How Much Do Executive Search Firms Charge?
How much should you expect to spend on an executive search firm?
You know these firms can make a huge difference when it comes to connecting with the perfect candidate for your latest executive role… but they don’t always come cheap. On average, executive search fees range from 25% to 35% of the hired candidate’s first-year salary.
This guide is designed to give you a better understanding of the pricing structures and fees associated with executive search services, so you can plan your budget and make an informed decision that won’t break the bank.
We’ll start by looking at the 4 main fee structures used by executive search firms, and then we’ll explore some additional costs. Let’s get started.
The 4 Main Fee Structures
When hiring an executive search firm, there are 4 primary fee models that you’ll encounter. They are:
Retainer Fee Structure: Involving upfront payments and ongoing charges.
Contingency Fee Model: Payment takes place upon successful hiring.
Hybrid Fee Arrangements: Combining elements of retainer and contingency models.
Percentage of Salary: Calculating fees based on the executive's first-year compensation.
The graphic below shows a brief comparison of two of the fee structures:
1. Retainer Fee Structure for Executive Search Firms
A retainer fee structure involves paying an executive search firm an upfront fee to start the search process. This fee is usually a portion of the total cost. Here’s how it works.
When you engage a search firm, the process begins with an initial retainer fee, which is typically paid at the start of the search. This fee is calculated as a percentage of the estimated total search cost, generally falling between 30% and 35% of the candidate’s expected first-year compensation.
Payments are usually structured in segments rather than a lump sum. For instance, you might pay one-third upfront, another third at a key milestone, and the final portion upon completion of the search. Unlike contingency models, where payment is only required upon successful placement, the retainer fee secures a commitment from the firm to prioritize your executive search.
It’s important to budget for the total cost, as the final amount will likely exceed the initial retainer. This typically includes the full search fee, calculated as a percentage of the hired executive’s first-year compensation, along with any additional expenses incurred during the process. Once the search is complete, you’ll settle any remaining balance, which may be adjusted based on the initial retainer and any pre-agreed costs.
The Retainer Fee Model in Practice — an example
Imagine you're the CEO of a mid-sized tech company looking to hire a new Chief Technology Officer (CTO). You decide to work with an executive recruiter to find the right candidate. Here's how it might unfold with a retainer fee structure:
The process begins when you contact a reputable executive search firm specializing in the tech industry. During the initial meeting, they outline their retainer fee structure. The firm proposes a fee set at 30% of the estimated total cost of the search, which is calculated as a percentage of the first-year salary for the CTO position. After reviewing the terms, you agree to move forward.
To initiate the search, you make the first payment, which amounts to 10% of the total estimated cost. With the process underway, the search firm conducts market research, taps into its network, and headhunts potential candidates. After a few weeks, they present a shortlist for your review. You provide feedback, and at this stage, you make the second payment, covering another 10% of the estimated cost.
As the search nears completion, the firm arranges interviews with top candidates. Once you identify the ideal hire, they assist with negotiations to finalize the agreement. Upon the successful hiring of your new CTO, you make the final payment, which covers the remaining 10% of the estimated cost, along with any additional expenses incurred throughout the process.
The image below shows some advantages of the retainer model:
2. Contingency Fee Model for Executive Search Firms
In a contingency fee model, you only pay the executive search firm if they successfully place a candidate in your company. There's no upfront fee. It works like this:
When you first contact a contingency search firm, they explain that their payment is contingent on the successful hiring of a candidate they present. You then agree on the terms, which typically involve paying a fee based on a percentage of the hired candidate’s first-year salary. This percentage generally falls between 20% and 30%.
With the agreement in place, the contingency firm begins the search process at no upfront cost to you. They conduct market research, identify potential candidates, and carry out preliminary interviews. Once they have viable options, they present these candidates for your consideration. At this stage, you conduct your own interviews and evaluations.
When you decide to hire a candidate the contingency firm has recommended, you proceed with the job offer and employment negotiations. If the candidate accepts and officially joins your company, you then pay the search firm their fee. For instance, if the agreed-upon contingency fee is 25% and the candidate’s first-year salary is $100,000, you would pay the firm $25,000. However, if no hire is made or if you fill the position through other means, you owe nothing under this model.
The Contingency Fee Model — a real-life example
As the HR manager of a growing software development company, you need to hire a new project manager but are uncertain about the exact requirements or salary range for the position. To navigate this process, you engage a recruitment agency specializing in tech roles. They explain their Contingency Fee Model, emphasizing that you only pay if they successfully fill the position.
