Wednesday, February 15, 2012

The only one you can "Beat" in a salary negotiation, is yourself

A poster on the guncounter forums pointed me to this article on salary negotiation:

Salary Negotiation: Make More Money, Be More Valued

I thought it was interesting and useful enough to share; and more than a little relevant to my current circumstances.

However, I also wanted to point out a few things the article didn't go into, or to my mind, didn't go into enough.

Unfortunately, I have recently conducted two unsuccessful salary negotiations. Unsuccessful in both cases, because both companies set a certain expectation of skill and career level coming into the interview process, but decided to try to pay at a lower career/skill level rate once it came time to negotiate.

We're not talking a small difference either; we're talking a 30% plus difference, such that their max rate for the position was below my "I can pay my bills with this" level.

I found out later talking with some contacts, that they had gone through similar issues with those two companies (both are contracting agencies). Apparently these positions have gone unfilled for a long time, because the companies have painted themselves into a corner where they can only bill so much, but the skillset and experience they need to complete the jobs are priced by the market at higher than they can bill, never mind what they are willing to pay.

That's one of the first points I wanted to bring up that wasn't addressed in the linked piece.

It's an unfortunate fact of life, that often, companies are VERY unrealistic as to what they need to pay, to get the skills and experience they need (or at least that they are asking for). Not only that, but they are often very pissy about it, acting as if you should be grateful for the opportunity to be stupidly underpaid.

DO NOT accept a job with such a company, unless you are desperate to pay your bills, and plan on finding another gig as soon as possible. Trust me, no good will come of it.

My personal recommendation, is never take a job whose takehome won't cover your bills plus 20%, AND never take a job for more than 10% below market.

You might think you can get in, wow them, and get paid what you're worth through raises in the first year or two. While that was once true, it hasn't really been true for years. These days, in most companies the only way to get more than 3%-5% a year, is to change jobs.

There is a very strong impulse to be polite in our culture; particularly when you are trying to make a good impression on a new prospective employer. A lot of people don't want to ruffle feathers or "create a bad impression" etc... in being a tough negotiator on their salary.

This feeling is entirely wrong.

You certainly don't want to be "difficult" or unreasonable, but you are negotiating for your primary source of income. If you don't ask for what you are worth, the person you are negotiating with will not respect you, and if you get the job, they will not value you as highly as you should be valued.

The linked piece mentions this, but I wanted to bring it up again for more emphasis.

There IS one major thing, which they kinda touched on but didn't specifically emphasize enough to my mind:

In a salary negotiation, the only person you can "beat" is yourself. It's not about you winning, and the company losing. If you approach it that way, you WILL be the one losing.

A salary negotiation is about coming to a mutually beneficial arrangement. A two way handshake where you are both happy with the result, and HOPEFULLY both feel you got a good deal.

Understanding the current market value of your skillset, and the position you are applying for (or for renegotiation at raise time, your current position),  your direct net economic value to the company, and your requirements for compensation, are critical to achieving the win win position.

If you don't understand what the market is paying for your skillset, or for the skillset the company is asking for (very experienced people will often find that most jobs they apply for will only use a small portion of their skillset), you need to start researching.

There are literally hundreds of web sites where you can find these things out, even for very obscure and specific skills and positions. And there's always your network of colleagues and contacts with similar skillsets and experience (and you absolutely should use their knowledge and experience to help you).

Basically, If you can't find salary data, and benefits comparison, for your skillset and career level, you aren't looking very hard.

Also remember, there are a lot of considerations other than cash compensation. The cost of living, and general quality of life in your home area (or relocation area) is a HUGE consideration. So is the amount of free time you'll have with the job, the benefits package, the non salary compensation (bonuses, profit sharing, benefits offset compensation, non-cash premiums etc...).

All of these together add up to the total package value; and it's the total package value you are negotiation. The salary is just one part of that total value.

The next part of the question is your actual cost to the company.

Your cost to the company as an employee is, as the linked article said, typically somewhere between 1.5 and 2 times your gross salary. Assume 2x for the purposes of negotiation.

Your cost to the company, must be offset by sufficient value to make you worth hiring.

Your value to the company, in revenue, cost avoidance, or cost savings; must be at least 3x your gross salary, and preferably 4x or more, for the company to realize enough value from its expenditure on you to reach a breakeven proposition (at least for large enterprises. Small businesses generally have lower overhead per employee, and also have a lower level of realized value where it's "worth it").

So, for a large enterprise, 3x is about the minimum realized value to cost multiplier for a reasonably well managed company, and smart management tries to get over 7x if they can.

That multiplier turns into a revenue per employee number; which is one way analysts judge the profitability and earnings potential of a publicly traded company.

A well managed, efficiently run company will have a MINIMUM gross revenue per employee of about $200,000. Very well managed companies are often into the $1 million or more.

Pepsico, which has very large manufacturing and transport operations (which are very inefficient business sectors overall), has an average salary of about $70,000 per year, on an average revenue per employee of just under $200,000 per year (slightly under 3x).

