Retained Executive Search Agreement: Explained
A retained executive search agreement is a written document that governs the relationship between a company or organization and an executive search firm retained to help identify, recruit, and place high-level candidates for key leadership positions. The hiring entity enters into this arrangement to fill these crucial roles in its operations. Typically, this agreement encompasses the entire process of search, recruitment, and placement of the selected candidate, from the initiation of the engagement to the successful onboarding of the new executive.
A retained search firm is more than a mere recruiting agency. Rather , the services of such a firm are comprehensive in nature. These firms usually have extensive experience in identifying, pursuing, recruiting, and placing highly qualified individuals at the senior management and executive levels. The extensive global networks of these firms give them access to an applicant pool too large for most organizations to go after without their assistance. These firms essentially serve as a partner in the recruitment process to assist the organization in locating and hiring just the right senior executive to fit into their management team.
Essential Terms of a Retained Executive Search Agreement
A retained executive search agreement typically embodies the following essential components:
Fee Structure – The component of the retained executive search agreement that is most often the subject of negotiation is the fee structure. This is the amount to be paid to the search firm for its services. In many cases, this is a percentage of the hired executive’s first-year total compensation (for example, base salary, bonus, stock options, etc.). The fee may also be in the form of a flat weekly, monthly or annual retainers. In some cases, the fees are not payable until the hiring is completed. However, retaining search firms on a contingency basis subject to an exclusive contract with another search firm (sometimes called "two-hatting") is highly discouraged and not recommended.
Duration of Contract – The length of time for which the search firm is hired is usually outlined in the contract. This range varies, but is not usually less than six months. Further, the contract may renew automatically unless terminated (or "dropped") by the client.
Exclusivity – Retained executive search agreements typically involve some form of exclusivity between the search firms and their clients. While it is acceptable, on occasion, for a corporation to utilize multiple search firms at the same time, it is not advisable to utilize multiple search firms exclusively on the same executive search at the same time. Therefore, the retained search firm must be given the opportunity to pursue candidates, exclusively, to fill a posted job opening.
Advantages of Hiring a Retained Executive Search Firm
The decision to engage an executive search firm to conduct a search for a senior-level position has dramatic consequences. But the reality is that "executive search firms" run the gamut — from multi-office behemoths to one-person, regional operations. How can one determine if this multi-zillion dollar, major operation is right for your company or if that one-person operation down the street is the right "executive search" for your company?
Contingent search is a placement method where a fee is charged only if the client hires a candidate presented by the search firm. For most positions, the contingent recruitment method is more than adequate, if you have the time to interview a large number of candidates simultaneously and move quickly to hire the best. The contingent method also tends to produce lower quality hires because the search firm’s objective is to generate billable activity, not necessarily to find the best candidate.
Retained search is a placement method where the search firm is exclusively engaged by the client and paid some form of upfront fee, either as a retainer or a separate initial set fee that, like a retainer, is credited against a final fee once the search is completed. The majority of the fee is contingent, just like a contingent search. In other words, fee structures are usually pretty similar between the two methods.
So why retained?
In short, if the assignment demands multiple resources, extensive expertise, or a high level of service, retained search should be the appropriate method to use:
• Retained search firms are often better suited to searches that require highly specialized technical expertise. For example, in industries as diverse as agribusiness, university advancement, healthcare, and manufacturing, retained search firms have the capability to tap into industry databases that many contingency firms lack or use less frequently.
• Retained search firms often tend to be better at identifying "passive" candidates, those individuals who are not looking for a job and for whom "waiting lists" and "calling trees" do not always work.
• A retained search firm may be justifiably more confident that he or she will be able to do a search in a shorter time-frame than a contingency firm. This is sometimes a critical criterion in a search — for example, if a position needs to be filled due to an unexpected vacancy or due to company growth.
• For searches requiring speed, organizations may benefit from an exclusive engagement so that non competing firms do not simultaneously present the same candidate(s).
Legal Aspects of a Retained Executive Search Agreement
When entering into a retained executive search agreement, there are several legal considerations for both parties to consider. First and foremost, retained executive search agreements should be in compliance with applicable employment laws; this is especially crucial if the individual at issue is located in another country. Where disputes arise under retained executive search agreements, governing law and jurisdiction are usually determined by the language used in the agreement. Additionally, most retained executive search agreements include confidentiality clauses, and sometimes even conflict-of-interest provisions. Therefore, parties should consider whether the retained executive search consultant will have access to information and employees that could create a conflict of interest and whether the information to be shared with the retained executive search consultant is confidential. If so, organizations should include an appropriate confidentiality provision to protect such information.
