Yesterday I had a really interesting lunch with Charlie O’Donnell. He is looking to expand his startup, Path101, and mentioned that his inbox was inundated with offers from headhunters. He couldn’t fathom their exorbitant fees. I can certainly understand the sentiment. Headhunters have an industry standard fee – 20% of the first years salary. Thats incredibly expensive in a world with monster, linked-in, theladders, and hundreds of other nitch job posting sites, not to mention vertical job search sites like indeed and simplyhired. So how do headhunters get away with those massive fees? Collusion? Cartels? Mafia-like market failures?
I didn’t give Charlie a great answer yesterday, so I thought I’d lay out my thoughts here. The first and most obvious answer is that the viability of online tools varies by industry and experience level. It could be that executives with experience in Global Operations and Logistics might not use job postings as much as recent college grads and Web Developers. That explanation has some weaknesses. It provides no structural or fundamental explanation as to why headhunters exist, and especially why they can charge such high fees. There has got to be a better reason than ‘older people aren’t web savy’ and ‘high-powered people won’t spend time sifting through job postings.’
I believe the stronger explanation has to do with the marginal product of labor. Lets assume a key executive at a large and hierarchical company quits. The projects and peopled managed by that executive will quickly lose their direction and leadership. They might be able to function independently, but they will certainly be less effective. In a large organization, and for a high level executive, this may amount to significant declines in productivity for the entire company. Thus, the cost of leaving that position open is very high. Here, a headhunter, “Executive Search Firm”, steps in and uses its contacts, specialized experience, and familiarity with the industry to quickly fill that position. They garner a large commission for providing a very valuable service by minimizing that costly leadership gap. (The contingent marginal product of labor argument is also my favorite explanation for high executive pay)
When it comes to startups this certainly isn’t the case. They are not large, hierarchical institutions. On the contrary, they have cultures that praise ‘bootstrapping’ and flexibility. Thus, the marginal productivity of a particular employee is far less than that of the corporate executive. Starups can afford to use cheap, but time intensive online hiring methods because the cost of hiring tomorrow is relatively low.
Hi John. My colleagues know yours and I follow Monitor110 and associated bloggers closely. I look forward to your posts and added you to my favorite feeds.
Interesting idea. I think a better explanation is headhunters negotiate compensation on behalf of client companies and ‘go the distance’. In some instances, playing bad cop. Online job sites are so early in the ‘deal’ process and really are just the first 10 yards of a much longer game. Also, corporate executives are less of a flight risk / more of a long term asset with expected value that can be paid now to a headhunter.
I disagree that there is a time cost. Most large company executives are on the 6 month notice, not the 2 week because public markets would eat companies alive for anything less which dictates employee behavior. Evidence is that the new person starts the same day the predecessor leaves. Startups move faster in pretty much everything.
Does the fact that corporate execs have less affect on company value play into the headhunter equation? At a startup, the hire and the team fit has a greater impact, and so there needs to be a direct courting process in order to test out the fit. For example, a team needs to see if they can negotiate with each other, because they will need to make many decisions with a lot of unknowns while working together.
Rob