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.

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.

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! )

That this rarely happens in practice should tell you something about where the value in an established consultancy is generated.

When I consulted, delivery was only a portion of the package. Sales work isn't just "Convince the customer to buy the engagement", it often required substantial (and often speculative) work on creating proposals, doing client education ("Why should I even send email anyhow?"), scoping projects, attending conferences, writing publicly (an activity which is both marketing and produced substantial value despite not being directly billable), etc etc. Clients were not strictly buying delivery; delivery came with a bundle of requirements like e.g. having to deliver while being insured. This produces client value, because they sensibly don't want to give a commit bit to someone who could accidentally bring down the business and has no meaningful assets if sued. Warren Buffet will happily take that risk off the client's hands, to their happiness, but he won't do it for free. Clients similarly can't engage consultants without lawyers being involved. Lawyers materially de-risk engagements; de-risking is something both sides very much want; professional labor is not free. Clients benefit from receiving trade credit (the consultancy will advance you $60k of value and you pay them back months later, with no interest charged, minimal underwriting, and functionally no recourse in event of default); trade credit isn't free.

From the perspective of a W-2 consultant, the things you get from the enterprise include having predictable work lined up by people who specialize in getting gigs and scheduling them so that you can focus on delivery. The set of technologists who can deliver is much larger than the set who can both deliver and convince software companies to pay premium rates for their time. (Trivial proof that this is true: look how many delivery-focused technologists say that business owners on HN are blowing smoke about rates clients are happy to pay every time that subject comes up.) The consultancy insulates the consultant from market risk; regardless of whether the consultancy is having a good month or a bad month in pipeline or cashflow management payroll happens on the day everyone expects it to in exactly the amount they expect it to. The consultancy invests in the professional development of their employees and in the specialization of their offering on the marketplace, which specialization increases the market value of their employees while at the consultancy and in the future.

There is a way for delivery-focused employees to get ownership. It is to become a principal consultant. Some firms offer promotion tracks which get one there. The faster option, if a delivery-focused employee thinks that the enterprise is not adding value, is to walk out the door and hang out their shingle. If the delivery-focused employee was right, they immediately have 100% ownership of the enterprise. If they were wrong, oh well, capitalism happens to capitalists.

The assumption that marketing, administration and sales work of business as non-productive is an arrogant view. While as engineers, we tend to think that doing the actual work counts more than the rest, clients actually value the other stuff and would be willing to pay much more for it as well. You can easily see this with enterprise contracts that value $25k to $1m or more, where they usually have account executives, project managers, training programs, etc. in addition to the product.

> eventually get towards ownership is through increasing your billings whereby the client is hiring the productive worker, at which point, it's usually when you become a partner of the company (effectively sharing in profits and losses)

I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

> I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

You're absolutely right and I see it with my experience as well. The highest rewards don't usually tend to fall naturally and equally to everyone whom we deem to be the most productive. And while there may be few incentives to share the power in small groups, one would hope that the goodness of an individual's heart would lead them to do so.

Beyond that, consulting has low startup/asset costs, there isn't much of a barrier to entry. So if a worker at a consultancy doesn't feel like they're getting as much value as they're generating, they can always just start their own. Plenty do.

It depends on the definition of "commensurately", but assume that only some of their developers are able to fill the new lucrative niche. Would it not be in the company's interest to be willing to give those employees something like a proportional 25% raise? If they don't, isn't it likely that a competitor will eventually poach those select employees, causing the company to lose access to the niche?

The mentioned 80-120 range seems like a feasible answer to this. Push for more (or strong bonuses) if utilization is generally high. Obviously the 140% depends a bunch on location / taxes / cost of doing business etc., find out what these are in your neck of the woods and exploit it to negotiate 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.

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.

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.

If it isn't obvious, this is a bit handwavy; particular jurisdictions will have rates/requirements which materially influence the 140% figure, etc.

Paying for an office having light, power, internet, management, and a mailroom is in the 20%.

annual_salary = 600 * hourly_rate

Because 50 * 600 does actually = $30,000.

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.

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.

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"

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)

Management consulting is a very different industry than (most) coding for hire.

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.

Here's what that billing had to cover:

* My normal work hours [the thing we billed for]

* My overtime hours

* My annual bonus

* My benefits & retirement savings & overhead & employer-side taxes

* My time spent on business development & sales (most of which don't pan out)

* My time spent in training & development (probably ~4 weeks in the first year)

* The time of managers spent training & developing me

* My support staff (industry analysts, Powerpoint designers, internal experts)

* Multi-million-dollar IT investments to build tools and databases to support me in my work

* A couple first-class flights a week

* A few nights a week at expensive hotels

* Lyfts & Ubers everywhere

* All meals expensed

* The firm's partners working the case

* New employees for whom we don't bill

* Fees for market reports

* Fees for expert interviews with industry executives

* Office overhead (rent, power, insurance, etc.)

* Office support staff (HR, finance, janitors, etc.)

* Profits for the firm's equity holders

(Now a few of these expenses were billed separately I believe, but it shows the wide breadth of costs that a firm has to cover.)

Lastly, none of this opportunity would have existed without the firm, the network, the brand, and the partners. It's amazing to think that all I had to do was show up and work, and in exchange, I would get paid a high salary, get experience working with senior executives, get a prestigious brand on my resume, and accelerate my career relative to most career tracks. I don't regret the job, nor do I think it's surprising that there are crowds knocking on the door trying to get in.