How to Select an Executive Search Consultant
The selection of an executive search firm is arguably the most important decision to make when it comes to retained executive search. Without the capacity to provide access to a large talent pool, a retained executive search firm is nothing more than a recruiting company, and it will have a difficult time differentiating itself in the market. So, what does it take to be a first-tire executive search firm? What factors should a client consider when engaging an executive search firm?
On the whole, an executive search firm should be able to demonstrate a well-established track record of success, solid industry expertise and contacts, and a good understanding of client culture. An executive search firm should also have the ability to customize the recruiting process to meet the needs of specific clients. This is particularly important for smaller clients and for clients that are completing their first search. According to Jonathan Iser of Iser & Associates, a Toronto-based executive search firm, "Seemingly small differences matter … we pride ourselves on our art of getting to know you and your organization, because there is no better way to ensure a successful search. We invest heavily [in the process]."
That level of investment is what makes a search endeavor unique. It may not be easy, and it may take time, but the end result—a qualified executive—is well worth the effort. While it may be tempting to choose a search firm that promises to provide you with an enormous talent pool , that talent pool will prove useless if the search firm cannot connect with that talent pool. Similarly, a search firm that emphasizes the importance of a high-volume recruiting environment may be better suited to deliver low-level talent than high-level candidates. A true talent pool is one that has been personally vetted by the search firm. Access to a large amount of money (or work) does not mean that a firm has a substantial talent network. More often than not, access to money means nothing, as emphasized by Mr. Iser: "We’ve become disappointed in the quality of work provided by the advertised big firms, and we’ve learned that critical mass doesn’t afford the best results. Success isn’t based on size, but on the right fit. You’re not paying for a name – you’re paying for performance."
When choosing an executive search partner, whether you’re a private organization or a public institution, make sure to go through the qualification process before the selection process. Establish that you have mutual goals, mutual expectations and a mutual fit with the executive search firm. Having a firm understand and know you does not mean offering the same old information at every meeting; it means being thoughtful about how you present and position your information. Put simply, search firms need to pay attention to the details.
Drafting Considerations for a Retained Executive Search Agreement
Once you have selected the recruiter best positioned to help you to successfully recruit the executive you desire, you will need to sign a written agreement, often called a "retained" search. The details of this written agreement are very important.
Fees will vary based on the assignment. You can expect fees to be lower for less difficult assignments. For higher level and executive positions you can expect to pay more. A typical fee for a retained search for high level executives (VP and above) is one-third of the hired executive’s first year annual base salary, which is generally paid in three equal installments upon commencement of the work, completion of in-person interviews, and acceptance. Fees for retained searches for VP level executives and below will be lower than for executive level searches. One way to determine whether a proposed fee is reasonable is to look at the recruiter’s fee structure for recent past assignments. For example, if for top level executives, the fee for the typical executive search assignment was $XXX, for a high level assignment, $XXX, and for a mid-level assignment, $XXX, and an executive recruiter is proposing a fee of $XXX for your assignment, it is likely not a reasonable fee. If you are paying a fee that is higher than the market, you should be getting a higher level of attention and better results. A recruiter is a salesman – he or she is selling his or her time, efforts, service and expertise. Retained search is usually thought by the clients to be more likely to yield a successful hire than a contingency search where the recruiter only gets paid for making the match. There are incentives for the recruiter here, especially for difficult to fill and high level positions. A typical retainer agreement will require that a retainer fee be paid, with the total fee payable to the recruiter depending on the success of the search. Another common provision of a retainer agreement is that the recruiter will provide for specific deliverables and at specific times. Often the agreement will require that the recruiter provide an informed assessment of the position description provided to the recruiter to assist him or her in the search for candidates. A good analysis includes an estimated compensation package, comparable positions and a description of the market place. In order to keep the search on time, a retainer agreement will likely also include a delivery schedule of potential candidates. Most retainer agreements will require the recruiter to find candidates who will work within the budgetary constraints of the compensation determination reached by the client and recruiter. In some cases, you will be required to pay the retainer fee regardless of whether the compensation estimates were stated prior to engaging the recruiter. Commonly, retainer agreements will burden the recruiter with posting a specific number of postings over a specified period of time. Some retainer agreements provide that the recruiter will post through specific social network portals exclusively. You will want a retainer agreement that is expressly written to indicate that the search is for a specific position at your company at a specific venue (an office, for example). In addition, you will want a provision that the positions is to be filled on a permanent basis and that the recruiter has agreed to not try to fill the position temporarily. Many retainer agreements expressly require the recruiter to be physically present during the hiring process. It is important to state in the retainer agreement that the recruiter has expressed an understanding that they may not always be able to be available for in-person interviews. A retainer agreement may also include provisions that do not call for the recruiter’s physical presence for the second phase of interviews or at the final stage, that the recruiter will pay for travel expenses including air fare, meals, accommodations, etc. that are approved in advance by you, that he or she will conduct reference checks before submitting the final list of candidates, etc.
