Recruiter Incentives: Are They Helping or Harming Clients?

The phone rang in my office a few months ago. When I picked it up, a male voice asked, “How are you today?” Even before he identified himself, I knew I was speaking with an agency recruiter. After warily telling him that I was fine, he proceeded to jump into a monologue that did not involve commas, periods, or, as far as I could tell, any intakes of breath. He told me he had seen a web posting of an open position of mine and that he had the perfect person for the job. I actually happened to know the candidate he was selling me. The candidate was not qualified and did not have the work ethic required to succeed at my company. This did not deter the recruiter. He continued to push the candidate, suggesting that all we had to do was meet him and we would see he was perfect for the job.

After finally putting down the phone, it became apparent to me that this conversation was not the recruiter’s fault. The problem with his approach could be traced to the agency he worked for and its flawed incentive structure.

Incentives in Recruiting: Corporate vs. Agency

There are two prevailing methods that are used by corporations and agencies to motivate recruiters. Both are complete opposites when it comes to incentives. Unfortunately, neither method promotes the right activities for successful hiring. For the purpose of this discussion on incentives, I will refer to them as the Corporate Method and the Agency Method. The Corporate Method treats recruiters like any other employee. Corporations believe that since recruiters are in HR, they should be paid a straight salary and periodically receive bonuses, just like their co-workers in finance, IT, engineering, and other functions. The Agency Method, on the other hand, is based on paying a minimal wage (if any at all) and offering hefty commissions based on the number of people recruiters place at their clients’ companies.

The downside of these two methods is that corporate recruiters are given little incentive to aggressively recruit talent, and agency recruiters are given little incentive to build long-term partnerships with their customers. Neither incentive system promotes the recruiter activities that are necessary to ensure successful hiring practices for the companies served. In this article, I will focus on the problems inherent in incentives for recruiters working at agencies. Let me start by describing a successful hire. A successful hire is someone who joins a company, excels in his job, and stays for an extended period of time. In my previous article on talent suitability, I discussed how the key to a successful hire is hiring someone who is a strong match for the right job, group, and company — and where the job, group, and company are a strong match for that person. We do not pat ourselves on the back and say we have made a successful hire the week a new hire starts. The real determinant of talent suitability success is what happens weeks and months after someone starts. What you want are new employees who are productive and stay a long time. When it comes to addressing this issue, agency recruiting incentives are a disaster. Agencies pay commissions to their recruiters based on the number of people they place. Their recruiters typically get paid a percentage of the newly hired employee’s first year salary. Agencies will usually have an agreement with their customers that any new hire who leaves the client company in the first 90 days (in rare cases up to six months) will be replaced free of charge. Based on this incentive system, the Agency Method is detrimental to ensuring quality hires. It cannot build fruitful long-term relationships and can only survive by the “hit and run” tactics utilized throughout the industry. Let me explain. By focusing on quantity, agency recruiters work aggressively to fill as many positions as possible. If recruiters are working on 20 positions concurrently, they will focus on the positions that are fastest to fill and will typically ignore the more difficult or longer cycle positions. As an example, if one company makes slower hiring decisions than a second company, the agency’s recruiters will focus on the company that makes faster decisions, to the detriment of the more thorough customer.

Annie Rihn, head of recruiting at Zillow.com in Seattle, has engaged several local agencies to help meet the hiring goals of the pre-launch start-up. She says, “We offer a unique and challenging opportunity and have an incredible culture. But having a very high bar when it comes to talent standards has caused frustration for several of the agencies we’ve worked with. Some agencies are less motivated to work with us because they can’t get as quick of a hit. The few that have been most successful are clearly focusing on building longer-term relationships and feel much more like a trusted business partner.”

Agency recruiters usually make two other costly mistakes. First, because they are competing with other agencies, and sometimes the customer’s internal recruiter for candidates, they will call and screen candidates quickly, without much attention to detail, as they want to win the “race” for candidate submittals. Second, they will take an aggressive tack with hiring managers to get their candidates interviewed, making comments like “you must see this candidate,” or “he is absolutely perfect for the job.” If hiring managers interview candidates who have not been well screened and who are not “perfect for the job,” the agency recruiter’s credibility is ruined. But with the focus on quantity, not quality, and so many prospects out there, agency recruiters simply move on to the next opportunity. Another poor practice of the Agency Method is the 90-day replacement guarantee. There is absolutely no incentive in this guarantee to ensure the hiring manager and candidate have a happy and productive relationship over an extended period of time. If a recruiter is only worried about a new hire staying for 90 days, there will be minimal effort given to principles of talent suitability.

