Ask HN: If my company bills me out at $165/hr what should my salary be?

[isthispermanent]

I work as a client-facing software consultant for a medium-sized firm. They bill me out at $165/hr. What would a fair salary given that number be or how should I think about my salary relative to that number?

SKILLSET UPDATE: - I work across both mobile and front-end projects writing major features on multi-month projects in iOS/Java/Typescript/React/Angular. - I am the only mobile person in the entire company and am one of two that has a Mac (the only real way to dev iOS). - I've also contributed to mid-tier areas in C#. - I've always delivered.

[patio11]

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.

[tptacek]

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.

[bargl]

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.

[qualsiasi]

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

[harryh]

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.

[alexhutcheson]

If you want a quick rule-of-thumb, all the math above simplifies out to:

annual_salary = 600 * hourly_rate

[flail]

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.

[mark_element]

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]

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

[tptacek]

As a W2 employee, your bill rate is not really your problem and only a secondary factor in how much your total comp will be. Given the same set of delivery staff, a strong consultancy might generate high bill rates, and a weaker one lower rates. The work is the same; as a full-time employee, your point of reference for your own comp isn't what the company earns, but rather what full-time people like you earn elsewhere. If people with your skillset and experience and capability generally earn $170/hr, it doesn't matter that the consultancy only makes $165/hr. Similarly, if they tend to make $90/hr, it doesn't matter that their firm makes almost 2x that in bill rate.

I'd also caution that people have weird ideas of how bill rates correlate to salaries. If you strike out on your own to do a solo consultancy (strongly consider doing that sometime!), you should know that whatever your FT salary was in your previous job, your bill rate should be drastically higher. It should account for:

* Your increased cost basis w/r/t taxes, facilities, vacation and "PTO", expenses, and benefits, which you'll now be on the hook for

* Your ample downtime --- a well-managed consultancy running in steady state at reasonable scale might expect 70% utilization across its staff, and a fledgling consultancy might struggle to break 50%

* The work you'll be putting in to source and close consulting engagements

* The substantial extra risk you're taking on by being a technical delivery person that can be "fired" (you're never really fired, just released) on a whim with little notice, which risk is something you as a consultant are selling.

People sometimes use a rule of thumb of 2x your full-time salary as a target consulting rate. I think that's lowballing it.

Always, these specific questions are best answered by consulting the market directly, not by asking for an axiomatic derivation of what a skillset is currently worth.

[seem_2211]

I run a small business, and the one thing I was not prepared for, vs being an individual contributor - there is SO much random stuff that pops up. Paperwork, compliance stuff, HR stuff, planning stuff, finance stuff, making sure that you've been doing enough sales. Oh and it's all urgent. And almost all of it is menial. But needs to be done in the next few days.

There's a world of difference in being an IC and running a shop. Reminds me a comment I saw on HN a while ago - "Oh you like writing software and want to start a SaaS business? Great, now writing software is 10% of what you do"

[tixocloud]

Very much agreed ever since I decided to build a startup.

[chrisgoman]

Normally, your salary is 1/3 your billable rate (for most industries). So approx $55/hr

1/3 goes to salary, 1/3 goes to overhead and 1/3 goes to profit. Overhead includes the hours you are not getting billed out (paperwork, internal work, etc.) and also fixed costs for the company (office, vacation, sick, PTO). Profit normally goes to the owner and retained earnings (savings for a rainy day for the company)

[tedsanders]

As a management consultant, I was billed out at about $875/hr. My salary was about $50/hr. That's a ratio of about 18:1. This felt fair to me. The billing had to cover a lot more than my salary.

[DATACOMMANDER]

Wow. Your time was valuable enough to be billed at nearly a grand an hour, and you didn’t think you could do significant better than $50/h working for yourself? The other commenters in this thread seem to think that a ratio of roughly 3:1 is normal for a coder. Why do you think the difference is so huge?

[josephjrobison]

Now that is quite the markup.

