What would you pay to avoid a £149,000 mistake? The majority of boards would say whatever it takes. However, when it comes to a Managing Director, Finance Director or Operations Director appointment, a £12,600 difference in fees regularly settles the decision.
A note to start with: Everything below is sourced where one exists. An objective, unbiased view. Where I couldn’t find one, I’ve highlighted it.
As a working example, let’s imagine you’re an SME building product manufacturer turning over £20m. The investors need a new Managing Director and have budgeted £140,000.
In my experience, once you’ve finished negotiating, a traditional recruiter (fee on placement only) would charge around 17%. That’s a fee of £23,800. A retained headhunter (medium sized Executive Search firm) will charge in the range of 26%; a fee of £36,400. That’s a difference of £12,600.
However, should we be considering a different figure: what does that vacant post cost you each month it’s empty, or filled by the wrong person? Afterall, this person will shape and execute strategy, customer relationships, culture and lender confidence.
For a £10m–£150m turnover UK manufacturer or construction business, appointing a Managing Director, Finance Director, Operations Director or Commercial Director should never be viewed as a recruitment transaction. Sadly, all too often it is.
Who actually hears about your vacancy
In my experience, any strong, specialist Executive Search firm will proactively approach and exhaust the required market. They will share data on the headhunt, so you’re aware of the limitations to your brief and left knowing the candidates make up the best possible shortlist.
You are highly unlikely to get that from a traditional recruiter, your network, or an internal talent team. Largely, these rely on database candidates, LinkedIn, and advertising.
LinkedIn surveyed 18,000 fully employed professionals across 26 countries. Just over 25% said they were actively looking and reviewing job boards. A further 45% said they were open to talking to a recruiter, and 15% were quietly sounding out their network. Only 15% weren’t interested in moving at all.[1]
I did look for a reliable figure on how many director-level candidates sit on recruiter databases, and how many board appointments come from a direct approach. There isn’t any. The percentages that circulate in my industry are mostly recycled marketing, and I’d treat them with suspicion.
What the LinkedIn data does show is that an advert speaks to the quarter who are looking. The larger group will listen, but only if someone calls them. In my experience the realistic pool for a senior appointment in this sector is small, and the people in it are employed by your competitors, customers and suppliers.
The cost of getting it wrong
The Center for American Progress reviewed 30 studies on the cost of replacing employees. Estimates ranged from 5.8% of salary up to 213%, with the highest figures at senior and executive level.[2] It’s US data from 2012, and 213% is the top of the range rather than the average. Even at half that figure, replacing a £140,000 MD costs around £149,000.
But that’s the cost of replacement only. It doesn’t cover what the business did, or failed to do, while the wrong person was in the chair. The opportunity cost, time wasted on that important stage to your five-year strategy, and an FD who’s beyond stressed at having to perform two functions.
The Recruitment & Employment Confederation puts the cost of a poor hire at leadership level at £132,000, once you account for lost productivity, management time and the impact on the wider team.
Clearly, I can’t give you a reliable UK figure for what an empty MD’s chair costs a business of your size, and I wouldn’t wish to invent one. No doubt you can work it out yourself: annual EBITDA ÷ 12, multiplied by the share of performance you’d attribute to the role
Once you’ve put a monthly figure on this the fee conversation changes.
What a right appointment is worth
McKinsey research attributes as much as 45% of a company’s performance to the CEO’s / Managing Director’s influence.[3] It’s an estimate rather than a measurement, and it comes from largely listed businesses. In the same body of work, CEOs in the top 20% for financial performance delivered 2.8 times the annual shareholder return of average performers.[4] Although we can’t treat both of these as hardened precursors, it’s a solid indication.
Again, putting this into a practical example, if your business turns over £20m and a stronger MD lifts EBITDA by half a percentage point, that’s £100,000 a year and eight times the fee gap.
Admittedly, plenty of things could stop that happening, and nobody can promise it. It does, however, show the impact that an optimum person at your top table can do, compared to hedging your bets as there’s someone in your network who would take the role.
Where the evidence is short and what to ask
Unfortunately, no independent UK study shows that specialist search produces better hires, or better retention, than internal teams, networks or generalist recruiters. Most of what’s published comes from search firms, and I’m one of them.
What I can openly state is 100% of my placements over the past year came from me directly approaching individuals. The majority of these were not actively looking but became increasingly engaged as the interview process progressed. Furthermore, only one individual left within one year of joining, and that was due to the company going into liquidation within five months of him joining.
To help you weed out the good headhunters from the bad, I’d start by asking these questions:
What proportion of your shortlists came from direct approach versus candidates who’ve applied or were already on your database?
What’s your retention rate at 12 and 24 months, and can you show me?
Who does the approaching, the consultant or a researcher?
How frequently do you keep in touch and what data do you share?
What happens if the appointment leaves in their first year?
Who from within the industry have used you in the last year that I can speak with?
The single biggest frustration for me as a veteran Executive Headhunter is witnessing a prospective client’s senior hire fail after filling the role through their own network, or via using a perceived cheaper option.
I can understand the rationale. Recruiting a director through your own network is viewed as being the free option. Using a traditional recruiter will save you roughly one-third of an Executive Search firms fee.
I’ve continually seen these approaches fail to deliver.
If you’re weighing up a Managing Director, Sales Director, Operations Director or Finance Director appointment I’ll tell you honestly whether executive search is worth it for that role, even if the answer is no – 07570 740490
References:
1. LinkedIn Talent Solutions, Active vs. Passive Candidates: The Latest Global Breakdown Revealed, March 2014. talent.linkedin.com/blog/index.php/2014/03/active-vs-passive-candidates-the-latest-global-breakdown-revealed
2. Boushey, H. and Glynn, S.J., There Are Significant Business Costs to Replacing Employees, Center for American Progress, 16 November 2012. americanprogress.org/article/there-are-significant-business-costs-to-replacing-employees
3. Dewar, C., Hirt, M. and Keller, S., The mindsets and practices of excellent CEOs, McKinsey Quarterly, October 2019.
4. “The EBITDA of organizations performing in the top quartile of leadership is almost double that of others.” — McKinsey