Case Studies on Effective Retained Executive Searches
To illustrate the above points, we have found a number of case studies within our own firm that exemplifies the value of the retained executive search agreement relationship both to our client and to the candidate selected.
Company Search #1: A Private Equity Firm
After moving to the state of Florida, our executive officer, Christine, was called by a private equity firm to help them make a hire in the Orlando area. The firm had been given three names by the previous CEO, all of whom had said no to them, and were seeking a fresh approach. She agreed to take the assignment on a retained basis as it was a great group of people, working in a great industry for a growing company. The retained search result was a new 60% owner with a track record of building companies and making them grow through the use of sophisticated investment strategies. He was hired, and six years later he continues to pour dollars into the business, looking to grow it even more. In between, as he bought out the other equity players he couldn’t believe his good fortune in having someone like Christine to work with. She essentially helped him build a sterling board of director’s over time, adding members from the likes of Fortune 10 companies he previously had worked for. He has also brought Christine in to help him do two other searches, and she considers him one of the best clients she’s worked with in her entire career.
Company Search #2: A Systems Integrator
Mike interviewed with a system integrator one week, then had a private equity firm call him with an assignment about the same company. Unable to keep his opinion neutral, Mike was honest with his recruiter, Christine. "It’s me and another guy, and the other guy is going to get it." The private equity firm allowed Christine to act on their behalf, signing a retainer agreement. Although Mike was the right candidate, he was concerned about taking a job with a company that only worked on a contingent basis. He presented the firm with a few ideas of what the compensation should be and was a little surprised when they agreed to him being paid a very high rate at a level several hundred miles away. He moved, started the job, and made it fine for the first couple of months . His attitude changed once the contingent search dollars were paid, even though he had offered suggestions about the changes that needed to be made with the staff. Long story short, it proved impossible to sell them on the full renovation that was needed. Mike left the company after 12 months and told Christine to tell the private equity firm that they needed to sign a retainer agreement next time. Again, hindsight is 20-20.
Company Search #3: An International Manufacturer
One of Christine’s client companies lost an intellectual property expert. She thought it would be a relatively easy search as there were plenty of such people around. The truth of the matter is that people with deep experience, in this case a PhD in organic chemistry, not available in the US any more, come from a very limited pool. In addition, he needed to be fluent in English, Chinese, Korean, and Spanish. In company forms of equity, this was going to be an expensive hire. So four months and thousands of dollars later, Christine and her co-workers completed the search. A very good doctor who spoke good English and Spanish was recruited, but he was terrified of losing his green card so he said no. In addition, there was no equity in the deal, meaning his income would have been cut substantially. While it wasn’t going to be a long-term deal, he did make it six months, longer than any of the others.
Company Search #4: Another International Manufacturer
The same client wanted another PhD company form of equity with no paycut, but one with the ability to offer free office space in China. Christine’s contact at the company had turned the reins over to the new COO because he was now doing due diligence for a different acquisition. Christine was able to get going again quickly, in spite of the considerable objections to her being involved, since the relations had soured over the earlier search. In the end Christine sent a PhD, also fluent in Mandarin, to the plant in China under the company form of equity deal. The rest is history; Christine was invited to join the company in China, but declined, and that opportunity has also been recently offered to the COO.