4 Recruitment Pricing Models, their advantages and disadvantages

Here’s what every business owner or hiring manager needs to know about the four recruitment pricing models – the percentage of salary model, retained search, fixed fee (flat fee) recruitment, and an hourly billed fee-for-service approach.

Bernadette Eichner

Sep 22, 2020

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Using the services of a professional recruiter is a smart move if you want to quickly secure the right person for the job. But recruitment pricing models can be tricky to navigate if you’re new to the game.

Essentially, there are four recruitment pricing models – the traditional percentage of salary model; retained search; fixed fee (flat fee) recruitment; and an hourly billed fee-for-service approach. Each one has its advantages and disadvantages, and each is best suited to different circumstances. Understanding the ins and outs of each one will position you well to make an informed choice.

1. Percentage of Salary – the traditional way

This pricing model has been the most common billing method since the professional recruitment industry burst onto the Australian scene in the late 1980’s.

How this model works

• The recruiter charges a percentage (usually anywhere between 10% and 30%) of the successful candidate’s annual salary as their placement fee.
• The “salary” usually always includes the superannuation component but some firms will include the value of allowances or non-cash benefits (such as cars), so be sure to check the fine print of your agreement.
• The fee sometimes includes all advertising and skills testing but not always, so you should check to make sure.
• A placement guarantee of 90-days is normally offered, although more recently, I’ve seen some firms offer 180 days. That is, if the placed candidate should depart the position within 90/180 days of starting in the job, whether it be for personal reasons or they’ve turned out to be unsuitably equipped for the role, then the recruiter will replace them for free. But only if you have met the recruiter’s terms of payment and only if the “fall out” isn’t as a result of an organisational restructure or illegal or unsafe behaviour on the part of the client or one of its representatives.
• Some firms will bill upon the candidate’s formal acceptance of the employment offer, while others will bill on the day the candidate commences in the job – either way, you must meet the payment terms if you wish to protect the placement guarantee

Advantages and disadvantages

Over the years, many have seen recruiters as being too expensive because of this approach. Fees can sometimes be as high as $65,000, depending on the role, the salary and the agreed fee.

The upside of the percentage of salary model is that if there’s no placement, there’s no fee – all the risk is taken by the recruiter and it’s in their interests to place the role with a candidate who is going to be successful. It also means you aren’t locked into a single recruiter – you can brief multiple recruiters if you’re happy to deal with each of them.

A downside if you’re needing multiple candidates with the same skill set (e.g. customer service centres) is that you’ll be charged the same percentage of salary for each candidate, even though they’ve come out of the same recruitment process.

To ensure they aren’t competing with others in what is a finite candidate market, many recruiters will be open to negotiating the fee in return for exclusivity.

2. Retained Search

This is similar to the above, except that the agreed fee is paid in three instalments, the first two (non-refundable) payments being one-third of the estimated total fee.

How this model works

• The first instalment is billed and payable upon commencement of the project
• The second instalment is payable at the completion of the shortlisting phase, and
• The third, the balance of the total fee, is payable upon placement of the successful candidate
• Again, a placement guarantee is always offered but again, be sure you meet the terms and conditions of the guarantee for it to be valid
• You should also check the terms and conditions to be sure what other parts of the recruitment process are included – advertising, skills testing, personality testing, etc.

Advantages and disadvantages

In this pricing model, both the client and the recruiter share the risk. The client agrees to make the first two payments to secure a shortlist of available, fully qualified, professionally interviewed and reference checked candidates and the recruiter doesn’t get paid the final payment until the placement is made.

The upside of this approach is that it’s usually always an exclusive agreement between you and your recruiter. While many recruiters using the percentage of salary model won’t agree, a retained recruiter is going to work more effectively for you – partly because they know they have money coming in to support the time and resources required to do the highest quality search for the best candidate and they’re not working on fifteen open briefs, hoping on the law of averages to earn a living. Retained recruiters generally have less open briefs, meaning they can genuinely give the time and resources required to their clients.

