How recruiters get paid and how they make money is not a simple issue. It’s dependent upon a number of different factors and extenuating circumstances.
Right off the bat, are we talking about internal recruiters or external recruiters?
Before we do that, let’s define internal vs. external recruitment.
External recruiters are also known as independent recruiters or agency recruiters. That means they work for themselves, they don’t work for one specific company. They work for a number of different organizations, helping to fill their open positions.
Internal recruiters are just what they sound like: they’re internal. They are an actual employee of a company. As such, they recruit exclusively for that organization and nobody else.
So why bring up that distinction? For one very big reason: typically, internal recruiters make less than external recruiters. That’s because internal recruiters almost always have a set salary. Their compensation has a cap on it. Not so for external recruiters. They’re more like commissioned sales people. There is virtually no limit to the amount of money they can make.
According to www.glassdoor.com, the national average salary for internal recruiters is $45,360. That’s why, for the purposes of this blog post, we’ll be talking about external recruiters.
How do recruiters make money?
There is one thing that internal recruiters and external recruiters have in common. That’s who pays them. In all placement situations, the company pays the recruiter, not the candidate. The only difference is that the internal recruiter is paid a yearly salary by a single organization. An external recruiter is paid much differently.
External recruiters do not receive a salary. They receive what is called a recruitment fee or a placement fee. This can take the form of a check or an electronic transfer. Here are some different aspects of this fee:
- The company always pays the fee, not the candidate.
- External recruiters typically receive fees from multiple organizations. They refer to these organizations as their “clients” or “client companies.”
- The amount of each placement fee is different. That’s because it’s based upon the candidate’s first-year salary. That does not mean the company takes money from the candidate and gives it to the recruiter.
Here’s an illustration to explain that third point more clearly.
A recruiter works a search for an automation engineer. The salary for the position is $70,000. As per the agreement that the recruiter has with their client, they will be paid 20% of the candidate’s first-year salary. So . . . 20% of $70,000 is $14,000. Once the recruiter places that candidate, their client will send them $14,000. Not right away, though. It usually takes 30, 60, or 90 days.
As you can see, an external recruiter doesn’t have to make too many placements before they’ve caught up to the internal recruiter’s $45,360 salary.
How do recruiters get paid?
Now that we’ve discussed how external recruiters gets paid, let’s discuss the different ways in which they receive that payment. There are three such ways:
This means that the recruiter is not paid until the candidate is placed. To use the example listed above, the recruiter does not get their $14,000 until after the fact. Of course, the recruiter is competing against their client’s internal HR department. They might also be competing against other external recruiting agencies that are trying to fill the position. If the organization does not ultimately select one of the recruiter’s candidates, then the recruiter does not get paid.
That’s what it means to “work on contingency.” The recruiter is working in the hopes of placing a candidate and then getting paid.
This means the recruiter is paid up front, not after the fact. In other words, they get the money before they’ve ever started working. In this situation, the recruiter is not competing against anybody. That means, of course, that they’re giving the search their full attention. That’s because there’s no contingency involved. They know they’re getting their money. That’s because they already have it!
This is a hybrid of #1 and #2. The recruiter receives approximately half of the fee up front, before they’ve begun the search. Then they receive the rest of the fee after they place the candidate. The first half of the money is typically called the “engagement fee.” The client “engages” the recruiter and has their attention.
Giving somebody thousands usually gets their attention—and keeps it. In addition, retained searches are usually at a higher level, meaning that the fees are higher. So there’s that.
Which of the following ways recruiters get paid depends upon a lot of factors. One of those factors is the recruiter’s preference. Another is how the company likes to operate when dealing with recruitment firms. Yet another is the type of search being conducted.
There are countless business models, preferences, and types of searches. It all adds up to a diverse payment system for the recruiting industry as a whole.
How much do recruiters make?
So—how much do recruiters make a single year? As we’ve already established, there is virtually no limit to how much an external recruiter can earn. (Well, there IS a limit, but there’s certainly no set cap, like a salary figure.)
The average placement fee in Top Echelon’s recruiting network last year was $18,571. (For giggles, the average fee percentage was 22.1%.)
Top Echelon also recently conducted a poll of its Network recruiters. As part of that poll, TE asked recruiters this question:
How many perm placements did you make in 2016?
The choice of answers that we provided is listed below, along with the percentage of Network recruiters that selected each one:
- 0-5 — 20.2%
- 6-10 — 23.4%
- 11-15 — 28.2%
- 16-20 — 8.9%
- 21-25 — 5.6%
- More than 25 — 13.7%
For the sake of argument, let’s use the most popular answer in this poll. That answer was “11-15” placements, which garnered 28.2% of the vote. Next, we’ll take the low end of the range, which is 11 perm placements. So let’s do a little math, shall we?
11 perm placements x $18,571 = $204,281
So using this information, we can surmise that an average external recruiter is capable of billing over $200,000 in a single calendar year.
