7 ms·

A fair salary is the one you shake hands on. It will largely be set by your value on the market and what you can successfully negotiate, not by your employer's

A fair salary is the one you shake hands on. It will largely be set by your value on the market and what you can successfully negotiate, not by your employer's unit economics. But let's talk unit economics of consultancies, since they're useful to know. Your employer will model you as being approximately 70% utilized for the year. Your gross revenue contribution is approximately $231,000. Your employer has approximately 20% overheads; that knocks it down to $185k. They'll want to keep somewhere in the 15~20% of gross range as their profit; that leaves about $140k. This makes the math convenient, since the TCO of a technical employee is about 140% of base pay, which is going to come in right about $100k. [0] "$100k is a very different number than $231k." Yep, it is. If you want to capture a substantial portion of the difference, put out your shingle and start getting gigs. [0] This isn't a guarantee, and if the company thinks that $80k gets you over the line, then they will probably offer $80k. If your other offers and irreplaceability to their ability to deliver gigs counsels $120k, they might accept being bid that high. But there are HNers who will suggest that you get e.g. $160k and that seems highly unlikely if the consultancy wants to stay in business long-term.

qualsiasi 8y ago
This predicts perfectly my salary (3% error) in Europe (Italy).
harryh 8y ago
How do you define the difference between the 40% premium on base pay to get to TCO and the "20% of overhead" for the business as a whole? What sorts of things fall into each of these two buckets? I feel like I know some of the answers but not all of them.
- mark_element 8y ago
  Not OP but heath insurance, taxes and other costs that can be marked down exactly as being for Employee #X are in the 40%. Paying for an office having light, power, internet, management, and a mailroom is in the 20%.
- schneidmaster 8y ago
  Not patio, but typically the 40% TCO includes items that scale ~linearly with the number of employees -- health insurance/other benefits, payroll taxes, etc. The 20% of overhead is for things like office space, business insurance, and to cover the salaries of employees like accountants and HR (who are essential but not billable to clients).
- patio11 8y ago
  Depends on the business, but most of the 40% is employer contributions to payroll tax, health insurance, and other per-employee costs, and the 20% overhead is "general and administrative" (office manager, professional services, coffee, etc), coverage for non-billable employees like sales folks (including otherwise billable employees who are below 70% due to winning you the gigs keeping you at ~70%), and what have you. If it isn't obvious, this is a bit handwavy; particular jurisdictions will have rates/requirements which materially influence the 140% figure, etc.
  - tptacek 8y ago
    140% fully loaded also sounds a bit low.
mark_element 8y ago
This seems pretty accurate. A lot of consultancies or professional services models also have a hefty bonus structure. This can strongly impact your total compensation.
projektfu 8y ago
1400 billable hours? That's like 72% utilization. Is that typical now in software?
- tptacek 8y ago
  For a consultancy, yes, if it's carefully managed.
bargl 8y ago
These are all very good points, as patio said, it's very handwaivy. It depends on insurance, how much of the cost do they push to you vs accept themselves. Do they match 401k. do they have vacation you enjoy? All of that adds to their overhead on top of your salary. The fixed part is that 20% overhead which is to maintain the recruiters, HR, contract admin guys who do all the work so you don't have to market yourself. As he said, if you want the full rate go off on your own, but before you do that I'd suggest you listen to some guys who talk about it. There's a .NET rocks podcast that talks about this because the guy says you can't work 100% for any given contract. You've got to be working towards the next one. So even if you go work for yourself you either work 40+ hrs or you bill at 35 hr a week and market yourself for 5+ to make sure your next gig is always there. Also, you have to factor in how much your consulting agency pays you for stuff into your salary. 0 days PTO? Well it seems like you're going to have to bump your salary by 10-15% in order to break even on a salary job? Paid overtime? Well you might knock that down a bit. It all balances out.
- tptacek 8y ago
  This is another reason never to bill hourly. You should set your client up to care as little as possible about the amount of time billed; they should just be paying for an outcome. You don't want to be in a position where you have to groom the amount of work you bill precisely to account for other things you have to do.
  - bargl 8y ago
    This is a really good point about what the guy in .NET Rocks said. He bills for outcome not hourly and discusses before hand why his billing rate is so high. It's an awesome approach. He actually tries to find reasons not to work with client, because he's so expensive that if he can offer cheaper alternative they should go with it. Only pay if you really need to.
tptacek 8y ago
This is a useful answer and these points are well taken but unless I'm misunderstanding, I object to the underlying logic here. If you work this backwards, starting from "I can get a developer for $100k/yr", your logic re-derives cost-based pricing. And of course, a strong consultancy doesn't price its services based on the cost of its inputs, but on the packaged value it's providing to its clients. So, for example, if this consultancy found a specialist niche within which it could charge not $165/hr but rather $220/hr, you would not expect to see developer wages increase commensurately.
- patio11 8y ago
  I definitely agree with that point; I'm trying to anticipate the question "Why isn't their opening bid $150k given $165/hour?" (Because they'd go out of business.)
  - tptacek 8y ago
    Yep, I had the same reaction. :)
  - Co_Reentry 8y ago
    I usually don't comment on these threads but felt the need to jump in. While I totally understand and agree that ANY business needs to turn a profit in order to stay in the market. I fundamentally disagree with the distribution of work vs risk in proportion to profit in a traditional consultancy model. The assumption that seems to be present throughout this thread is that there is an owner/s (not necessarily the same person as the operator) present who needs to take a percentage from the bill rate. This model is inherently extractive and sets up a really bad set of incentives for the people doing the productive work. (productive in this case is actually writing code/solving client problems and maybe not doing the marketing, administrative, or sales work of the business.) I know someone is going to raise the point that there has to be an owner to put up the capital/bear the initial risk of starting up, which is totally valid! This will always be true I just think that there should be a route/way for the productive worker to work towards a piece of that ownership pie. Also, the fact that the bill rate vs pay rate is transparent is actually great. I know many staffing firms/employment agencies that keep that information hidden from thier employees. (Full disclosure I am a member-owner at a worker cooperative staffing startup staffing.coop, so I am biased towards employee ownership in general! )
alexhutcheson 8y ago
If you want a quick rule-of-thumb, all the math above simplifies out to: annual_salary = 600 * hourly_rate
- stormcode 8y ago
  This is pretty accurate for me thank you!
- bradknowles 8y ago
  So, if they bill me out at $50/hr, my equivalent annual salary should be $30,000? Because 50 * 600 does actually = $30,000.
flail 8y ago
As someone who's running an agency--even if in a different part of the world--and taking care of the financials I see a very similar pattern. More importantly, I'd second "A fair salary is the one you shake hands on." Interestingly, there may be an interesting relationship between the two observations. We are located in Poland so the numbers are not exactly the same as they are for a US-based company, yet the structure is similar. However, some of the work we do goes through a partnership agency located in US. Some of the work we do directly for US customers. So these are the same people doing the same quality work with the same efficiency. The difference in the rate for the end customer? 100%+ If they go through US-located partnership they pay double. Note: the whole setup is fully transparent for the end customer so there's no pretending that we are not who we really are. Should our people expect better salary because there's someone making a huge premium on the top of what we are making? Well, that would definitely make our business unsustainable. Can we raise our rates to a similar level when working directly with US-based customers? That doesn't work either as the premium is paid for the fact that people come through US-based consultancy. Is the work done in any different manner? No, it's exactly the same work. So we end up balancing our financials and we acknowledge that from time to time we would lose an engineer who will either jump on the independent consulting bandwagon (the leverage for them is potentially much bigger than if they were located in the US) or join US-based company remotely. Ultimately "a fair salary is the one you shake hands on." Note: we are an entirely transparent company, thus all the financial details are known to everyone and we openly discuss these matters. We also strive for fairness understood as collective fairness, i.e. if I want to earn over what is commonly perceived as the value I bring to the company I'm not getting it. Also, we share the profits with everyone at the company.
- ericzawo 8y ago
  Sounds like an interesting model for an agency. Have you written about this?

