How do Recruitment agencies and headhunters make money? If you’ve ever asked this question, you are in luck. This article answers just that.
Let’s have a look at the existing structure of how headhunters make money. But first, let’s clear the air.
Do I have to Pay a Recruiter to Help Me Join a Company?
No art at all! In most cases, job seekers do not pay a dime to recruitment agencies. Majorly, their services are funded by the companies that are seeking to fill open positions.
What this means is that you can enjoy the benefits, benefits of a recruiter’s expertise, network, and guidance completely without paying any fee.
Now that we have cleared the air, let’s talk deeper now about how recruitment agencies and headhunters make money
How do recruiters make money then?
There are different ways recruitment agencies make money depending on the model of employment and the agreement the agencies’ tricks with various employers.
However, recruitment agencies make money by charging a specific percentage to the company they are working for. Recruiters do not charge job seekers. Moreover, the payment structure for recruitment agencies depends on the nature of the employment offer they are working on.
Hence, this implies that the payment offer for a permanent hire differs from that of a retained search and contract recruitment, respectively. I will go into that in much more detail later in this post.
Payment Structure for Recruitment Agencies (General view)
Payment Based on Percentage
As earlier mentioned, recruitment agencies get paid by percentage. This is measured according to the number of successful hires or placements they make in a year. However, the nature of the job role also determines the inflow of cash. These payment methods below use the percentage-based model.
This is by far one of the most common models that pay recruiters. In this model, the recruitment agency earns a commission which is typically a percentage of the candidate’s first-year salary.
This is usually around say 15-30% (This may differ depending on several conditions like the nature of the employment), upon successful placement.
For example, let’s say, a startup company needs a software engineer and hires a recruiter to help them search for the right candidate who agrees to work for a fee of 20%. If the position has an annual salary of $100,000, This means that if the engineer is hired at a salary of $100,000, the agency will earn $20,000.
This is a typical example of a contingency search. The agency takes on all the risk of not finding a suitable candidate, but they are rewarded handsomely if they do
This model differs from contingency search which involves payment after placement. For retained search payment models, you ask the recruiter to get paid upfront by your client (the employer) even while the search is ongoing.
This is done basically, for high-level, hard-to-fill positions. Hence, the hiring company pays you a retainer fee upfront, regardless of the outcome. This route is often taken to ensure recruiters (you) focus on quality and search for the best fit for the role.
However, payments for a retained search are often milestone-based. While there might be an initial retainer as expected, additional fees could be tied to specific progress markers like presenting a shortlist and securing an offer acceptance.
So, typically, for the retainer search model, the client or employer is expected to pay recruiters about two to three times during the search process. However, each payment made is usually calculated from the percentage of the first-year salary of the recruit without deductions,
Let’s place this in perspective. Imagine a tech startup in need of an AI engineer and find your agency that proposes a retainer of 25% of the target salary ($150,000) payable in 3 installments. That would be, 50% upfront, 25% upon shortlist presentation, and 25% upon offer acceptance.
Either way, if this proposal comes from the clients or the agency and there is an agreement. It stands for retainer search payment plan
Temporary or Contract Placement
Contract staffing happens when the recruitment agency carries on the process of searching, interviewing, and employing new hires including negotiating salary plans. it is called contract payment because the agency bills the client (Employer) for the employee’s wages. Plus, an addition to cover their services.
This is a common arrangement for temporary or contract workers because it allows the agency to take on the responsibility of payroll and employment taxes.
“To calculate contract bill rates, multiply the employee’s hourly rate by a markup multiplier” (https://topechelon.com/blog/recruitment-agency-fee-structures/)
- Bill rate = Contractor’s hourly rate * (1 + Markup %)
- Total bill = Bill rate * Total hours worked
- Contractor’s hourly rate: $50
- Markup: 20%
- Total hours worked: 150
Bill rate = $50 * (1 + 0.2) = $60/hour
Total bill = $60/hour * 150 hours = $9,000
Other Payment Options for recruitment agencies are:
Recruitment Process Outsourcing (RPO):
A PRO acts as an internal recruiter who helps manage the entire recruitment process for a specific department or project and receives a fixed monthly or project fee but is staffed by an external agency.
Picture handing over your entire recruitment function or a specific part of it (think high-volume hiring, niche roles, or employer branding) to a team of experts, that’s RPO.
So, these recruiters (PRO) serve as an extension of the client’s company, taking ownership of the entire recruitment process, from sourcing and screening candidates to interview scheduling and offer negotiation. Here, such recruiters get paid monthly by the external agency they report to.
Internal Recruiters and Talent Acquisition:
Internal recruiters and talent acquisition are paid like regular employees in an organization. They receive monthly payments as their job role is to recruit and onboard new members to a team.
Also, Interval recruiters and Acquisition (TA) get paid bonuses based on how many positions they can fill. Moreover, their pay does not depend on the total package of your salary.
Recruiters make money based on the nature of the project, in this case, the kind of employment they are working on. If it is a permanent role, they get paid based on the annual salary of the new hire. Weber, if it is a retainer search payment plan, They get paid in installments also, depending on the nature of the job.
However, the only payment plan that sounds flexible and depends solely on the hands of the recruiter is that of the contract payment plan, where the recruiter gets to deceit the extra amount to add as a markup.
However, internal recruiters serve more like on-site recruiters. They are hired to work within an organization and they are not paid based on the total package of your salary.