Dear Matt: Our company bills $160 per hour for my work, but I only make $30 per hour of that. Plus two employees with less experience make more than me per hour. How does this happen?
Matt says: How companies determine compensation goes far beyond hourly wage and billable rate, and that’s why trying to figure out the magic equation that determines your own salary is difficult. “Compensation is often complicated,” says human capital consultant and HR professional Elliot Lasson. “It includes base salary, bonus, commission, benefits, deferred compensation, stock options and vacation.”
Comparing one employee to another is not always apples-to-apples, says Lasson. One employee may elect to receive more cash but less benefits coverage, and that’s why more employers are focusing on total compensation rather than straight pay per hour or yearly salary when making offers to employees.
There are a number of factors to be considered in determining the pay rate for employees whose time is billed externally to a client, says certified compensation consultant Joe Kager, managing consultant and founder of the POE Group. Billing rates are typically two to four times the compensation paid to externally billable positions, and the difference in the salaries employees are actually paid is determined by factors such as individual performance, tenure, experience, skill acquisition and negotiation.
“Generally, employee pay levels are driven by market-competitive rates,” says Kager. “Externally billable employees are paid less than the rate the company receives from the client to account for all of the additional costs in running the business. These include the compensation of employees that are not externally billable, the cost of benefits and the infrastructure costs of the business.”
In a survey by global outplacement firm Challenger, Gray & Christmas, 55 percent of HR executives said that companies should practice some form of salary transparency — making individual salaries open to company employees or public information — but 39 percent were opposed to opening the books on salaries. “There are countless pitfalls related to practicing salary transparency,” said John A. Challenger, chief executive officer of Challenger, Gray & Christmas. “Even minor discrepancies between co-workers’ salaries can lead to resentment and conflicts over who earns what.”
Instead of worrying about what the person next to you makes, focus on mastering the art of salary negotiation, and once hired, focus on adding new skills. “The person with the higher salary may possess a unique or in-demand skill or it may have taken a higher salary offer to lure the worker from his or her previous employer,” says Challenger. “It simply may be that the higher earner was a better negotiator.”
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