Fixing the Agency Method

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So if talent suitability equals successful hiring, what concepts would agency recruiters need to embrace in order to improve?

  • They need to build long-term relationships with their corporate customers. Customers want to work with their recruiters over an extended period of time, as it takes a while to learn the nuances of the job and the manager’s hiring expectations. Agencies who invest in their customers’ success over the long term are more profitable.
  • They need to help hiring managers fill all, not just some, of their positions. Positions are given to agencies for a reason: The manager needs all of her positions filled as quickly as possible. Extra effort should be made to fill difficult positions, as the agency should be concerned about the hiring manager’s success.
  • They need to become business partners with their hiring manager clients. Hiring managers want to work with a partner, not a salesperson. Poorly qualified candidates who are pushed on hiring managers result in short-term relationships and lost business.
  • They need to be invested in the new hire’s success. Back-filling a poor hire after only three months is not good enough. If an agency is paid a full commission and its placement leaves after four months, the hiring manager is going to feel cheated.

As you can see, pushing recruiter behavior with commissions for each placement is not conducive to the above values. Recruiters are not motivated to work on all positions; they are rushed to produce hastily prepared candidates; they are motivated to oversell; and there is no downside to a new hire leaving after a short amount of time. None of these points ensure a healthy agency/customer relationship. If agencies want excellent long-term relationships with their customers they should set up incentive programs that reflect the best facets of talent suitability. Hiring people who are productive and who stay a while should be rewarded. Working on all of their customers’ positions should be expected. Ultimately, making their customers successful should be a cornerstone of the Agency Method. Here are some concrete ideas for a new Agency Method:

  1. Set the expectation that all companies and positions are worked on with equal diligence. Incentives for recruiters should be based on the percent of open positions filled for each customer. For example, starting in January, 2006, the success rate for all customers could broken out as follows:
    • If 30% or more of requisitions are successfully filled, commissions will be paid.
    • If 30% of the positions recruiters worked on from Microsoft are filled, 42% of the positions from Yahoo! are filled, and only 18% of the positions from Costco are filled, commissions would only be paid to the recruiters who successfully filled positions for Microsoft and Yahoo.
    • Keep an ongoing tally. If Costco’s success rate goes above 30%, then all successful hires over the year now get paid. If Microsoft or Yahoo! drops below 30%, future commissions are stopped until the proper percent is attained.
  2. Pay commissions based on new hire milestone dates. Agencies could pay their recruiters a portion of the commission at the date of hire, another portion when the new hire has been on board for six months, and the remainder at a year. (The agency should be paid by the customer at these milestones as well. It communicates a strong commitment to the customer’s success, which will itself pay dividends.) Paying out recruiter commissions further down the road demonstrates that the agency and its recruiters are committed over the long term to each new hire’s success. This will not only motivate recruiters to source, screen, and present higher quality candidates, but it will also serve as an excellent retention tool for the agency recruiters themselves. With commissions being paid out over many months, how can a recruiter ever leave?
  3. Pay agency recruiters a higher base salary. The emphasis should be on partnering, not selling. Your customers will appreciate it. Besides, there is nothing worse for your company’s reputation than the voices of increasingly desperate recruiters!

These are only a few ideas for aligning agency recruiter incentives with talent suitability. If your agency utilizes a different plan, or if you’re on the corporate side and you’re aware of other incentive plans that motivate the right behavior, please drop me a line. Your feedback is very welcome. In my next article, I will discuss what can be done to improve recruiter incentives on the other side ó corporate recruiting.

Randall Birkwood is a former director of recruiting at T-Mobile USA, Cisco Systems, and Microsoft Corporation, and HR at Intermec Technologies. While at T-Mobile his organization was listed in an ERE article as a top 10 benchmark firm in recruiting and talent management. He has been an advisory speaker at General Electric and AT&T for VPs and directors of HR, and spoken at a number of conferences in the U.S. and UK. He was the subject of a cover story on the "War For Talent" in Internet World Magazine.

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11 Comments on “Recruiter Incentives: Are They Helping or Harming Clients?

  1. Randall:

    I want to congratulate you on pointing out some of the problems inherent within the agency mindset. Your statements are clearly stated and right on the money. Unfortunately, most of those in the agency business just churn and burn recruiters utilizing Darwinism as a measure of who is good and who is not.

    Truth be told, most folks at the helm of those agencies are hardly what one would call long term thinkers. Expect little in the way of real and meaningful change from the world of contingency recruiters and you won?t be disappointed.