After discussing your needs, you provide details about the role, including preferred qualifications, experience levels, and potential responsibilities. However, you remain open to suggestions and adjustments based on market insights. With these criteria in place, the agency begins its search, tapping into its network and sourcing potential candidates. They handle initial screenings and create a shortlist of strong matches.
Over the next few weeks, they present several candidates for you to interview. Some show promise, leading to second-round interviews, but since no placement has been made yet, you owe nothing at this stage. Eventually, one candidate stands out. They possess the right mix of skills and experience, and their salary expectations align with your budget.
You extend a job offer, and the candidate accepts, agreeing to an annual salary of $80,000. Since the agency operates on a contingency model with a 25% fee, you only pay them upon successful placement. In this case, that amounts to $20,000, paid after the candidate officially joins your company.
3. Hybrid Fee Arrangements for Executive Search Firms
Hybrid Fee Arrangements blend elements of both the retainer and contingency fee models, requiring an initial payment upfront while the remaining fee is contingent on a successful placement. This structure offers a balance between commitment and performance-based compensation.
The process begins with an initial retainer payment, which is typically lower than in a pure retainer model. This fee generally falls between 10% and 25% of the estimated total search cost. At the same time, you agree on a total fee percentage, usually based on the candidate’s first-year salary. This percentage often ranges from another 10% to 25%.
Once the initial payment is made, the search firm starts sourcing and vetting candidates, following a process that mirrors both the retainer and contingency models. As candidates are identified, they are presented for interviews, and at this stage, there are no additional fees.
If you decide to hire a candidate recommended by the firm, you then pay the remaining balance. The final payment reflects the total agreed percentage minus the initial retainer. For instance, if the total fee is set at 30% of the candidate’s first-year salary and you have already paid 10% upfront, the remaining 20% is due upon successful placement.
In cases where the firm does not successfully place a candidate, you may still owe a reduced fee or, depending on the terms agreed upon, no additional payment beyond the initial retainer.
The Hybrid Fee Model — a Practical Example
Let’s say you're the owner of a boutique marketing agency and you're looking to hire a new Creative Director. You want a committed search but also prefer a payment structure that aligns with successful results. Here's how you might proceed with a Hybrid Fee Arrangement:
When selecting an executive search firm, you opt for one renowned in the marketing sector. During initial discussions, they propose a Hybrid Fee Arrangement, suggesting a total fee of 25% of the candidate's first-year salary, with an initial retainer of 10%. This approach offers a shared risk model, as the retainer is less than that of a full retainer model.
You proceed by paying the 10% retainer, which amounts to $10,000, assuming a projected annual salary of $100,000 for the Creative Director position. This payment officially initiates the search. Over the next few weeks, the firm will conduct the candidate search and present you with qualified individuals. You conduct interviews without incurring additional charges during this phase.
Eventually, you find the ideal candidate through the firm and offer them the position at a salary of $100,000, which they accept. With the successful placement, you now owe the remaining 15% of the fee. Since you've already paid $10,000 as a retainer, you pay an additional $15,000, completing the agreed 25% of the first-year salary. The search concludes with your new Creative Director on board, and the total cost to you is $25,000, divided between the initial commitment and the success-based final payment.
This Hybrid Fee Arrangement provides a balanced approach, combining the commitment of a retainer with the performance-based aspect of a contingency model. Such structures are often preferred for high-stakes roles requiring specialized skills, ensuring focused agency attention without the hefty upfront costs of retained searches.
4. Percentage of Salary for Executive Search Firms
In the "Percentage of Salary" model, the fee you pay to an executive search firm is a percentage of the first-year total compensation of the candidate you hire. This includes base salary, bonuses, and any other monetary benefits.
When engaging a search firm, they will outline their fee structure, which typically involves a percentage of the candidate's first-year salary. As we know, this percentage varies but generally ranges from 20% to 50%, depending on factors like industry, role complexity, and firm prestige.
Once terms are agreed upon, the firm commences the search for suitable candidates without requiring any upfront payments from you. As candidates are identified, you'll review, interview, and select them, with the firm assisting in coordination and feedback at no additional charge during this stage.
Upon hiring a candidate, the fee is calculated based on the agreed percentage of the candidate's first-year total compensation. For example, if the agreed percentage is 25% and the candidate's first-year total compensation is $120,000, your fee to the search firm would be $30,000.
After the candidate accepts the offer, you'll finalize and pay the fee to the search firm as per the agreed terms.
