Did you know that the staffing industry alone generated $490 billion dollars worldwide in 2018? That’s a lot of cash, and there’s plenty more of it to come, with the industry expected to grow between 4-5% each year over the next few years.
So where does all that money go? How does it all get paid out? Those are good questions, and I’m glad you asked.
Before I answer, I want to make one thing clear. For the purposes of this article, I’m not going to be talking about recruiting as a human resources function: there are hundreds of thousands of “in-house” recruiters who work directly for a company as a full-time or contract employee, and are paid a salary to help that company hire people. I’m talking specifically about external recruiting, or agency recruiting as it is often called. Here’s how those people make their money.
First, there’s “direct hire” placement. Direct hire placement is useful when a company has a full-time position they are trying to hire for but are struggling to find qualified candidates on their own. An external recruiter, sometimes called a “headhunter”, will market the position to prospective candidates and present the interested ones back to the hiring company, their client. If the hiring company decides to hire one of the recruiter’s referrals, they’ll pay a fee, usually around 20%, of the candidate’s first year salary back to the recruiter, generally within 30-60 days of when that person starts the new job. That’s called a placement fee.
Some headhunters only work on “retained” searches – that’s when the hiring company pays the recruiter a pre-set amount of money to conduct a formal search, usually for a very high-level position. Your favorite college head coach? Chances are he or she was recruited by a headhunter who had been retained by the university to find a new coach. Payments for this service are usually done in three parts: 1/3 to get started, 1/3 after a set number of candidates have been presented, and 1/3 when the hire has been made. There are independent headhunters and executive search firms that work in this area.
Next, there’s contract placements, or staffing. This is when a company needs resources to help with projects or seasonal type stuff but they don’t want to invest in more full-time employees, so they use a third-party recruiting or staffing firm to find the talent they are looking for. The staffing firm will hire the contractor on their payroll and pay them as they would any employee but the contractor will work directly for the hiring company. The staffing firm will “mark-up” the hourly rate they are paying the contractor and bill the hiring company for those hours, and that’s where they make their money, or profit margin – the difference between what they are paying and billing for the contractor’s hours.
Finally, there’s something called recruitment process outsourcing, or RPO. This is when a company will outsource some or all of its recruiting functions to a third party. It can range from a single recruiter making a few thousand dollars a month to help a startup build their team, to a global team of recruiters supporting the recruiting and hiring of a Fortune 500 company. Unlike staffing and contingent recruiting, recruitment process outsourcing is payment for a service, or deliverable, similar to retained search. In staffing and contingent recruiting, recruiters are only paid IF their client hires their candidates.
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Now let’s go make some placements!