    Howard Adamsky
    HR Innovators

  2. This was an interesting article, but it leaves me wondering if the author has ever worked for any length of time as a third-party recruiter? My guess would be probably not, or if so, for a short period of time before switching over to corporate.

    The reason I say this is because I can’t see any third-party recruiter buying into your solution, especially not getting paid if the agency fills less than 30% of the openings. No one would agree to work under those conditions. I also don’t agree that an agency should necessarily fill all openings that a corporate recruiter has. There will always be areas that people have strengths in, and some that they don’t. So, it might make more sense to consider what types of openings that agency has had the most success with, and continue to give them those openings, which they should fill, and give the other ones to someone else. That should increase the percentage of fills, as the recruiters efforts will not be diverted onto those less likely to fill openings. They can focus on what they do best.

    Regarding partnering with clients, I happen to agree completely with you on this. But, this is more of a quality issue, and as you no doubt know, quality varies among recruiters. There will always be those throw it at the wall and see if it sticks agencies, and you will simply have to weed out the ones who operate that way, and partner up with the ones who are seeking to develop and maintain a long-term relationship.

    If you do that, then the issue of guarantees should be a non-issue. If you are working with a third-party recruiter that has truly partnered with you, and doesn’t just ‘make placements’ but who takes the time to make sure the true fit is there, then you will not have problems with new hires leaving. I do believe that if that up front work is done, and the company, recruiter and candidate are all on the same page regarding an opening, then things should go well. If after four months that candidate leaves, well I think you need to look internally at that point and ask why? I also believe that at that point, the recruiter is out of the picture, and you need to be accountable for what happens. We cannot control your work environment, and thus, we should not be punished if something goes wrong. And realistically, this will so rarely happen in a true partnership, that it is a non-issue.

    And there would be no need to strung out payments.

    It sounds to me from the overall feel of this article, that more weeding out needs to be done, and the recruiting firms you work with need to be evaluated more thoroughly to make sure you are only working with those agencies who will treat the relationship like a partnership.

    If you do, everyone will be happy!

    🙂 Pam

  3. I am an agency Recruiter and have been for over 8 years. I have built long-term relationships with a variety of employers and have had a successful career under the traditional commission-based incentive programs based on the number of placements I make per year.

    The example of the Recruiter portrayed in this article does not represent the agency recruiter world as a whole and as with any service industry, there are varying levels of quality – exceptional recruiting firms and sub par recruiting firms. It seems to me that maybe this hiring authority has not had the opportunity to speak with a quality agency recruiter or maybe has never given a recruiter their time and attention in order to overcome their preconceived notions of our industry and how an upstanding firm can be a partner in helping them with their recruiting challenges.

    It seems to me that maybe corporate hiring authorities and internal recruiters need to take more time to listen to quality agency recruiters and less time trying to make assumptions about how their incentive programs are the problem.

    Hiring a candidate is a shared responsibility between the client and recruiter. It amazes me how if a candidate doesn’t work out, the blame seems to immediately fall on the agency recruiter, not the multiple individuals at the client company who thoroughly interviewed the candidate as well. Recruiters are not retention experts. We don’t know what the candidate is experiencing on a day to day basis once they start. How can a recruiting firm be asked to guarantee the unknown factors of the actual work environment? The Recruiter and client hiring authority can do all their due diligence and background checks and sometimes it just doesn’t work out. It’s not a result of how the Recruiter’s employer choses to compensate the recruiter. If you are on high commission, it is in your best interest as a recruiter to establish long-term relationships with clients, establish an excellent reputation among clients and candidates alike. Our business is based on referrals and our reputation. It seems to me if a Recruiter had a higher base salary, it wouldn’t matter what they did, they would still get paid. A higher commission incentive puts a Recruiter in a position to establish a quality business or they can’t make a living!

    My advice to corporate hiring authorities working with recruiters – don’t worry about how the inner workings of their compensation packages, etc. Focus on finding a quality recruiter with a good reputation and references in the industry who can help you find the talent you need.

  4. Great article, and on a subject that has concerned us quite a bit lately. I’ve noticed two trends of late: the quality of candidates presented to us by agency recruiters is much lower, and the ‘pushiness factor’ of agency recruiters has become much higher. What this amounts to for us, as a customer, is a requirement to do more work on our end screening the customer, and less trust in the agency recruiters. As a result, our use of agencies has greatly declined and we are focusing much more on filling our hard-to-fill openings in-house. I look back fondly on the days when agency recruiters sought business relationships and long-term partnerships and really seemed to care about the impression they made; nowadays, in most cases, that seems to have disappeared and many have gone the way of the cliche’d ‘used car salesman.’ Don’t get me wrong, there are still a few great, ethical, successful recruiters out there, but they’re becoming a rare breed due, largely, to the way that agency recruiters are being compensated by their agency.