The Percentage of Salary Model — a real-world example
Let’s take an example where you're the HR Director at a large manufacturing company, and you need to hire a new Vice President of Operations. You decide to work with an executive search firm that uses the Percentage of Salary fee method. Here's how it unfolds:
When selecting a reputable executive search firm experienced in your industry, they explain their fee structure based on the Percentage of Salary method. In your initial meetings, you discuss the salary range for the VP of Operations position, expecting to offer a total compensation package of around $200,000, including base salary, bonuses, and other benefits. The firm states their fee is 25% of the first-year total compensation of the candidate you hire.
You agree to these terms, knowing that the fee will be calculated based on the final compensation package agreed upon with the candidate. The firm conducts a comprehensive search and presents you with several qualified candidates over the next couple of months. After a thorough evaluation, you decide to hire one of the candidates, negotiating and agreeing on a total first-year compensation package of $220,000.
With the candidate's compensation set at $220,000, you calculate the fee owed to the search firm. At 25%, the fee amounts to $55,000 (25% of $220,000). Once the candidate officially accepts the offer, you process the payment of $55,000 to the search firm, completing your obligation under the Percentage of Salary arrangement.
https://www.youtube.com/watch?v=hE-jahm05
Additional Expenses for Hiring Executive Search Firms
In addition to the standard fee, your executive search firm may also charge some additional costs.
These can include things like travel costs, background checks, and marketing fees. The graphic below shows an example breakdown of some common recruitment costs:
Here are some guidelines to avoid getting hit with unexpected fees.
When you engage a search firm, it’s important to ask about potential additional expenses upfront. They should provide a clear breakdown or estimate of what these costs might include, helping you plan accordingly.
Most firms have a policy for handling additional expenses, which can take the form of either a flat fee covering all anticipated costs or an itemized billing approach. The total cost can vary significantly depending on the search requirements, often ranging from a few thousand dollars to much more for complex and high-level searches.
To prevent unexpected expenses, it’s wise to establish a budget or cap for additional costs. For example, you might agree to a cap of $5,000 to ensure that expenses remain within a manageable range. Throughout the search process, the firm should keep you updated on any costs incurred, particularly if you’ve opted for an itemized billing approach.
Before any significant expenses are added, the firm should seek your approval, especially if they fall outside the anticipated range or exceed the agreed budget cap. At the end of the executive search process—or at predetermined intervals—the firm will present a detailed invoice of additional expenses. Reviewing this carefully ensures alignment with prior agreements before finalizing the payment.
How Market Variations Affect Fees for Executive Search Firms
The fees your executive search firm charges can vary significantly based on market factors like industry, geography, and the level of the position being filled.
It’s a good idea to do some groundwork here to understand your situation and anticipate any market-related fee fluctuations. Here’s a quick guide:
When determining the cost of an executive search partner, start by researching the standard fee ranges in your specific industry. For example, executive search fees in the technology sector typically range from 25% to 30% of the candidate’s first-year salary, while in the non-profit sector, the range tends to be lower, around 20% to 25%.
Geographic location also plays a role in pricing. Search firms operating in major metropolitan areas or regions with high demand for executives often charge higher fees compared to those in smaller cities or less competitive markets.
The level of the position further impacts the fee structure. Senior-level roles, such as CEOs or CFOs, generally command higher fees, sometimes reaching 50% or more of the candidate’s first-year salary, whereas mid-level management positions tend to fall on the lower end of the spectrum.
Additionally, the complexity of the search influences the cost. A highly specialized role may require a more extensive search process, leading to higher fees, while a more general position with a broader talent pool may be less expensive to fill.
Let’s take a look at a real-world example.
Imagine you're a hiring manager at a financial services firm in New York City looking for a new Chief Financial Officer (CFO). You approach a well-known executive search firm and learn that their standard fee for such a role in the financial sector in NYC is typically around 30% of the first-year salary due to the competitive market and the high level of expertise required for the position.
Meanwhile, your colleague in a manufacturing company located in a smaller city is also working with a search firm to hire a CFO. However, due to the lower competition and different industry standards in manufacturing, they are quoted a fee of about 25% of the first-year salary.
What We’ve Learned
In this article, we looked at the main fee structures employed by executive search firms, including retainer, contingency, hybrid arrangements, and percentage of salary. We also considered extra executive search costs like additional expenses and market variations.
When searching for the right executive search firm, take the time to evaluate your company's specific needs and budget constraints before choosing the best fee model for you.
