Everything That’s Wrong with Contingency Contracts and Some Ways To Fix It

Article main image
May 15, 2012

I imagine at some point back in the 60’s and 70’s the concept of providing recruiting services under a contingency arrangement made sense. Back then many “employment agencies,” as they were known, were exactly that: clearing houses for local companies they held established relationships with. As such, the fees — usually 10% of the employee’s first year’s salary — were paid by none other than the employee.

I ought to know, since as late as 1985, I obtained two interviews in Southern California through this arrangement. I still remember the companies: Roadway Express and Gallo Wine. At the end I did not accept either job. In my mind, any company that feels their job is so precious that I’m expected to “pay for it” is setting the stage for the wrong career path for me.

The contingency approach was a great idea back in its day when we, as an industry, were trying to wean businesses away from their employee-paid practice. It also made sense in an era where a businessperson’s word meant something, and a recruiting firm agreeing to work under “contingency” did not necessarily translate to the client company going out the next day and signing on two more competing firms. In the early days, such tactics would not have crossed most hiring manager’s minds at all as merely dealing with contingency approach itself was a novelty.

The Business Model Changed

But something peculiar happened around the 80’s and 90’s. As thousands of new recruiting firms opened their doors, quite possibly fueled by the rewards of larger percentage fees paid by companies with deeper pockets than college grads, the unwritten business protocol and unspoken understandings fell to the wayside.

With a larger choice of search firms came the idea that if one search firm is good, then two might be better. And why stop at using two search firms? Since many company hiring managers have a recruiter or two calling them every week now that the market was becoming saturated with competition, why not pit these firms against each other? If there are too many cocks in the henhouse, then let’s have a cockfight and see who wins.

From Use to Abuse

Somewhere, the gentlemanly, unspoken, and unwritten rules of conduct were turned upside down against our industry. Aggravating this was the fact that no professional organization representing recruiters (that I know of) did anything about what transformed from the use of search firms to the abuse of search firms. (Excluding perhaps the AESC – Association of Executive Search Consultants, which tried to distance itself from the morass by focusing on retained search membership.)

Moreover, as many larger franchises coalesced into multi-office operations, the idea of using multiple search firms simultaneously was not only given a blind eye, it was almost encouraged by new firms trying to edge out a previous supplier of talent in order to gain a client. In fact, in my early training by Ronald Kolman (owner of the first firm that hired me), and later, others encouraged me to offer contingency as way to “window shop” candidates without incurring a fee unless one was hired.

The Realtor Model

The result was one big mess by the mid-1990s, when IRES was building its client roster. By the end of the 90’s, I came to realize that contingency worked well only under certain limited conditions. Remove those conditions and the process falls apart. I set out to delineate what each of those precarious conditions is in my book, “A Manager’s Guide To Maximizing Search Firm Success.”

Few professional, service-based industries tolerate what the contingency recruiting profession allows to take place routinely. Imagine calling a CPA for your annual taxes, and then contacting two more CPAs to simultaneously work on your taxes just to see which one saves you the most on year-end returns. Then you pay the service fee only to the firm that achieved the most tax savings. The others can take it on the chin since they did not come up with the winning formula.

There are times where contingency recruiting is perfectly acceptable, but then we ought to follow the real estate agent’s model and ask for a commitment of 90 days or six months exclusive just like a real estate agent requires to list a home for sale.

Following are examples of common corporate contingency agreement clauses, as well as everything that is wrong with them. Recruiters who sign these may think to themselves, “I only work on these when necessary or feasible.” That may be the case, but if we all formed a “union” of recruiters and ceased signing these flawed and dumb agreements — which harm the client-company just as  they do our industry — perhaps companies would stop writing these comedic statements of irony, hypocrisy, and self-contradiction.

Sample Corporate Agreement Clauses  (…and why they stink)

1.       “Recruiter will initiate recruiting on a non-exclusive basis.”

Translation: We’re going to be asking three of your competitors to expend efforts on the same search. You’ll go crazy in about three weeks finding out everyone was already contacted by another recruiter. We’ll be laughing at you all.

2.       “Recruiter will use best efforts… and provide status reports …on a periodic basis.”

