One of the naive arguments about salary

“You know how much we are being billed to the client. But what is our salary, it’s peanut. They should pay us more.” This is one of the arguments I hear from newbies or even experienced folks when we generally talk about salary and billing. This applies mainly to service-based companies, where knowledge is the product sold to the client and revenue is earned by billing in person-hours. There is a billing rate for every resource based on their skill set and role. This would vary from company to company, client to client.

If a resource is billed at X hours to clients, does the company owe an employee, half of it or say more than 50% of it?

Let’s see how logical it is.

When a company was in its start-up mode – it would have had a long list of angel investors who invested in it. At different stages of its growth as a start-up, VCs would have started to back it up. Then when it got publicly listed, a whole lot of the public would have bought the company’s shares. So at different stages of the company, the company was invested i.e financed by n number of people. The n number of people become part shareholders of the company. All these shareholders would expect a return on their investment. That return must be paid back from the revenue generated by the company.

So the billing rate at which a resource is billed at – it has to contribute not only to the salary of the employee, but also to paying back the shareholders.

To those who argue, the investors did nothing but I work hard to get those billing and revenue flow, if not for the investors there wouldn’t be a company that could employ you in the first place. It’s a payout on the risk the investors took when the start-up emerged into the scene with no track record.

Next, there is a certain amount of cost involved in running the company, isn’t it? Rental for office buildings, salary for billed and non-billed resources, support staffing company payout, electricity, taxes, all maintenance expenses etc, all these have to be taken out of the profit generated from the billing made on resource’s head.

So yeah next time you question why the billing rate is high, but the salary is low, include all the other parameters in the equation. It is not only about you. Unless you are a solopreneur, not every billed cost will belong to you.

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