How Recruiting Businesses Make Money
Recruiting agencies, also known as staffing agencies or employment agencies, are like any other small business — they need to make money.
Typically, recruiting businesses make money by charging companies a fee for their services. There are several different ways that recruiting agencies can generate revenue, including the following:
Placement fees are the most common way that recruiting agencies make money. Placement fees are a percentage of the first year salary, paid by the employer to the recruiter for each candidate that is hired. The company pays the recruiter once the candidate starts work.
Placement fees can range in size based on several factors:
- The type of position that was filled (e.g., executive or administrative)
- How long it took to fill the position (a longer search means more time spent on finding candidates)
- Whether or not there were multiple offers made to competing candidates
They’re usually between 1% and 10% of a new employee’s salary, but can vary depending on geography. For example, in Silicon Valley, it’s common for placement fees to be between 2%-4% for senior-level engineers or executives, whereas in New York City, it might only be 1%.
Contract staffing is a form of temporary staffing, which means that the recruiter will find and place workers on contracts for companies that need them. In other words, the recruiting agency acts as a middleman between the company and the candidate. The agency hires the candidate and then contracts them out to the company until the contract ends or they find permanent work elsewhere.
Contract staffing differs from permanent replacement — placing one candidate in one position at one salary with one employer for an indefinite period of time. In this model, the company pays the agency a fee for the candidate’s services, and the agency pays the candidate a salary.
Contract staffing is useful for companies that need workers for specific projects or timeframes due to seasonal fluctuations in demand or during periods of high growth.
Retained search is when a client hires a recruiter to find a candidate for a very specific position.
For example, say a company wants to hire an executive VP of Marketing and has budgeted $150k per year in salary for this role. A retained search firm will be given access to all of their current employees’ resumes as well as any other information about them (their education history, skillset, etc.). Then, the agency finds suitable candidates for the position by searching through job boards or networking with their connections.
Typically, the company pays the recruiting agency a upfront fee to conduct the search (regardless of whether a candidate accepts an offer), and pays an additional fee if one of the candidates is hired.
Temporary staffing is a service where a recruiting agency provides companies with temporary workers to fill short-term staffing needs.
The workers are not direct employees of the client but rather an employee of the temporary staffing agency. The agency hires the workers and pays them a salary, and the company pays the agency a fee for the workers’ services.
In addition to the services mentioned above, recruiting agencies may also offer other services, such as:
- Background checks, also known as criminal records checks or employment verification,** **which are used in a variety of industries, including healthcare and financial services.
- Drug testing, by partnering with a company like Quest.
- Skills assessments, since some recruiters are highly trained in a specific field and can help companies weed out candidates before putting them through the full interview process.
- Consulting, in which they provide companies with an overall hiring and candidate brand awareness strategy.
You can make money with a recruiting business.
Recruiting can be a lucrative industry for those who want to venture into it as an entrepreneur or work with other entrepreneurs interested in starting their own companies.