Let’s play a guessing game. Guess the average CEO pay in 2018 across America’s largest corporations. I’ll give you a hint. It’s increased 940 percent in the last 40 years.
The answer: $17.2 million. Jaw dropping.
With C-suite salaries well into the eight figures, what does that mean executive search firms are earning? Good question. The fee for finding an executive worth $17 million annually might be $3 – 5.5 million! Movies have been made for years about sports agents and their excessive commissions (“Show me the money!”), but in reality, sports agents make far less than CEO “agents” (aka executive search firms). A typical sports agent earns about 3 percent from a player’s salary and around 15 percent of an athlete’s endorsement dollars. The average commission paid to one of the established executive search firms for finding a CEO or other C-level executive is about 25-33 percent of that person’s salary. Last year, combined revenues for the three largest search firms in the country were almost $2 billion.
Companies are willing to pay for an executive search based on the salary of the position. If a search firm spends eight weeks recruiting a CEO to be paid $17 million, their fee is the same as if the search only took eight days. It’s the most inefficient and expensive system most companies have on their books. Consider if the client company decides to promote from within. They know the person they want is working in the office down the hall, but they want to see who else is out there “just in case” The company still pays the search firm the same fee (approximately 30 percent of the executive’s first year salary) for finding a person who was already found! This is a model that’s ready for disruption.
Unemployment is at an all-time low, and good leaders are in high demand. Corporate boards need help. Recruiting services are greatly sought after. Qualified executives can command an incredibly high salary, and boards are willing to pay a search firm equally high fees to find the right person. Talent is at a premium and the job of finding great talent can be tedious and difficult. It’s a contingency search firm’s dream: the perfect mix of high salaries (high commissions) with a seemingly endless supply of work!
But, beyond the mathematical inefficiencies, a fundamental conflict of interest exists between the search firm, whose profits rely on filling roles quickly, and with the client, who wants the most qualified person available. While everyone wants the position filled quickly, the client certainly doesn’t want to sacrifice quality for speed. A client wants to be assured that an executive recruiter’s goal is finding the best candidate versus making a fast transaction for an enormous payday. There’s no way to know the recruiting firm’s priorities.
Twenty-five years ago, before LinkedIn, Facebook, AI, and Indeed, C-suite candidates were in an exclusive club known only to a few lucky recruiters. These executive recruiters, who grew into massive executive search firms, had a rolodex full of the top corporate executives. If you wanted access to these players, you had to pay for it. Now, we have Google. And it’s free. Yet those huge fees keep rolling in. This system has been in place so long, no one questions it, and the contingency firms’ fees are considered “a cost of doing business.”
More companies have internal recruiting teams, and outsourced recruiters and executive search firms are moving toward more consultative roles. The fee structure should look more like other professional services: an on-demand hourly rate. Like any other professional service that augments an in-house team, such as accountants and attorneys, search firms perform a similar service. These other professionals work with an internal team and are paid for the hours they spend on a job. An executive recruiter who uses a billable hour fee structure isn’t going to push a candidate through in order to fill a role quickly just so he can make his next Jaguar payment.
Treating executive search as a professional service creates a partnership where both parties are on the same team, running toward the same endzone and reading from the same playbook. Today’s executive recruiters no longer need to be hired on the strength of their rolodex. They need to be hired on their knowledge of the most recent recruiting and search technology and their ability to engage candidates. And, they should be paid for the service they perform. If a search takes two weeks, a client pays for two weeks of work. If a search takes two months, a client pays for two months of work. Either way, I bet it’s less than 30 percent of $17 million.