Can you provide details on what categories the billing would also cover? I'd imagine it would be flights, hotel rooms, equipment, transportation, meals, remote offices, etc.

[aantix]

How is that remotely fair?

The company has the expectations for you to perform as an $800+/hr consultant, and your return for that effort is $50/hr?

[onetimemanytime]

Fair might not be the right word, $825 an hour covers the rest and then some. The thing is that they can get away with charging that much, and based on your skills /competition at that time, $50 was a good rate for you to pocket.

[kator]

I consulted for many years of my career and my general rule of thumb is bill at a rate of what you want your annual comp to be divided by 1,000 ($165k/yr / 1000 = $165/hr). This is based on the basic concept of 50% billable or a bit higher with overhead. If you're doing independent you will need to bake in insurance (health and liability), taxes and other costs of running your business. If you beat the 50% billable you're in the money, if you don't then it might be time to find a job.

In your situation if your company bills you out at $165/hr I would push for total comp of $165k (base + bonus + insurance + other benefits). Remember to also factor in risk/reward, if you don’t mind all the risk you can go independent and reap more of what you bill, but if you’re worried about not landing customers then you should consider a job with a company that has a pipeline and can get you billed out quickly. That said don’t overestimate the “safety” of working for a company, if you don’t bill well or they have issues they’ll fire you in an instant.

As a side note when talking to people about setting up their own consulting gig I always remind them that customers pay for what the perceived value is of a resource. If you ask for $75/hr billing you may not get the gig but ask for $250/hr and shockingly they might sign you tomorrow morning. There is an interesting balance between perceived value, asking price and what people will pay vs what they expect to pay. Your asking price actually communicates your confidence you can deliver, and customers have a built in bias on this front and will make pre-conceived judgements based on this simple part of the overall negotiation.

[ddebernardy]

Counter question for you: what can you charge when you're selling yourself? If you're unable to charge anything close to your expected salary as a consultant, then you're de facto answering your own question.

For clarification, I'm not suggesting you're a cog or that you're providing no value. Just that, it's easy as a knowledge worker to fall into the trap of thinking you're delivering more value than you actually are. I've seen this happen in each of engineering, sales, and marketing departments. I can only imagine it's true in other corporate functions. (Part of me would have wanted to make an exception for HR, but I know more than a few HR folks who deluded themselves into getting in that field to make things better for the rest of us, and as a manger I'd put forward that HR actually does come in handy as a business function.)

The truth is that, in reasonably well functioning companies, the various departments are pulling their weight (admittedly more or less well) more often than not. And a surefire way to sink a company is when a department decides they're a worth a lot more than some other guys over there. (You'll eventually get fired over this if that is your mindset. As your manager I'd give you a single strike before giving you the boot; it's that toxic.)

Point is, your company is providing value by selling your skills -- by finding relevant clients and closing them, neither of which are easy. And they've spent money to recruit you, are continuing to spend money to manage you and invoice for you and pay you and pay taxes on your behalf if applicable and extend vacation time and what have you.

If you believe the added value is not high enough and wish to get paid more, then it's fair game -- ask for one, if only because you never get anything without asking. But keep in mind that the surefire way to get a raise isn't to ask for one; it is to resign and sell yourself to the same types of companies. It's not easy, but quite doable; just think it through, thoroughly, before giving it a go.

[brycehamrick]

I'm a business owner, and I've had disputes with employees based on our gross collections vs. the employees pay MANY times, the reality is this: Your value in what you do is based on what the market is willing to pay you. It's not based on what the market is paying ME for work you're contributing to. Your pay isn't based on my gross collections minus costs. No part of what I collect from customers are you entitled to. I hired you for a job, at a rate we agreed to, and if you believe you are owed more I welcome you to see what the market offers you.

[socalnate1]

While everything you said here is correct; I hope you've found a way to communicate a bit more gently than what you wrote above.