qualsiasi 8y ago

This predicts perfectly my salary (3% error) in Europe (Italy).

harryh 8y ago

How do you define the difference between the 40% premium on base pay to get to TCO and the "20% of overhead" for the business as a whole? What sorts of things fall into each of these two buckets? I feel like I know some of the answers but not all of them.

mark_element 8y ago
Not OP but heath insurance, taxes and other costs that can be marked down exactly as being for Employee #X are in the 40%. Paying for an office having light, power, internet, management, and a mailroom is in the 20%.
schneidmaster 8y ago
Not patio, but typically the 40% TCO includes items that scale ~linearly with the number of employees -- health insurance/other benefits, payroll taxes, etc. The 20% of overhead is for things like office space, business insurance, and to cover the salaries of employees like accountants and HR (who are essential but not billable to clients).
patio11 8y ago
Depends on the business, but most of the 40% is employer contributions to payroll tax, health insurance, and other per-employee costs, and the 20% overhead is "general and administrative" (office manager, professional services, coffee, etc), coverage for non-billable employees like sales folks (including otherwise billable employees who are below 70% due to winning you the gigs keeping you at ~70%), and what have you. If it isn't obvious, this is a bit handwavy; particular jurisdictions will have rates/requirements which materially influence the 140% figure, etc.
- tptacek 8y ago
  140% fully loaded also sounds a bit low.

mark_element 8y ago

This seems pretty accurate. A lot of consultancies or professional services models also have a hefty bonus structure. This can strongly impact your total compensation.

projektfu 8y ago

1400 billable hours? That's like 72% utilization. Is that typical now in software?

tptacek 8y ago
For a consultancy, yes, if it's carefully managed.

