time, there is minimal risk to their budgets, as only the successful recruiter wins the fee.
As a result, you may think about the value of fees you charge on a contingency basis. The reward must not only cover costs and finance your business growth. It also has to account for the level of risk that you are taking on in a no-win-no-fee arrangement.
3. Set Rate
Some agencies will charge a set fee for locating a candidate. This is a set rate because it is charged with no consideration to the value of the candidate, their salary, or package. Often this is the pricing model for high level executives who may have a complicated remuneration package. A set fee eliminates the ambiguity of what may or may not be included in the percentage fee option.
A set rate can appear highly attractive to a new recruiter as it represents guaranteed earnings. But think about it – is your set rate going to appear so attractive to your potential clients? If you are new, and you’re growing your business and client base, then choosing a set rate may not be the best way to attract clients to your agency.
4. Flat Fee
Some agencies will charge a fee based on the salary band of the candidate. But how does this work on paper?
Salary bands usually increase in £10,000 increments. For example, you charge the same fee for any candidate whose salary is between £50,001 and £60,000. Your client activates the next higher bracket as soon as your placed candidate negotiates a salary of £60,001. Naturally, this fee structure is likely to play a more active role in salary negotiations and the interview process. But it can work out as a mutually beneficial arrangement for both you and your client.
5. Temp and temp-to-perm fees
There are additional considerations if you are supplying temporary workers to client. Temporary worker placement fees can be a little different to standard recruitment charging models. You may charge a percentage of workers’ basic salary, or their hourly rate. This percentage may vary greatly depending on the industry of the client.
But clients may sometimes decide to transfer a temporary worker to permanent staff member to secure their expertise or provide stability for the worker and/or organisation. If the temporary worker was employed by the agency then the agency is entitled to charge a fee for the loss of the income they were receiving for that worker.
Additional Fees, Expenses and Refunds
It is also worth considering the extra costs, fees, and compensations that your agency may need to manage. Firstly: additional costs.
Some agencies choose to charge expenses on top of their fees. This may include things like the cost of promoting a vacancy and advertising to multiple channels. Sometimes, your client will have their own recruitment marketing team, or have an agency that they outsource to. But if you, as a recruiter, are able to provide this service as a part of your overall hiring package, you may increase your earnings while reducing the overall spend for your client. If you are looking for ways to expand your business activities, then marketing is always a good option.
Next, you should pay close attention to the way you handle refunds and failed placements. Your clients will want to know that they are protected. For high value placements, most will want at least a three- or six-month guarantee. If Your candidate decides to leave during this period, your client is not liable to pay for that candidate. This ensures quality in the hiring supply chain. But how is this handled? Usually, rather than returning a fee that has already been pocketed, you will want to offer the client a replacement candidate, free of charge.
Whichever model your agency decides on be sure that the fees are clear so that the client knows what they are up for. Recouping unpaid fees through debt collectors or small claims courts is the model everyone wants to avoid. Communication and contracts are the keys to ensuring this doesn’t happen.
Not every agency has in-house contract writing skills. It may be worth the cost of paying someone to write the client contracts or draft your own and have an expert provide their comments. Work with your clients to ensure the pricing model suits your agency and the client. If both parties are happy the relationship will continue well into the future.
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