The Math of Moving from Hourly to Salary

Not a complex question, but often oversimplified:

Not to worry, this will not be some heady deep-dive into salary calculations or tax advice. This is just some baseline wisdom when someone asks an hourly contractor “what do you want to make in salary”?

Firstly, it’s a simple question with complex answers, so you will want to avoid oversimplifying lest you miss the mark completely and overprice yourself in the job market. There is often a disconnect between hourly consulting rates and permanent salaries, and this doesn’t just have to do with the math (something I’ll go into in another segment called “The Compensation Disconnect in Professional Services”.

When you’re asked what you want to make, it’s tempting to simply take your hourly rate and multiply it by the standard 2,080 hours in a year and arrive at an annual salary figure. But this is just the first step, and you have further questions to ask yourself about the cost of being a contractor.

Factors that can be monetized:

• Are you paid for your days off? If you’re only paid for the hours you work, with no paid time off benefits, then you have to factor in your average time away from work in a year. Also, are you ever “furloughed” for several days or weeks? Companies may furlough their contracted hourly employees during project hiatus or over the holidays to avoid cost overruns. This can account for up to a month of unpaid time in a year in some cases.
• Do you work the entire year? Often times consultants in niche skill sets may find themselves between engagements for weeks or months at a time. So earning has to be prorated. You can't say you make a full year's salary when the opportunity to work an entire year isn't there for you. Although this makes for built-in vacations, it also means a lot of effort on your part to set aside money for such periods.
• Do you pay 100% of your own benefits? If your employer doesn’t subsidize the cost of your benefits (including health, life, dental, 401k matching, vision, etc.) then this cost can be the largest amount you need to factor in. But be careful and don’t allow for too much. Most companies will subsidize only between 50% and 70%, so you would still end up paying something even with a full-time salary position. The point here is that benefits often account for a major outlay of cost for being a contractor. Standard coverage for an individual might be over $600 a month, and for a family it can easily top $1200 a month in some cases. So factor in half of that as your “cost of being a contractor”, because a fulltime job would at least cover that much. And the cost of life insurance is often 100% subsidized by an employer for up to one year’s salary.
• Are some benefits harder to obtain as a contractor? For instance, Short-Term Disability and Long-Term Disability are standard corporate offerings, but you may find that you have to turn to specialty supplemental insurance companies to get similar benefits at a more prohibitive cost. Even if you are a W2 Hourly employee of a company, such benefits may not be part of their portfolio. Also, there is often no 401k matching available to hourly contractors.

Intangibles:

• Do you have opportunity for career path advancement? It’s a common misconception that hourly contractors or independent consultants don’t have career path aspirations. But the problem is that companies that employ them aren’t concerned about their development. Such employees are there to do a job, and are often times not even offered any type of regular performance feedback.
• Do you have job security as a contractor? It depends. If you’re in a stable industry domain, for instance Public Sector, you may have plenty of job security, especially if your job requires some sort level of clearance. But if you’re in the more volatile private sector, you may have experienced more than once the whims of market pressure and fading budget priority. This can be a two-fold challenge for contractors: a. Although many companies adhere to professional protocols and try to give notice, in some cases they simply can’t; projects can end abruptly when they run out of funding approval, and you’re instantly out of a job.  b.  As a contractor, the only severance cushion you have is the one you make for yourself. This means dutifully saving for a rainy day.

It may be prudent to do some math for yourself to figure out what you’re really taking home as an hourly contractor before you answer the questions “what are you making?” and “what do you want to make?” If you find yourself surprised by the question and haven’t done this kind of calculation yet, a good rule of thumb is to subtract 10-15% from the 2,080 hours times hourly rate formula.

In the end, however, the main question for any job offer is about the opportunity, not the money. Yes, you may not be in a position to lose much ground financially, but if you do the math on what they are offering you, and then factor in where that job could take you in the future versus staying an hourly contractor, you may find that the permanent job offer may answer all of your current and future questions about compensation. Or, you may find it’s not worth pursuing on the merits of the opportunity. In any case, the math is just part of the equation.

Cheers and happy hunting.