Looking at other industries, I wouldn't be surprised if a cashier at a grocery store made less than 5% of what they put in the register each day. And I wouldn't be surprised if a oil drilling engineer got paid 5% of oil that they extracted each day. Even if we're the ones touching the revenue, we're still a small part of what it takes to run a big business.

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

If they can't do that, whatever the reason they can't is the answer to your question.

I can't speak to the exact numbers but that's basically how the math works. (And the reason you hopefully perform as an $800/hr consultant is that there is theoretically methodology and experience being provided by the firm behind you.)

But if the employee is getting less than 1/4, they have a good reason to look for employment elsewhere. At least in software dev.

At 1/18th, the employee should probably be interviewing with competitors as often as they are billing hours. If that does not work out, it should be possible to go independent and undercut your former employer and their colluding competitors by charging only 9 times your former salary, giving yourself 1/3 of that, and investing the rest into growing the new business, such as by poaching former colleagues and business development personnel, and offering them 1/4 to 1/3 of what they bring in.

It seems very dishonest to me to bill at near-partner rate for junior associate work. If the latter aren't that useful, making the client pay a rate as though they were doing vastly more or better work than they really are getting done is very unethical.

I personally don't think it would be fair if 1/3 of a supermarket's revenues went to the cashiers. Just because you're bringing the revenue in for a business doesn't mean your labor is irreplaceable.

In a grocery store, the direct-value employees are the procurement employees--the people who purchase the goods that go on the shelves. If they can negotiate a good wholesale buying price, the store can make a profit on reselling individual units. If they buy at a bad price, the store takes a loss when reselling.

You can measure the direct value that employee provided by adding up the final sale prices from the items in their buy, and subtracting the initial purchase, optionally adjusting one or the other with a TVM calculation. If you bought a ton of pineapples for $X, and they were all sold or discarded by the next month, bringing in a total of $Y, that's $(Y-X) in direct value. It is very reasonable for 1/3 of that number to go to the individual employee responsible.

The cashier might be able to boost $Y by ensuring that no one who would have bought pineapple walks out without one, because the check-out lines are too long, but that effect is not measurable. The produce manager and stockers might boost $Y by arranging the pineapples in an attractive way, and by pricing them to encourage them to sell before they rot, but that effect is not (easily) measurable (without testing and statistical analysis).

The procurers are responsible for $X. Many other employees are responsible for $Y, along with other unpredictable factors, such as whether or not the customers actually want any pineapple this week. Maybe some cooking show featured it in their latest episode, or maybe Dole decided to run a coupon in the latest Sunday newspaper. Maybe some scientific study reached a conclusion about bromelain, and it trickled out past the scientist-journalist barrier. It's hard to say why $Y was that number, but the purchasers can use it to inform their bargaining to get the next $X, a number more predictably under their control.

https://news.ycombinator.com/item?id=19029926

Bingo.

Also, the scale of impact that mgmt consultant provides is 'usually' greater than developers, at least on per-hour of service rendered basis. Hence, companies are willing to pay more.

1. management reads about idea/tech in mag or internet article

2. gets report from expensive research firm showing its the next big thing

3. hires big named consultation firm to prove its the right direction(which usually is just repackaging the existing employees work)

4. gets board approval

5. big checks fall from the sky

Also, if your hired to do "Analysis" understand what your role is and the real goal. Or a lot of people will get pissed when your report comes back saying how much money could be saved using open source software and the other features aren't really that important for what they're trying to do. People at big orgs don't think like small businesses and/or consumers.

I thought I was doing what they wanted. How was I supposed to know they wanted to justify a big purchase. It wasn't until I saw it happen for a 20M purchase at a much larger company that I realized the game.

18:1 does seem like a pretty high markup, but if you're working at McKinsey/Boston/Bain, you're also being paid in prestige - just like if you're working at Goldman Sachs or Skadden Arps. Because you have had a prestigious job in the past, it's much easier to be in 'the club' for other prestigious jobs in the future. It's also a big part of the carrot of eventually being a Partner/MD where you make $1m + for the last 30 years of your career.

It's hard to fathom, but as a recruiter, there's a massive inequality in the employment experience. Some people are battling to get into entry level roles, whereas others are recruited straight from college into highly paid opportunities that lead onto more of the same.

Also, there are overheads of running a company (assuming OP isn't the only employee).

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.

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.

I actually prefer that my superior talked to me like that.

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.

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.

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 jeremy@tribestaffing.co.

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.

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.

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.

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.

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.

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.

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.

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

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.

Pay your own quarterly and payroll taxes and write off your expenses. Get your own health insurance.

You’ll come out like a bandit. Since they aren’t paying payroll taxes or giving you any benefits, the spread they keep is pure profit.

So why wouldn’t they agree to $140 an hour? Why indeed..

When in that situation, I tried to earn 1/2 of that. At ~2000 hours per year, that comes to about $165k/year. Whenever making less than half, I knew that some other company would be willing to pay more for my services. This was government contracting, so your situation might be different.

How do you even go about finding those clients? I can’t help but think that they’re almost all going to be companies going through an unexpected existential crisis...

Lower means you might leave for somewhere that pays you better. Higher means the company won't be able to spend enough on business overhead, support staff, and benefits package.

You’ve got a $99,000 job including the value of benefits and bonuses.

You get what you negotiate.