They are a "worst case" example, of an operation that is highly profitable, but simply cannot be much more cost efficient. They don't have any wiggle room in their employee cost, because of their huge legacy overhheads and structural inefficiencies (which are not really fixable); but they have spent decades pounding those costs down to the point that they are as efficient as they possibly can be.

Google has an average salary of about $140,000 per year on an average revenue of about $1.9 million per employee (about 13.5x). Google is a "best case" example, of a company with extremely high gross productivity, and an inherently cost efficient structure, and business segment. It's nearly impossible to be more efficient than Google; and they have a LOT of wiggle room on their employee costs.

What all that breaks down to is YES, seriously, in order to be worth hiring someone at $50,000, that person has to generate at least $150,000 or they are a at best a breakeven proposition to the company; and at least $200,000 to really be worth bothering to hire.

If you want to make $150,000 you need to be worth $600,000.

There are only two common exceptions to this rule of thumb (lots of uncommon exceptions in odd market corners though):

  1. If you are an independent contractor on 1099 or corp-to-corp, where the company you are contracting with has no benefit or tax burden associated with you, and no (or minimal) office and facilities cost to employ you. In that case you only need to provide 2x your gross salary to be a net positive value (or even 1.5x in a very small, very efficient operation, and you are relatively highly compensated).

  2. If you work for a company that provides your services as a service to other companies (a contracting agency, professional services organization or consultancy); in which case they can make money (barely) at about 25% over your gross costs to them.

    So if the company can charge $150 an hour for you, they can start making acceptable money on a gross cost of $120 an hour. Remember, there's still about a 20% overhead even on a 1099, and about a 35% overhead on a W2, presuming they are reasonably well managed and efficient; and that has to be factored into the gross cost.

    That's for very well managed, very efficient companies. A lot of places aren't so well managed, and they may have another $5 or even $10 an hour in costs; and they'll need to pay less accordingly. You will NEVER see a contracting company take less than $25 an hour on their gross cost for your labor, and they'll try to take a minimum of $35 to $40.

    Given this, if they're getting $150 an hour from the client, they're going to want a maximum labor cost of $110 an hour, but may go as high as $115, or in dire need $125. That includes your wage plus the overhead of about 20% on 1099 and about 35% on W2, so the highest they're ever going to go is something like $105 on 1099 and $95 on W2, and much more realistic is $90 1099 and $80 on W2. 

Now remember, these are the maximums they will want to pay you and still make good money off your services. They're going to want to cut that down a bit and make more money off you; and that's not exploitation, that's business.

Most companies will try to start their negotiating position at about 1/2 what they think they can make money on. So, if they can charge $150 an hour for you, and they start making money at a gross cost of $125 a hour, they're going to want to start their negotiation at around $65 an hour W2.

You know that they can still make good money on you at $85 an hour W2.

You know that the absolute maximum they could possibly pay is $95 an hour, and that's unlikely.

Those are your negotiating boundaries.

If you don't know what rate they're getting from the client, a decent rule of thumb is to take the salary of a full time permanent position in thousands, cut it in half, and that's the maximum dollars per hour they are going to want to pay you on W2.

It isn't necessary the maximum they WILL pay, but it's the maximum they will want to pay. The absolute maximum they WILL pay, is a little more complicated, and is based on how much they can charge the client, and how little they are willing to take over your rate.

On that contract they're probably charging the client about 1.5x to 1.75 times the permanent salary (though it may be as little as 1.35 to as much as 2x), divided by 2000 hours.

So, on what would be a $150,000 a year full time position; they're probably charging around $125 to $130 an hour, but may be charging as much as $150, or as little as $105 (if it's that little, it's as a loss leader or special rate for a big client, and the normal percentages go out the window. You'll probably get a max of about $65 W2 for that, about $5 more than you would max out at otherwise).

If they're charging $130, you might be able to get them up to $85 an hour 1099 but they're much more likely to top out around $80. If they're charging $150 though, you may get from $90 up to an absolute max of around $105 (again, that top number is if they're both desperate, and extremely efficient. $95 is much more realistic). On W2, you've got a range topping out at $95 or so if they're desperate, and getting $150 an hour; going down as low as somewhere in the $65-75 range if they're only getting $125 or $130.

Thus, the most they're going to want to pay you W2 is $75, but you MAY be able to negotiate up to $95; and the most they're going to want to pay 1099 is probably $90, but you may be able to negotiate up to as much as $105.

Now, one more thing...

How do you figure out your economic value to the company?

Honestly, this one is about understanding your business, not just your job, and it's something I can't help you with.

That said, it's something you ABSOLUTELY MUST be able to evaluate,  and to communicate to others. You don't necessarily need to be able to put a hard number to it (though it's very useful if you can), but you need to be able to at least understand and estimate it to within a reasonable approximation; unless you can clearly communicate that the number is well over 4x your cost to the company.

If you can't communicate your value, you will never be paid what you are worth... or anywhere near it; and you will never reach a senior level in your field.