However, as you can see, there are many recruiters who make much more than that. For example, 13.7% of recruiters in the poll chose “more than 25” placements as their answer. So let’s run the numbers there. Once again, we’ll use the low end of the spectrum. That’s 26 placements, which is one more than 25.
26 perm placements x $18,571 = $482,846
NOW we’re cooking with some gas. That’s nearly $500,000 working as an external agency recruiter. Sure beats $45,360, doesn’t it? And it goes without saying that those recruiters who made many more than 25 placements earned much more in the way of recruitment fees.
How recruiting companies make money
We’ve looked at individual recruiters, but what about the recruiting companies themselves? How much money do recruiting companies or staffing agencies make? As is the case with individual agency recruiters, the sky is pretty much the limit. There is no cap for individual recruiters, so there is also no cap for recruiting agencies.
However, this is where the agency owner can reap the most benefits. Let’s say, for example, that a recruiter owns his own agency. He’s the only one running the agency, a solo practitioner, if you will. That practitioner bills the $500,000 per year that we discussed above. The firm grows to the point where the owner hires other recruiters to work for him.
Let’s say the owner hires three other recruiters, and this is what they bill in the first year:
- Recruiter #1—$100,000
- Recruiter #2—$200,000
- Recruiter #3—$300,000
There is no college degree for being an executive recruiter. That’s why when an agency owner hires a recruiter, they typically have to train the person on the finer points of the profession. Not only do they give the new recruiter training on outreach practices and recruiting software, but they also give them access to their recruiting database and job orders.
In exchange for all of that, the agency owner takes a portion of each placement fee that the recruiter makes. While that percentage can vary from firm to firm, it’s typically 40%. The recruiter gets 60% of the fee, while the owner takes 40%. Let’s apply that percentage to the figures above.
- Recruiter #1—$100,000 x .40 = $40,000
- Recruiter #2—$200,000 x .40 = $80,000
- Recruiter #3—$300,000 x .40 = $120,000
So this is how to calculate what the agency owner brought in during that first year:
$500,000 (their billings) + $40,000 (recruiter #1) + $80,000 (recruiter #2) + $120,000 (recruiter #3) = $740,000
The recruiters still earned six-figure salaries. However, the agency owner increased the overall billings of their firm by 48% by hiring three recruiters. And that owner’s personal billings were exactly the same as the previous year. That’s how recruiting companies make money and continue to make more on a year-over-year basis.
2 additional ways that recruiters make money
To this point, we’ve discussed full-fee, direct hire placements only. However, recruiters often supplement their overall billings with recruitment fees derived from other placements. Two types of those placements are as follows:
Sometimes, a recruiter does not have the candidate they need to fill their client’s job order. Sometimes, a recruiter has a great candidate, but does not have a job order suitable for them. In such cases, that recruiter turns to a split fee recruiting network. With a split network, that recruiter can conceivably find the candidate and/or job order that they’re seeking. That’s because it’s another recruiter’s candidate and/or job order.
In such a situation, if the two recruiters are able to make a placement happen, they split the fee. In the Top Echelon model, each recruiter receives 47% of the final fee. Top Echelon receives a 6% brokerage fee, 3% from each recruiter. The money associated with these split placements is in addition to the money from the recruiter’s other full-fee, direct hire placements. Bonus cash!
Many a direct hire recruiter also makes contract placements. These recruiters offer contract placement services to their clients, helping them to fill their temporary assignments. With contract placements, a recruiter does not receive their fee up front. They usually receive it on a weekly or bi-weekly basis, earning money for every hour the contractor works. Here’s a prime example:
Let’s say a recruiter places a software engineer at his client’s company for a 10-month assignment. During those 10 months, the recruiter earns $20,000 in placement fees. That’s a steady income of $2,000 per month. Everyone would sleep better knowing that kind of money was coming in each month, regardless of how many direct placements they made. (I know I would.) But let’s look at an even bigger picture.
Let’s say that a a blended firm (one that offers contract staffing services and direct hire) tries keep at least 10 IT contractors working at a time, earning an average of $12 per hour on each contractor. See how this calculates into annual recruiter income:
$12/hour x 10 active contractors = $120/hour
$120/hour x 40 hours/week = $4,800
$4,800 X 52 weeks = $249,600
So the agency owner in our hypothetical situation billed $500,000 by themselves; received another $240,000 from their three recruiters; and earned $249,600 in contract fees. That’s a total of $989,600. So close to billing a million dollars. So, so close.
What are you waiting for?
Being an external recruiter (and an external recruiting firm owner) can be a lucrative career. However, there is one big key to billing a lot and making a lot of money. You’ve got to know how to be a great recruiter. You must be good at sourcing candidates and then placing them.
Recruiting is a unique profession, but it’s not for everybody. It takes a rare individual to do what it takes to be a good search consultant. Unfortunately, some recruiters burn out and quit before they become great.
But that’s not YOU, is it? Of course not! You are destined for greatness. You’re destined to bill more and make a lot of money.
So go do it! Why are you still reading this blog post?