Recruiters as Accidental Underwriters: Why You Pay for Others' Poor Hiring Decisions
When I talk to founders, I don't have to work very hard to get them to complain about job boards and recruiters. The problems I’ve focussed on thus far have been those of selection and trust. But the status quo also suffers from a more subtle problem - the externalization of costs, especially less legible costs, such that rationality is not forced upon the different stakeholders in the recruiting process.
I want to start with the provocative claim that it's not just recruiters who face misaligned incentives - it's also your employees. In the traditional 'pay for success model' (where recruiters earn 20% of first-year salary upon hire), the evaluation costs are somewhat externalized. When a company interviews dozens of candidates without hiring anyone, or maintains unrealistic standards for what an acceptable hire looks like, that cost is largely borne by recruiters and candidates.
The instinctive reaction to this might be: 'Who cares? Recruiters get paid too much anyway.' But this is precisely the point. In the current system, recruiters charge high fees precisely because they're internalizing costs that should ideally be borne by the company—the costs of uncertain outcomes and unclear requirements.
The Optimal Role Division in Recruiting
This is roughly my map of the recruiting process:
Hiring manager: Responsible for formulating and outlining what the organization is looking for and communicating those requirements to recruiters.
Recruiter: Responsible for comprehending the requirements (at some higher level of abstraction), tapping the most likely sources where these requirements are met, and performing basic filtering to qualify candidates.
Hiring manager/organization: Responsible for evaluating candidates at each stage:
Do we have enough information/confidence to hire candidate X?
If not, is candidate X worth investing more time to evaluate?
This evaluation is not something the recruiter has much control or visibility on, not to mention expertise. Yet, the recruiter's payoff in any one case is largely dependent on the company's decision-making. In the current paradigm, recruiters are paid for accepting this risk. But this is not a risk they have any expertise in pricing and accepting.
Moreover, employees are sometimes structurally incentivized to minimize their personal risk rather than maximize company outcomes. This doesn't show up in financial statements, but manifests as hours lost interviewing too many candidates, indecisiveness, and then overpaying when desperate to make a hire.
A New Paradigm: Pay to Evaluate
What would an alternative model look like?
Recruiters shouldn't be paid for bringing lousy or even mediocre candidates to companies. Recruiters should be paid for leads that the company is willing to pay for.
What we want to offer clients at Clout (in addition to the traditional model) is a "pay to evaluate" model:
Companies/hiring managers get a 30-minute screening call with any candidate we surface to you.
If you like what you see, you pay to evaluate them further. If you only want to progress 1 candidate from the 10 we brought you, you only pay for 1.
Here's a simple model that illustrates the savings at our starting rate - 0.50% of base salary per candidate assessed.
For a $150K role, traditional recruiting costs $30,000 per hire. If you believe you need to thoroughly assess and interview (after a quick screening call) 10 candidates to hire 1 candidate (in expectation), the pay to evaluate model, as we’ve currently priced it, will cost you $7,500. That’s a 75% reduction in recruiting costs.
To match the cost of traditional recruiting, you would need to assess 40 candidates after initial screening. If you find yourself approaching this number without making a hire, it's worth reconsidering your process. At that point, the opportunity cost in management time far exceeds what you're paying us, and signals a fundamental mismatch between your needs and market reality. Perhaps your compensation package is below market, or your requirements exceed what's realistically available. Either way, this becomes valuable information for refining your approach.
The Spectrum of Pricing Models
While I've presented the pure pay-to-evaluate model, it's worth noting that this exists on one end of a spectrum. The traditional 20% contingency fee sits at the opposite end. Between these poles, there's room for hybrid approaches that distribute costs and incentives differently.
For companies concerned about potential gaming of the screening process, a tiered model might make sense. In this approach, companies would:
Pay a small fee after an initial screening call (say 0.5% of salary)
Pay a slightly higher fee for candidates who progress to later rounds (perhaps 1%)
Pay a modest success fee upon hiring (5-7% instead of 20%)
Add a retention bonus if the candidate remains with the company for a year (1-2%)
This graduated structure maintains most of the cost advantages of the pure pay-to-evaluate model—perhaps reducing costs by 50-60% rather than 75%—while providing additional safeguards against potential misalignment. It creates multiple checkpoints where the interests of all parties can realign.
Incentives Under the “Pay-to-Evaluate” Paradigm
Incentives are no more aligned for the recruiter in the traditional model, even if it appears that way. The fact that the recruiter gets paid on hiring doesn't make them any more likely to give you good candidates than if they got paid upon you choosing to evaluate those candidates after a screen. If you think otherwise, you'd be implying that recruiters have an ability to predict and sell you candidates that can fool you in a screening call but not in further stages of assessments. This is incompatible with how insightful most people think recruiters are.
In fact, if the model is one where the recruiters face high probabilities of zero payoff and low probabilities of very high payoffs, there is an incentive to put much less effort into qualifying each candidate and instead focus on finding more candidates, and this is precisely what you see.
Again, this works for everyone but people who foot the bill - founders. Recruiters will externalize the cost of finding too many, crude candidates onto your employees in terms of time and opportunity costs. Your employees will externalize the cost of their time to you because that's how salaries work.
Addressing Skepticism
I expect skepticism to be the typical first response. People come up with all sorts of reasons why this is bad but most of it is premised on assuming they will be incompetent in their recruiting process and thus end up overpaying us. "But what if I spend $5K and hire no one?" That $5K is a signal that you need to re-evaluate the specs, comp etc or that you weren’t screening hard enough at the free screening call stage. Conversely, if you're good at recruiting, you might spend just $3K instead of $30K, making this model even more advantageous for companies with strategic hiring practices.