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.
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
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?