[jjcinaz]

Such a correlation is difficult to draw from that single data point. You could look at the entire business model to get a better idea but in reality it’s not about that at all. Really it’s just what would the company have to pay to replace you? If it’s easy to find someone who can do the same job for the equal or lower salary then you have your answer.

There will be a range of salaries for your job position in your market. You should evaluate your total compensation against these to help you decide if you are fairly compensated.

[kxyvr]

It's hard to tell without more information, but here are some general rules of thumb. Most companies have a multiplier based on salary on how much an employee really costs. Small, efficient companies have a multiplier a little over 2. Large organizations and the government tend to have a multiplier at a little over 3. The overhead covers everything from benefits such as health and 401k to keeping the lights on to paying for secretarial staff and management. Running a business is a team. That said, these numbers don't really include true profit, so it's important to factor that in as well.

Now, say we assume a multiplier of 2.1, that puts the upper bound at $78/hr. You're never going to make that because it means the owner is not making their profit and not that many companies are that efficient. If their multiplier was 3.1, it puts the bound at $53/hr, but again that still doesn't take into account profit. As such, my off the cuff guess would be somewhere between $30-60/hr.

And, to be sure, this shouldn't imply anything about the morality of that decision of salary. However, it has been helpful for me to think about salaries and multipliers when bidding on contracts because it tells me how much a company is willing to pay.

[sdroadie]

I've read through most of the threads, and the responses here are interesting. While some people have made cogent points about the role of prestige in consulting (this being the reason firms like McKinsey can charge what they do), I really don't think that the pay differential is as reasonable as people tend to think. In general, I think it's unreasonable and extractive. Most businesses aren't McKinsey.

From what I've seen and lived, there is, at best, a weak correlation between someone's pay rate and what they're billed at. One company I worked at charged 5x my rate for projects. It was usually explained away as "a blended group rate." More often than not, I was the only developer on those contracts.

I wouldn't claim to be an expert on the economics involved, but I'd wager that the pay rate/bill rate ratio is, in most cases, due to layers of management, and a lack of transparency and automation. I'm trying my hand at combatting this at the startup/coop I founded. If anyone is interested in chatting about this, screaming at me about how I'm wrong, or learning more about the business, send me an email at [email protected].

[oliwarner]

Whatever they're willing to pay and you're willing to accept. Likely less than they're billing your time for.

Just remember that the company has costs on that time. Both through direct tax on the income but employers also tend to pay out for things like your space, hardware, liability insurance, and other intangible benefits you get while employed.

The expectation of work from an agency is also significantly different than a freelancer. When you're talking to a lone wolf, you expect a level of flakiness, perhaps you'll need to be more hands on to manage them through your requirements. With a digital agency, I would expect that money to cover the local management of you. And if you screw up, I expect the work to be put right for no additional fee. I also expect their liability insurance to be a lot sturdier than a freelancers.

All this stuff is essentially what would be covered by introductory sales contracts. I don't think I've done work with an agency that hasn't tried to —on day one or two— laid out a vast document of everything that isn't going to be their responsibility. These cause endless fun in negotiations. And as part of this, I also understand that part of the $165 is going into the pocket of the jobsworth sales team who just happened to take my call.

I've worked with and for agencies. The bad ones are horrible places places for developers. Very rarely will an agency developer have enough freedom to do something good enough that it makes a sale. Not in the way that Art and Sales teams can. It's an unfortunate truth that managers are more than willing —IME— to exploit.

That is not to say you're not worth more than you're being paid. As I lead, pay is entirely negotiable. Understanding your actual value to the employer is critical to extracting the best salary though.

[wilkskyes]

$80/hr, no more, but possibly less.

The number they bill you out at matters, but not for reasons you think. You do not want to work somewhere that cannot make at least twice as much money as what they pay you. Growth will be anemic, and long term job stability will be a problem. You may eventually be fired and replaced with someone cheaper. Most of your skills are commodities.