  5. As an Agency Recruiter I do agree with this article in many ways and even more.

    As I have impressed earlier these are my thoughts and opinions, and do not intend to dismiss others views in expressing my feelings.

    The industry has become one of reqs and numbers in so many ways that we seem to miss the most important factor – why, what, and who of our industry.

    In the efforts to make numbers we forget that we are working with People, real people with real feelings who have real families. Our job like their is what makes or breaks an individual, it effects their lives, that of their families, it is who we are.
    Yet that important factor is forgotten when we push the envolope in ‘the war for talent’- maybe by greed, fear of losing ones job, ego, ignorance, or just plain lack of listening.

    So many instances of justification, misrepresentation or reduced information gathering has caused problems with placements that do affect the outcome for the company and eventually the candidates along the way.

    If we can one day come back to focusing not on the war factor, but the people factor, then we will be able to justify our incentives.

    My personal thoughts

  6. Randall, I commend you on your observations and agree the agency model is broken and needs to be fixed.

    But as a TPR who is very good at what he does. I have to say this.

    It’s a two way street; of course a long-term partner relationship is preferred to one based on transactions.

    Why doesn’t the client reciprocate its committment with an engagement fee for retained searches more often.

    We will make a stronger committment when they do (thru a retainer)It’s a proven method that works. Retaining a consultant, fulltime,exclusively, to provide a service.

    I mean do you work for free? Isn’t that what contingency recruiters do?

    But most hiring managers go cross-eyed at the mention of it and can’t believe you have the cajonas to ask such a question.

    Then continually wonder why they don’t receive quality resume or the agencies efforts.

    My thoughts.

  7. While I do appreciate many observations regarding the TPA model, I also must question the experience with outside agencies. Those of us in search generally would like to develop a long-term relationship with a client(s), but this means more than just knowing the HR person, but also the different hiring managers within the organization as well. I cannot speak for others, but unless I can spend some time with the hiring manager getting to really understand their real needs and concerns, I will not take an assignment.

    Is this extra work? Only if you want to do a quality job and understand the nuances of the company, hiring manager and real requirements for the chosen individual. Also, some openings are going to take longer to fill than others depending on what is being asked as far as skill levels, formal education, experience level and compensation. If the compensation is not realistic to the position, it will not be filled except by the most desperate.

    If you want our full attention, you need to give us some of yours. I am amazed at the demands made for candidate resumes when the reviewer takes a week or more to look at the resume and respond back. Then once a candidate is to be screened, the telephone screen is a week or two from today. If the phone screen is successful and the candidate is to visit the client company, it takes 2-4 weeks to get that candidate into the company to see all the people that will have input. At this rate, the average TPA will have two months invested in finding, interviewing, checking references and monitoring the candidate to keep them active in the process. The decision is finally made to hire the candidate (after a week of discussions) and it takes another week of back and forth negotiations or waiting for the offer letter to arrive, be signed and then returned. The start date is then three weeks away so the candidate can give two weeks notice and then take a week off for a vacation. Time to this point, 3 months.

    The TPA then sends an invoice to the client who typically has 30 days to pay from the start date to maintain the guaranteed replacement factor (4 months). The company waits to the last minute to maximize interest on the funds and sends a check. This arrives within a week. The check is then processed and if paid to an agency (as opposed to someone self employed) it is finally credited to the recruiter. The payment to the recruiter is then paid in the following pay period and all told, from beginning to end, the recruiter sees the results of his/her success in placing someone in this position at the end of 5 months time. Is it fair to stretch this out even further?

    Lastly, while there may be some TPA recruiters who receive a salary, most that I am aware of receive a draw versus their commission. There is no guaranteed paycheck and with the high level of turnover in the industry, unless you are a veteran with a proven track record, the agency is not going to raise the draw level for every new person that would like to be a ‘recruiter’. I might suggest that the in-house recruiter/HR person receive the same payment schedule as the outside TPA for every assignment. That would put both on an equal footing and might be a greater inducement for the in-house person to work more closely with the TPA when used to fill a particular assignment.

  8. Applaud Randall! If we aren?t careful what behaviors we reward with compensation plans, we will often reward poor behaviors that don?t necessarily contribute to long-term success.

