Freakonomics was a NYTimes bestseller, bringing economic tools to answer such great questions as why drug dealers live with their mothers, despite supposedly making so much money.
The book is really about dispelling myths by explaining how incentives drive us to act. One of the examples is real estate agents. Using some basic numbers, the book explains that a $300,000 house that sells yields a $4500 average commission for a real estate agent. A $310,000 yields an average $4650 commission. Thus the effort to hold out for the best price yields very little for the agent, but $10,000 for the seller.
Tracking the agents who sell their own homes, the book finds that the agents hold out for $10,000 more when it's their own home, but not so much when it's someone else's. It's an example of simple math. Effort matched to reward.
Third Party Recruiters working for national firms are in much the same boat. During a permanent placement, we're fond of saying, "the more you make, the more we make," as recruiters are usually paid a percentage (20-33%) of the annual salary. But Third Party Recruiters working inside don't make the full commission amount. On a salary of $100,000, with a fee of $25,000, the recruiter recieves half-credit, $12,500 which she then receives a percentage of - somewhere between 10-30% (depending on if they are commissioned or salaried).
So if a recruiter places a $100,000 candidate, they can expect to receive on average, $2500 in commission. If the candidate wants to negotiate, say $5000 more, the benefit to the recruiter is only $125, but the risk is the client may refuse, and or go with another candidate at a lower salary. The initial negotiation has the recruiter and the candidate working together, but in final negotiations, the risk of raising the salary outweighs the reward.
There are, of course, many, many comp plans in the industry, but the one I cited above is pretty standard for larger firms. I imagine it was not created to form an economic incentive that pits the good of the recruiters against the good of the candidates, but it clearly does. I wonder what other aspects of our industry create similar problems?
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