John, I was candidate in one of your CEO searches last year. I noticed in your Position Prospectus that you give your clients a three-year placement guarantee. I was recently a candidate in a search being led by one of the best known national firms. When I asked about their placement guarantee the associate who was screening me said they only provide a one-year guarantee, the industry standard. Why do you offer a longer guarantee and is that an issue that a candidate should even care about? Roger, Memphis , TN
Yes, the placement guarantee offered by the vast majority of retained search firms working in healthcare is for 12 months from the date the candidate begins work in her or his new position. But candidates should understand more about the search process than just the placement guarantee. I will get back to the placement guarantee later in this post.
The major firms working in the healthcare space, including SpencerStuart, Korn Ferry, Witt Kieffer, Diversified and others, charge professional fees that are typically north of 30 percent of the first year total cash compensation, which means that your projected bonus payment is factored into the fee.
Virtually all retained search firms charge their expenses to the client. One national firm also charges a 15 percent administrative fee that uses as its base the candidate cash compensation package. This is an addition to their expenses. To be fair, more and more healthcare organizations are pushing back on that provision which could add $90,000 more to the fee for a $600,000 cash package.
In salary negotiations, as the cash compensation increases, so does the search consultant’s professional fee and, if they charge an administrative fee, that increases as well. You might argue that this floating professional fee structure that has been used for decades places the search consultant in a potential conflict of interest position if he or she is actively involved in the negotiations, which they usually are.
Some firms, including ours, now use fixed professional fees to avoid that real conflict. Expenses are invoiced to the account of the client.
Pressures to Add Value
As cost-control pressures intensify, healthcare providers are becoming increasingly concerned with what they are getting for their money. Some firms, ours included, have added additional services like onboarding and a half-day team-building exercise as part of the professional fee structure. Fixing or capping the professional fees is another way some smaller firms, typically with significantly lower overhead, are attempting to add value to this process.
One of our most popular value-added features is the use of video summaries of our interviews with candidates we plan to recommend to the client. Clients say that incorporating the video summary into the evaluation process helps them minimize the possibility of inviting the wrong candidates for site interviews. One client confided that they had to start two searches over because they were relying on the paper — the resume and the recruiter’s comments — versus being able to see the candidate answer questions related to the specific job.
THE PLACEMENT GUARANTEE
The major firms are using a business model that is at least 50 years old. They are loaded with business and their profit margins are healthy. When I asked a long-time friend who is a senior associate with one of the Big Seven firms why they provided only a one-year placement guarantee, their response was surprising. “The client’s aren’t asking for it.”
He explained it this way: “The search firm business model is driven by two factors: expanding the bottom line and minimizing risk. In the end they are more focused on maximizing profits rather than expanding their accountability.” In an industry where the average CEO tenure is less than 3.5 years, would offering a longer placement guarantee dramatically improve the transparency and outcome of the search firm’s work?
I think so but then I am probably in the minority.
Another retired partner that I have known for years told me that the current search firm business model is transactional. Each search is a very profitable transaction. “In this model we deliver five or six candidates that match up with what the client told us they wanted and allow them to make a selection. At some point in the process, the Partner, who has turned most of the work over to associates, is out looking for more business because, in the end, that is how their performance is really measured; how much new revenue did you generate. If the candidate the client selects does not do well, then the firm will be only too happy to conduct a replacement search for another fee if the executive flameout occurred in the second or third year, outside their guarantee period, which is when most mis-hires begin to show their various irritating or costly foibles. By this time it is just another transaction.
The search firm/client relationship is built on trust or other reasons. Until the clients understand they can ask for more, and probably get it, then the current search model will not change dramatically, and that’s a shame.
I have routinely offered a three-year placement guarantee for executive positions since the late 1990s. This accountability requires that we be more detailed with our initial due diligence site visit and in screening. I have had precious few mis-hires, not one at the CEO level. I think the guarantee drives our candidate evaluation process and that does make a measurable difference for the candidates who want to be sure there is transparency in the process.
The longer the guarantee, the more accountability you will have in the process.