My favorite article on salary negotiation of all time talks about “fully-loaded costs” of an employee. The idea is that when figuring what it costs a company to employ an engineer (or whoever) it’s short-sighted to just take their salary and multiply by time. Patrick suggests that "a reasonable guesstimate is between 150% and 200% of their salary" and that the “extra” tends upward as salary does. Of course it depends on benefits and whatnot.

Many people think that’s complete baloney. Specifically, they tend to think that the “extra” is fixed (e.g. $30k extra,) rather than a large and increasing percent of salary.

But when you’re negotiating salary, or otherwise asking, “what does an employee’s time cost a company?” he’s right. Let me explain why.

It’s not just the equity, bonus and benefits, which are already a significant and increasing percent of salary. When you ask, “what does DynaCo lose when it loses ten hours of engineer time,” you’re also including all the support staff that are required for them. That can be admins and project managers, but please don’t forget folks like HR who exist primarily to hire other employees and deal with their benefits and grievances.

For that matter, don’t forget middle management. If much of their purpose is to increase the hour-by-hour effectiveness of an employee (or manage them at a fixed effort per employee per year) then costing the company ten hours of engineer time is also costing a chunk of management time.

That’s ignoring other expenses like equipment, office rent, software services and what not — but they’re cheap on this scale. As a rule, a software company spends far more on support staff than on material goods or software.

It’s not always the case, but often you’re talking about what a company loses by not getting the time. For any good hire, that is by definition more than what the company pays for that time — an employee should make more money for the company than they cost it. And as a rule, a more senior employee will tend to have a higher multiplier, if they’re a good hire. A junior engineer could be awesome by adding 50% more revenue than they cost — the company expects them to improve, and that’s already pretty good. But a senior engineer should certainly be adding two or three times their salary in revenue (or reduced costs, or future revenue, or reduced risk, or…)

Treating the employee’s fully-loaded cost, particularly their opportunity cost, as 150%-200% of their salary is quite reasonable in most cases.

Have you already read Patrick’s article that I linked at the beginning? Remember why you care?

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