Ideally, you want to work somewhere that can make even 3 or 4 times as much money as your salary. This will ensure a healthy cash flow and gives enough headroom to hire more people, and ultimately win big contracts with big clients (millions).

If they cannot make at least 2x of your salary, they are either a new company with little to no reputation or a bad sales process.

And do not even think about striking out on your own trying to get a full $165/hr salary. For one, you will have more expenses and taxes to deal with, and two if you do not have a strong sales skillset you will struggle to bill at those rates and ultimately get starved out.

[swanson]

Roughly $100k (+/- 15% based on performance, tenure, location, company financial health, etc)

Salaries usually cap out at $130k-$150k for the role of "writing the code" at general software consulting at small-medium (5-150 person) "agile" shops. Likely higher at speciality shops, but I can't speak to that.

[zackmorris]

As a rule of thumb, I've observed that most businesses charge between 2-4 times as much as the employee is paid for hourly work. So without more information on overhead etc, $41.25 to $82.5 per hour seems fair in your case.

However, it can be a lot worse than that in non-tech locations. Where I live, you often see $60-100 hourly rates in shops where employees are only paid $15/hr. Each business you see on the street supports roughly 1 family, so they might use turnover or other techniques to stay in business for the long term while paying wages that are below the going rate. I'm wary of jobs now that convey a feeling of owing something to the employer, as this correlates with subpar pay. The best jobs that I've had have felt very mutually beneficial to employer and employee.

[bhouston]

When I started in business, I learned that you should charge out employees 3x salary or better is a good rate if you wanted to grow and be viewed as a viable service business. If you charge out at 2x salary you are going to roughly breaking even at the business level. If you charge out less than 2x salary it is a going out of business rate.

I think this is still reasonable advice.

The reason is there is significant overhead. In benefits, support services, equipment, employer matching taxes, HR, building, hiring, write-offs, and even getting the contracts and maintaining them. It is hard to charge out the time of someone negotiating the contract, or dealing with customer complaints, sending out billing, following up on unpaid bills (collections), not to mention the cost of sales, etc.

[crikli]

I'm going to do the math below, but your employer very likely isn't billing highly enough.

Most employees top out billing 80% of time, so 32 hours. Assuming that, you're generating $5280 / week or $21,120 / month. Agencies need to be shooting to bill 3x of _actual_ hourly employee cost (this is target and I can elucidate if people are curious). Therefore your cost needs to be $7040 a month. 20% of your cost is wrapped up in health benefits, vacation time, and other perqs, so your hourly wage will be determined by that figure. Less the cost of perqs your hourly cost will need to be $5632 / month, or $35.20 per hour. That's a salary of about $70,400 per year assuming a 2000 hour year.

[raincom]

It all depends on what kind of medium-sized firm it is. Is it some kind of semi-staffing company (like taos.com)? If it is, you need to get paid 80% (1099 rates), as such companies let you go once they can't get you projects.

If you look at big 4 consulting firms, the partners get huge contracts like SAP implementations, here that 70-80% formula won't work. The partner takes home more money, when he gets fat contracts and executes them. You can expect some kind of job security in these companies, compared to the above type.

[apohn]

I can give you some rough numbers for a company I used to work with a few years ago in the USA. Billed Customers at $225 an hour. Consultants were typically paid Between $45 - $65 when you include bonuses for billable hours beyond X%. 3 weeks vacation was standard and healthcare was great with very low employee premiums and low copays.

There was a "Principal Consultant" level where the salary was disconnected from the bailable rate because they were heavily involved in selling services.

[USNetizen]

These two things are not related. There is a lot more than salary and benefits that go into an hourly billing number. There is no way anyone would know for sure what salary they set unless we somehow knew their overhead, G&A, fringe and other indirect allocations.

They bill $X so I should get paid $X is not how the industry operates - there is so much more that needs to be considered here.

Anyone who has owned a company that specializes in services or even worked long-term as a 1099 could confirm this.