A Retained Recruitment approach is most effective and beneficial in cases where you will need to conduct an executive or targeted search for the best candidate available, rather than just an ad campaign.

3. Flat Fee or Fixed Fee Recruitment

This pricing model is not linked to the successful candidate’s salary – rather, you and your recruiter agree on a flat (sometimes also referred to as “fixed”) fee for the work.

How this model works

• The fee is generally less than it would be under the percentage of salary model but still respectful of the work the recruiter will be doing for you
• Recruiters will generally always require an exclusive agreement under this pricing model
• Placement Guarantee periods are usually always offered but you should check what the terms are – there may be a trade-off in return for the capped fee
• You should check what is included in the fee – advertising costs, skills testing and so on may be billed separately

Advantages and disadvantages

This pricing model is great for companies that need the services of a professional recruiter but aren’t sure what the salary is going to end up being for the skill set they are looking for, and need some comfort around the budget.

4. Hourly Billed Recruitment

This pricing model is relatively new to the recruitment industry in Australia but is gaining popularity. Essentially, it’s just like the pricing approach taken by other professionals such as accountants, lawyers, business consultants and so on.

How this model works

• The fee isn’t linked to the type of role or level of seniority.
• The recruiter charges by the hour for all work done – from taking the brief to facilitating the offer and acceptance process.
• A consulting timesheet is provided with the invoice so the client can see exactly how much time was spent on which part of the process (or in our case you have a shared online workspace which enables you to see what your recruiter is doing at any time!)
• The fee is usually anywhere between 50% and 75% less than the traditional percentage of salary model
• Placement guarantees generally aren’t offered – this is the trade-off for the lower fees – a good recruiter rarely has a fallout, so this hasn’t proven to be an issue for most of them using this pricing model
• Advertising, skills testing and so on are charged separately

Advantages and disadvantages

This model works brilliantly well when you have a trusted recruiter and know they’re going to find you the best person. Some larger clients report being able to reduce their recruitment fees by over $1 million per annum by moving to this pricing model. And on the few occasions that someone doesn’t work out, it’s cheaper to go straight back to the market, rather than wait for the recruiter to find the time and motivation to find a replacement for free.

The upside for the client is that their recruitment cost comes in at around 50% less, they can secure multiple candidates at no extra cost and their recruiter makes sure they get the best service possible to ensure the repeat business! The flip side is that it’s a fee-for-service pricing model and the bill is payable regardless of whether a placement is made or not.

The upside for the recruiter is that they are paid for their professional worth and are able to work on fewer projects because they have the comfort of guaranteed income. And less competing projects means a better outcome for you.

Which recruitment pricing model is best for you?

You want to be sure you’re choosing the right recruitment pricing model to get the best outcome for the fairest price.

If you’re a risk-averse person, you’re going to gravitate immediately to the “no placement, no fee” traditional percentage of salary pricing model. No doubt about it! But be ready to pay the highest price in return for the safety net it provides.

If you’re looking for a really specialised set of skills and experience, you might consider the Retained Search pricing model. Paying your professional recruiter for their expertise upfront for the work they’re doing will ensure your project gets their focussed attention.

A Flat Fee (Fixed Fee) pricing model agreement will work well for you if you’re working with a hard budget and are not in a position to not be able to accurately project the costs. Or you may be wanting to recruit multiple people into the same job description – your recruiter can agree to a flat project fee or a flat fee for each placement.

The Hourly Billed pricing model works for anyone wanting to save money on their recruitment, anyone wanting to recruit multiple people into the same job description, or anyone with an internal HR department that needs help in any stage of the process. And it works best when you have a “trusted business advisor” relationship with your recruiter and are confident they will deliver what you need when you need it.

Whatever your choice, always make sure you understand the individual recruiter’s terms and conditions first.