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 role… but they don’t always come cheap.

This guide is designed to give you a better understanding of the pricing structures and fees associated with executive search firms, 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.

I. Retainer Fee Structure

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.

Initial Payment: As you engage with a search firm, you must pay this initial retainer fee. This payment is typically made at the beginning of the search process.
Know the Typical Fee Range: The retainer fee is generally a percentage of the estimated total search cost. This percentage can vary, but it often ranges from 20% to 35% of the candidate's first-year expected compensation.
Know the Payment Schedule: Be aware that the retainer fee is often paid in segments. For example, you might pay one-third upfront, another third at a specified milestone, and the final portion upon completion of the search.
Recognize the Commitment: By paying a retainer fee, you are securing a commitment from the firm to prioritize your executive search. This is unlike a contingency model where payment is made only upon successful placement.
Budget for Total Costs: The total cost will likely be more than the initial retainer, and usually includes the full search fee, often a percentage of the hired executive's first-year compensation, along with any additional expenses.
Final Settlement: Once the search is completed, you'll settle any remaining balance. This final payment might be adjusted based on the initial retainer and any additional agreed-upon 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 search firm to find the right candidate. Here's how it might unfold with a retainer fee structure:

Initial Contact: You reach out to a reputable executive search firm specializing in the tech industry. During your initial meeting, they explain their retainer fee structure.
Agreeing on Terms: The firm proposes a retainer fee that's 30% of the estimated total cost of the search. They estimate the total cost based on a percentage of the first-year salary for the CTO position. You agree to these terms.
Making the First Payment: You pay the first part of the retainer fee, which is 10% of the total estimated cost, to initiate the search process.
Search Commences: The search firm begins the process. They conduct market research, tap into their network, and headhunt potential candidates.
Midway Point: After a few weeks, the firm presents a shortlist of candidates. You review them and provide feedback. At this point, you pay the second part of the retainer, another 10% of the estimated cost.
Final Stages: The firm arranges interviews with the top candidates. Once you identify the candidate you wish to hire, the firm assists with negotiations.
Completion of Search: Upon successful hiring of the new CTO, you pay the final portion of the retainer fee, which covers the remaining 10% of the estimated cost, along with any additional expenses incurred during the search.

II. Contingency Fee Model

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:

Engaging the Firm: When you contact a search firm, they will explain that their payment is contingent upon the successful hiring of a candidate they present.
Agreement on Terms: You'll agree on a fee, typically a percentage of the hired candidate’s first-year salary. The percentage can vary, but it usually ranges between 20% to 35%.
The Search Process: The firm begins the search process without any initial cost to you. They conduct market research, identify potential candidates, and conduct preliminary interviews.
Candidate Presentation: As candidates are identified, the firm presents them to you. You then conduct your own interviews and evaluations.
Hiring Decision: Once you decide to hire a candidate the firm has presented, you move forward with the job offer and employment negotiations.
Payment upon Success: If the candidate accepts the offer and joins your company, you then pay the search firm their fee. For example, if the candidate’s annual salary is $100,000 and the agreed-upon contingency fee is 25%, you would pay the firm $25,000.
No Success, No Fee: Remember, if the search does not result in a hire, or if you hire a candidate through other means, you owe nothing to the firm under this model.

The Contingency Fee Model — a real-life example

Let’s take a hypothetical scenario — you're the HR manager of a growing software development company. You're looking to hire a new project manager but are unsure about the exact requirements or the salary range for this position. Here's how you might proceed with a Contingency Fee Model:

Engaging a Search Firm: You reach out to a recruitment agency that specializes in tech roles. They explain their Contingency Fee Model to you, highlighting that you only pay if they successfully fill the position.
Setting the Criteria: You provide the agency with details about the role, including preferred qualifications, experience levels, and potential responsibilities, but you emphasize that you're open to suggestions and adjustments.
Candidate Search Begins: The agency starts the search process, tapping into its network and sourcing candidates. They handle the initial screenings and shortlist potential matches.
Interviewing Candidates: Over the next few weeks, the agency will send you several candidates to interview. You find some of them promising and proceed with second interviews, but there's no fee for this process.
Finding the Right Fit: Finally, one of the candidates stands out. They have the right mix of skills and experience, and their salary expectations align with your budget.
Job Offer and Acceptance: You extend an offer to this candidate, and they accept. The agreed-upon salary is $80,000 per year.
Calculating the Fee: The agency's contingency fee is 25%. Therefore, upon the successful placement of the candidate, you pay the agency 25% of the annual salary, which amounts to $20,000.

III. Hybrid Fee Arrangements

Hybrid Fee Arrangements combine elements of both the retainer and contingency fee models. This means you'll pay a part of the fee upfront and the rest only if the firm successfully places a candidate. Here’s a quick step-by-step process:

Initial Retainer Payment: Begin by paying an initial retainer fee when you engage the search firm. This fee is typically smaller than in a pure retainer model. It's often a percentage of the estimated total fee, ranging from 10% to 25%.
Agree on Total Fee Percentage: Understand that the total fee in a hybrid arrangement is usually a percentage of the candidate’s first-year salary, similar to the contingency model. This percentage can vary but is often in the range of 10% to 25%.
Search Process Begins: With the initial payment made, the search firm starts the process of sourcing and vetting candidates. This part is similar to both retainer and contingency models.
Review and Interview Candidates: As the firm presents candidates, you'll have the opportunity to interview them. During this phase, there are no additional fees.
Successful Placement and Final Payment: If you decide to hire a candidate presented by the firm, you'll then pay the remaining fee. This final payment is the total agreed percentage minus the initial retainer already paid. For example, if the total fee is 30% of the candidate’s first-year salary and you've already paid 10% as a retainer, you'll pay the remaining 20% upon successful placement.
No Success, Reduced Fee: If the firm doesn't successfully place a candidate, you might still owe a reduced fee, or in some cases, no additional fee beyond the initial retainer, depending on the terms agreed upon.