    I want to point out that Sales Reps often aren?t paid until product is delivered. For example, in the publishing industry, reps are usually paid commission when the ads they sold are printed. A basic example: if a rep sold a 6-month contract with one ad running once/month, they are paid commission on ads as those ads are printed ? once/month. If we define Recruiter performance by considering the deliverable “talent,” and a client says the quality of our talent (deliverable) is determined by performance/retention at 3, 6 and 12 months, then payments could be easily and logically tied to those milestones in much the same way.

    In that sort of model, though, it wouldn’t make sense for a Recruiter to just throw any old candidate at a client?s wall to see what sticks; the Recruiter wouldn’t even waste time on a candidate they didn’t believe would result in a high-quality hire that would, in turn, result in commission payments. Clients who don?t have to deal with a TPR pressuring them about questionable candidates may be more willing to sign on the dotted line. It may sound harsh if you consider making a sudden switch to that sort of model, but in the long-term, if you are able to supply great talent, you?d earn just as much, and possibly a more consistent and comfortable income if your payments were spread out!

    I?m curious to read Randall’s thoughts on corporate recruiting. One problem I see with the incentives for corporate Recruiters stems from the fact that most of the folks responsible for hiring, managing and designing compensation packages for corporate Recruiters don?t have recruiting backgrounds. Without experience, they can?t identify and reward superior recruiting performance, and can?t even identify the behaviors that drive recruitment success.

  9. I currently own my second TPR firm and have often thought about this issue. A couple of points:

    A) There definitely are ‘used car salesman’ type recruiters out there. They could and did succeed in the ‘go go 90’s’ and have always given the industry a bad image. I doubt they are having much sucess today and rarely last at any given firm for any length of time.
    B) There are good TPR and good corporate recruiters in the business. There are bad ones on both sides.
    C) Any TPR that doesn’t view themselves and act as a ‘partner’ with their customers won’t have that customer for long.
    D) We work just about every requirement from our customer in the interest of customer relationships. That said, it does NOT make sense for us to work anything that has 0% chance of success and it makes sense to tell the customer that that person may not exist and or may not exist at the salary level they want (ie. setting expectations is good for both sides)
    E) I wouldn’t want to work with a recruiter that wasn’t ‘hungry’ and driven by sucess – ie. making placements. The better ones are.
    F) It is unrealistic and unfair to expect a commission oriented recruiter to forgo his commission on a good deal just because he couldn’t also find the ‘purple squirrel’ they also wanted.
    G) I have had little success in the business paying higher bases and lower commissions. I’ve tried too many times and lost too much money with ‘proven’ recruiters that just didn’t seem to go the extra mile to fill a role when they had less incentive to fill it – ie. a large commission.
    H) There are, or used to be firms, that paid larger bases and less commission. Top performers would have 60-80K bases and then end up making less than 75-100K. That same recruiter in a highly incentivised environment would have made 125-150K+. Top performers in good times tend to go to commissioned organizations (ie. if you really want to deal with top performers, you are unlikely to find them at places that don’t pay high commissions).

    You should only work with TPR’s that work well with your organization. Find the ones that do, and ‘kick out’ the ones that don’t. Anyone that ‘pushes’ a candidate on you does not deserve your time.

  10. Mark,

    You raise some excellent points, it is a two way street and it requires BOTH parties to engage to become partners. As a contingent recruiting company, this partnership become even more important. We put an incredible amount of trust in our clients and hope they have the same level of ethics we live up to and extend to them. For the 38 years my company has been in business, we are lucky that we have only been ‘burned’ a few times by clients who reneged on paying placement fees.

    Clients who have reneged on these fees have usually found themselves in tight corners later on with other agencies, some have even come back to us and have paid past due fees.

    While I don’t require my clients to pay me a retainer, I do ask that they give me the same trust that I give them, but only after I have earned it.

    My thoughts too.

  11. It seems to me that the word ‘partnership’ is often used when in fact the word ‘trade’ is the one that should be. Partnership refers to doing something together to reap and share resulting profits. Trade is the exchange of something (a result for example) for something else viewed as equivalent (enough money to cover the costs of producing it for instance). The business relationship between a recruitment service provider and an employer bears the characteristics of a trade much more than those of a partnership. Which is logical, for a partnership between them would indeed create serious conflicts of interest.

    Like all vendors, recruitment service providers (the TPRs) simply comply to the business models (i.e. trading terms) that their market accepts from them. The fact that the same model seems to have been adopted for many decades by practically all of them suggests it may be the only viable one.

    But perhaps times have changed and new, better and therefore also viable trading terms can finally be implemented.

    If Randall or anyone else wants to work on these, I would be delighted to contribute. (in a partnership?)

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