Is There a Rule of Thumb for the Amount of Money Your Employer is Making Off Your Effort?

October 7, 2004 4:01 AM

Is there a rule of thumb for the amount of money your employer is making off your effort? (MI)

In other words it's a general rule in retail that most items in a store are marked up at least 100%. Is there something similar for employees? In other words, let's say I'm offered a job for 20k a year. Does that mean my employer is making 40k from the work I'm doing? Or am I comparing apples and oranges?

posted by jeremias to work & money (15 comments total)

It's not quite the same. I was outsourced by my company to a client at a rate approximately six times what I was earning. However, the client weren't simply paying for me, but also for the admin back-up that comes along with me (not that I was using anyone, but there are always knock-on implications), the security that comes with paying a company for me rather than an individual, insurance, negligence responsibility and God knows what else.

My point being you have to be carefil with thinking "why am I only being paid this if they are earning that from my endeavour?" It isn't anywhere near so simple.

Six times was the rate in a building services engineering context. I'm sure such rates would order massively depending on industry and level of experience.
posted by nthdegx at 4:34 AM on October 7, 2004

More than you are. :-)
posted by NotMyselfRightNow at 5:20 AM on October 7, 2004

There's always a markup, but as nthdegx says, it's not easy to quantify. After all, the power of a company comes from producing something greater than the sum of its parts (employees).

But, yes, a successful business will always make a profit on an employee. Those who employ people to sit around doing very little tend to go the way of the dot-coms or have profitable divisions which can prop up the quieter ones.

Indeed, one of the best ways to sell yourself when trying to get a job is to demonstrate how you can make more for the company than your salary. If you can do this convincingly, it's a no-brainer to hire you.
posted by wackybrit at 5:30 AM on October 7, 2004

I'm fairly intimately acquainted with what goes into the rates that my employers charge versus what they pay their employees and what they pay for their employees. All of which is massively confidential so I can't say that much about it, except I will say this: think of all the backend things that that rate has to be paying for, in addition to the employees salary. Once you've thought of all the things, think for another 10 minutes to come up with the ones you missed. Now double it. You're now getting close to how much it really costs to keep an employee.
posted by jacquilynne at 5:31 AM on October 7, 2004

Depends on your effort.
posted by luser at 6:34 AM on October 7, 2004

There are so many jobs out there which do not directly lead to profit that this is sort of an odd question.

Back when I was in school I worked two summers a row for a company building a diamond mine. During those two years they were in construction and not making a cent, but they had many many employees.

Now they have employees who work the machinery that gets the diamonds out of the ground, but there is still quite a large support staff who never see a diamond. How would you calculate how much money everyone is bringing in and why should that be relevant to salary? There are probably some positions (VP finance?) arguably more valuable, but not responsible for direct income.

I guess your question is more for service industry only?
posted by ODiV at 6:48 AM on October 7, 2004

Oh, and the real answer is "As much as they can."
posted by ODiV at 6:49 AM on October 7, 2004

I've heard numbers like salary costs should be less than half or even a third of gross revenue for software firms, so you "make" 2 or 3 times your salary for the company. Corel, in the person of Michael Copland, claimed that they were getting upwards six times at the height of the boom, which partly explains why they were so foolhardy with their money.

Charge-out rates are a completely different ball of wax. On one hand you have to cover your costs, at least triple the salary of the employee. We charge out at roughly 5x salary. In reality though, what ODiV said.
posted by bonehead at 8:20 AM on October 7, 2004

When I worked for a small company (early 90's) and was contracted out, my employer charged 3x my hourly salary. Interestingly, I was not given any overtime pay even though we charged the customer for it (I'm one of those "salaried exempt" workers). It was almost enough for me to start my own business but I was able to find a job that gave me a significant increase so I never did.
posted by tommasz at 9:18 AM on October 7, 2004

wal-mart has margins of only about 30%, not 100%.

investors look for at least 20% returns, according to my step-dad.

all the rates that are higher than 20-30% aren't adding their own costs into the manufacturing/purchase cost. wal-mart, for instance, already works in payroll, distribution, etc. to their costs, so that 30% is above and beyond that.
posted by taumeson at 9:20 AM on October 7, 2004

I am a net cost to my employer. However, without someone to do what I do, my employer's costs -- in terms of defect and failure rate, higher servicing cost, and late time to market -- would rise many times higher than my pay.