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:

Selecting a Search Firm: You choose an executive search firm known for its expertise in the marketing sector. During your initial discussions, they suggest a Hybrid Fee Arrangement.
Agreeing on Terms: The firm proposes a total fee of 25% of the candidate's first-year salary, with an initial retainer of 10%. You agree, knowing that the retainer is less than a full retainer model and provides a shared risk approach.
Making the Initial Payment: You pay 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.
Candidate Search and Presentation: The firm undertakes the candidate search, presenting you with qualified individuals over the next few weeks. You conduct interviews without any additional charges during this phase.
Successful Placement: Eventually, you find the perfect candidate through the firm and offer them the position at a salary of $100,000. The candidate accepts the offer.
Finalizing the Payment: 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.
Completion of the Process: The search concludes with your new Creative Director on board, and the total cost to you was $25,000, split between the initial commitment and the success-based final payment.

IV. Percentage of Salary

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.

Engaging a Search Firm: When you decide to work with a search firm, they will outline this fee structure. Be prepared to discuss the anticipated salary range for the position you're seeking to fill.
Establishing the Fee Percentage: The firm will specify their fee as a percentage of the candidate's first-year salary. This percentage varies but typically ranges from 20% to 35%, depending on factors like industry, role complexity, and firm prestige.
Search Process Commences: The firm begins the search for suitable candidates. During this process, there are no upfront payments required from you.
Interview and Selection: You'll review, interview, and select candidates. Throughout this stage, the firm assists with coordination and feedback but does not charge additional fees.
Hiring a Candidate: Once you select and hire a candidate, calculate the fee. For instance, 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 25% of $120,000, which equals $30,000.
Finalizing Payment: After the candidate accepts the offer, you'll finalize and pay the fee to the search firm based on the agreed percentage of the candidate's first-year compensation.

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:

Choosing a Search Firm: You select a reputable executive search firm experienced in your industry. They explain their fee structure based on the Percentage of Salary method.
Discussing Salary Expectations: In your initial meetings, you discuss the salary range for the VP of Operations position. You're expecting to offer a total compensation package of around $200,000, including base salary, bonuses, and other benefits.
Agreeing on Fee Percentage: 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.
Search and Candidate Presentation: The firm conducts a comprehensive search and presents you with several qualified candidates over the next couple of months. You conduct interviews and assess each candidate.
Hiring the Right Candidate: After a thorough evaluation, you decide to hire one of the candidates. You negotiate and agree on a total first-year compensation package of $220,000.
Calculating the Fee: 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).
Completing the Payment: 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.

Additional expenses to consider

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. Here are some guidelines to avoid getting hit with unexpected fees.

Initial Discussion with the Firm: When you engage a search firm, inquire about potential additional expenses. They should provide a clear breakdown or estimate of what these might include.
Agreeing on Expense Policy: Most firms will have a policy for handling additional expenses. This could range from a flat fee that covers all anticipated expenses to an itemized billing approach. The costs can vary widely depending on the search requirements, often ranging from a few thousand dollars to much more for extensive searches.
Setting a Budget or Cap: It's wise to discuss and agree on a budget or cap for additional expenses. This ensures that costs don't escalate unexpectedly. You might agree, for instance, to a cap of $5,000 for all additional expenses.
Monitoring Expenses During the Search: Throughout the search process, the firm should keep you updated on expenses being incurred. This is especially important if you've opted for an itemized billing approach.
Reviewing and Approving Expenses: Before any significant expense is incurred, the firm should seek your approval, particularly if it's outside the anticipated range or if you've set a budget cap.
Finalizing and Paying the Bill: At the end of the search process, or at agreed intervals, the firm will present you with a detailed invoice of additional expenses. Review this carefully, ensuring it aligns with your prior agreements and approvals, and then process the payment.

Understanding Market Variations

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:

Research Industry Standards: Start by researching the standard fee ranges in your specific industry. For example, executive search fees in the technology sector might range from 25% to 30% of the candidate's first-year salary, whereas in the non-profit sector, the range might be lower, from 20% to 25%.
Consider Geographic Location: Be aware that fees can also vary by region. For instance, search firms in major metropolitan areas or regions with high demand for executives might charge higher fees compared to firms in smaller cities or less competitive markets.
Assess the Level of the Position: Understand that the level of the position impacts the fee. Senior-level positions, like CEOs or CFOs, typically command higher fees (up to 30% or 35% of the first-year salary) compared to mid-level management roles.
Negotiate Based on Complexity: Keep in mind that the complexity of the search can affect the fee. A highly specialized role might require a more extensive search process, leading to higher fees.

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 fees 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.