bargl 8y ago

These are all very good points, as patio said, it's very handwaivy. It depends on insurance, how much of the cost do they push to you vs accept themselves. Do they match 401k. do they have vacation you enjoy? All of that adds to their overhead on top of your salary. The fixed part is that 20% overhead which is to maintain the recruiters, HR, contract admin guys who do all the work so you don't have to market yourself. As he said, if you want the full rate go off on your own, but before you do that I'd suggest you listen to some guys who talk about it. There's a .NET rocks podcast that talks about this because the guy says you can't work 100% for any given contract. You've got to be working towards the next one. So even if you go work for yourself you either work 40+ hrs or you bill at 35 hr a week and market yourself for 5+ to make sure your next gig is always there. Also, you have to factor in how much your consulting agency pays you for stuff into your salary. 0 days PTO? Well it seems like you're going to have to bump your salary by 10-15% in order to break even on a salary job? Paid overtime? Well you might knock that down a bit. It all balances out.

tptacek 8y ago
This is another reason never to bill hourly. You should set your client up to care as little as possible about the amount of time billed; they should just be paying for an outcome. You don't want to be in a position where you have to groom the amount of work you bill precisely to account for other things you have to do.
- bargl 8y ago
  This is a really good point about what the guy in .NET Rocks said. He bills for outcome not hourly and discusses before hand why his billing rate is so high. It's an awesome approach. He actually tries to find reasons not to work with client, because he's so expensive that if he can offer cheaper alternative they should go with it. Only pay if you really need to.

tptacek 8y ago

This is a useful answer and these points are well taken but unless I'm misunderstanding, I object to the underlying logic here. If you work this backwards, starting from "I can get a developer for $100k/yr", your logic re-derives cost-based pricing. And of course, a strong consultancy doesn't price its services based on the cost of its inputs, but on the packaged value it's providing to its clients. So, for example, if this consultancy found a specialist niche within which it could charge not $165/hr but rather $220/hr, you would not expect to see developer wages increase commensurately.

patio11 8y ago
I definitely agree with that point; I'm trying to anticipate the question "Why isn't their opening bid $150k given $165/hour?" (Because they'd go out of business.)
- tptacek 8y ago
  Yep, I had the same reaction. :)
- Co_Reentry 8y ago
  I usually don't comment on these threads but felt the need to jump in. While I totally understand and agree that ANY business needs to turn a profit in order to stay in the market. I fundamentally disagree with the distribution of work vs risk in proportion to profit in a traditional consultancy model. The assumption that seems to be present throughout this thread is that there is an owner/s (not necessarily the same person as the operator) present who needs to take a percentage from the bill rate. This model is inherently extractive and sets up a really bad set of incentives for the people doing the productive work. (productive in this case is actually writing code/solving client problems and maybe not doing the marketing, administrative, or sales work of the business.) I know someone is going to raise the point that there has to be an owner to put up the capital/bear the initial risk of starting up, which is totally valid! This will always be true I just think that there should be a route/way for the productive worker to work towards a piece of that ownership pie. Also, the fact that the bill rate vs pay rate is transparent is actually great. I know many staffing firms/employment agencies that keep that information hidden from thier employees. (Full disclosure I am a member-owner at a worker cooperative staffing startup staffing.coop, so I am biased towards employee ownership in general! )

alexhutcheson 8y ago

If you want a quick rule-of-thumb, all the math above simplifies out to: annual_salary = 600 * hourly_rate

stormcode 8y ago
This is pretty accurate for me thank you!
bradknowles 8y ago
So, if they bill me out at $50/hr, my equivalent annual salary should be $30,000? Because 50 * 600 does actually = $30,000.

flail 8y ago

As someone who's running an agency--even if in a different part of the world--and taking care of the financials I see a very similar pattern. More importantly, I'd second "A fair salary is the one you shake hands on." Interestingly, there may be an interesting relationship between the two observations. We are located in Poland so the numbers are not exactly the same as they are for a US-based company, yet the structure is similar. However, some of the work we do goes through a partnership agency located in US. Some of the work we do directly for US customers. So these are the same people doing the same quality work with the same efficiency. The difference in the rate for the end customer? 100%+ If they go through US-located partnership they pay double. Note: the whole setup is fully transparent for the end customer so there's no pretending that we are not who we really are. Should our people expect better salary because there's someone making a huge premium on the top of what we are making? Well, that would definitely make our business unsustainable. Can we raise our rates to a similar level when working directly with US-based customers? That doesn't work either as the premium is paid for the fact that people come through US-based consultancy. Is the work done in any different manner? No, it's exactly the same work. So we end up balancing our financials and we acknowledge that from time to time we would lose an engineer who will either jump on the independent consulting bandwagon (the leverage for them is potentially much bigger than if they were located in the US) or join US-based company remotely. Ultimately "a fair salary is the one you shake hands on." Note: we are an entirely transparent company, thus all the financial details are known to everyone and we openly discuss these matters. We also strive for fairness understood as collective fairness, i.e. if I want to earn over what is commonly perceived as the value I bring to the company I'm not getting it. Also, we share the profits with everyone at the company.

ericzawo 8y ago
Sounds like an interesting model for an agency. Have you written about this?