I don't sell anything directly, nor do I make the product, but I do contribute to its marketability far beyond the cost of my salary and benefits.
posted by majick at 10:33 AM on October 7, 2004

From when I started out at my first job, my employers have always charged about 5x my salary to our clients. My field is oriented towards billable hours.
posted by LionIndex at 10:43 AM on October 7, 2004

.. there is still quite a large support staff who never see a diamond. How would you calculate how much money everyone is bringing in and why should that be relevant to salary?

It is easy to make the false assumption that if it's not easy to see how someone is making money for the company, then they aren't. However, you can (or must be able to) turn any employee into a definable $$ value.

Take the canteen workers at the diamond mine. They don't handle diamonds. They even feed people who don't handle diamonds. If there were no canteen on-site people would have to leave and find lunch elsewhere. This would take them a longer time than eating on-site, leading to a loss of workhours. If productivity would be $10000 a day less without an in-house canteen, the break-even point for a canteen is $10000 in costs. If there were no canteen on-site, and people weren't given enough time to eat off-site, or weren't allowed to leave, they'd begin to quit, or file lawsuits based on worker treatment. Again, this would cost $$ which the in-house canteen is removing from the picture.

If you can't figure out what an employee is worth, split the company up into multiple companies and determine how they define on each other. This is what a good CEO does, and is how most companies are put together. Everyone must have a purposes, everyone must have a value, and everyone must be earning their keep.
posted by wackybrit at 10:55 AM on October 7, 2004

Two to three times salary is pretty common for consulting firms.

This sounds excessive, but most firms don't manage to bill more than 60 or 70% of employee time. When you add in the overheads of offices, support staff, management and rapidly depreciating IT capex, the profit margin is not as great as all that.

As to what you should be paid - assuming a free labour market, you should be paid enough that you will continue to do the job and not leave. Since hiring replacement staff is expensive, an employer should add a reasonable margin on to that. And if that means that they can't make a profit, then there's something wrong with the business.

There is NO relationship with how much the employer makes off you, other than if they can't make enough, they can't stay in business.

When people say "retail markup is 100%" or I say "charge your developers at 250% of their hourly rate" that's NOT a moral rule, or a convention, or anything; it's just what tends to work in our line of business if a company is to stay profitable. In some specialised retail lines, like groceries or PCs, margins are razor thin, less than 5%; in others, like antiques, they're enourmous. (In general, the slower the turnover, the bigger the margin you need). Same goes for employees; it'll depend on the nature of the business. There is no "ought" to it though.
posted by i_am_joe's_spleen at 12:56 AM on October 8, 2004

I agree it's very variable. I've worked in law firms where the attorneys were billed at $300 an hour 35 hours a week, but their salary was maybe $80 K - $90K per year. Of course, the rate is kind of meaningless, since the client was really paying not just the attorney, but probably at least part time for another associate, a paralegal, a clerk, an admin . . .
For IT work, it seems a lot of firms bill 3 to 4 times what the worker gets. Again, there are a lot of variables - for instance, if the worker is a consultant, the firm may be paying him or her $40 an hour versus them costing perhaps $28 an hour if they are on staff.
You have to also remember in you example, 20 K a year, there are a lot of other costs to the employer besides salary. Their share of your income tax, FICA, unemployment tax, healthcare premiums, etc. So your "cost" may really be something like $30 K per year.
posted by sixdifferentways at 2:45 AM on October 8, 2004