Translation: Even though we will have no loyalty to your company, we expect you to treat us as if we’re your most important client. A ludicrous proposition given that we just told you of our intent to use multiple firms. It would be different if we were working one-on-one (the professional way).

3.       “In the event of a competing claim for a specified candidate or position …  candidate’s resume bearing the earliest time and/or date will be deemed as being referred by the agency.”

Translation: We are going to create a chaotic situation by a) using multiple recruiters, which will b) inevitably cause tension and battles amongst competitors so c) this will be our way to referee the chaos we have brought upon you as a result of our unwillingness to work logically or exercise common sense.

Not to mention, in addition to needing a method of “tie-breaking,” using the date/time stamp method for determining who gets credit forces each search firm to cut every conceivable corner and flip the resume out the door as quickly as possible with the least amount of interviewing/assessing possible. Since of course, while one is interviewing the other may be flipping resumes over in bulk in order to get credit for submission. Pure, utter nonsense.

4.       Confidentiality and Non-Solicitation “…Recruiter agrees that it will not … disclose confidential information to any third party…”

Translation: We plan to issue jobs to multiple recruiters (a.k.a. the world) and disclose everything they need to know for recruiting on those positions (to the world via multiple recruiters), but once everyone knows all the particulars you’re supposed to act and pretend this is all “confidential” information.

Knowing that each recruiter will be talking to dozens of people, multiplied by several search firms the company clearly plans to use, by definition this translates to having no concern whatsoever for “confidential information.”

Consider this: How will they prove who released what?

Another reason for using only one search firm: If confidential information was released, at least you know whom to hold accountable since there’s no doubt what the source was.

5.       Non-Solicitation: In accordance with the value recruiter places on loyalty to clients … for a period of one year following termination of this agreement … recruiter will refrain from approaching company’s employees in connection with any other search.”

Translation: We will hold no loyalty to recruiters whatsoever, as we have clearly stated we plan to give this job search to multiple recruiters. However, to protect our own assets, we expect you to be loyal to us by not recruiting our employees out while this agreement is active, and for one year after it is terminated.

Recruiters: you should value your loyalty to the client if the client demonstrates ‘loyalty’ in return to recruiting professionals.

Just for fun, try penciling this in to such a section/clause: Unless recruiter finds company has held no reciprocal loyalty to recruiter by contacting another recruiter or exploiting multiple recruiters simultaneously rendering this Non-Solicitation clause void.”

We’re All A Little Guilty

I could go on for pages. It is comical actually. But why bother; I think I have made my point. Most of the corporate HR/Legal Department contingency agreements are little more than an exercise in self-contradictions, hypocrisy, and nuttiness that make little logical sense, and if anything, undermine best practices and common business protocol.

Someone must be signing these agreements. I’m guessing many thousands of recruiters throughout North America are for if the company encountered resistance and refusal by the top-rated search firms it would be forced to hold a meeting with legal and revisit these clauses.

Here’s a little secret: In the same pen stroke it took for someone to insert such language into these agreements, it requires little additional effort and creativity to get some of this disadvantageous language struck out and replaced.

What To Do

How? It won’t be easy. But it requires the following:

  • A tight working relationship with a senior level executive who holds clout over human resources.  (Not all executives exert influence over H., only some do.)
  • Knowledge of a pain (position that must be filled soon), and knowledge on behalf of the client of the recruiter’s access to a candidate who can fill the vacancy..
  • A little wiggle room — most written-in-stone corporate agreements allow for wiggle room. You won’t know unless you ask. Sadly, few bother to ask. (Even I have regretted this after later finding out I could have obtained more preferential terms.)
  • You must ask, ask, ask. Ask if the guarantee period can be cut to 30 days instead of 90. You may have to settle on 45.
  • You must ask if the fee can be held to 25% instead of 20%. Offer a more thorough search if they can pay 25% and provide an exclusive.  (Show them samples of what you are willing to do in return for the higher fee.)

While some companies cannot or will not budge (their HR VP is intimidated by management, and does not want to rock the boat), others are happy to oblige. Just ask — it could save you multiple headaches backtracking with these crazy contingency contracts and earn you extra (and well deserved) fees!

Get articles like this
in your inbox
Subscribe to our mailing list and get interesting articles about talent acquisition emailed weekly!