Don't Get Your Pocket Picked

Salary expense is the most significant expense on a consulting company’s Profit and Loss Statement. Since all costs erode profit, the knee-jerk response of many company leaders is to try to minimize salary expense.   

But salary expense lumps together two different kinds of salaries: overhead and consultant. The first is a classic business expense, but the other is not as much expense as it is the ‘cost of goods sold.’

Consultants are unique because the value of their time gets appraised twice, first by their employer (the seller) and then by clients in the open market (the buyer). The latter is the ultimate judge of their value.

Failing to stay on top of each consultant's market value risks exposing them to poachers. Headhunters and competitors, who constantly troll for these disparities in pay vs. value, see the opportunity and pick the company’s pocket.

A consultant's salary is a function of the hourly rate clients are willing to pay, not a salary survey or company-wide percentage increase.

To maximize profit, consulting businesses want to charge the maximum reliably achievable billing rate for each consultant. Likewise, counterintuitive as it is, they also want to pay every consultant the maximum salary their billing rate will reliably support. If they don't, someone else probably will.

Imagine multiple clients will reliably pay $1000/hour for one of your consultants' time. Will you immediately increase their salary to a million dollars a year ($500/hour)? Don’t say no...

The same logic applies when clients would pay $30/hour more for a consultant who has earned their trust. Raise their billing rate and give that consultant the $10/hour raise the open market says they deserve. "But that'll make us less price competitive." Over time, fighting to be the cheapest consultant is a demoralizing race to the bottom and not a strategy. Think it all the way through, and you'll see. There are much better, more inspiring alternatives.

Punchline: Sit down at least once a year and focus on each person on your team, one at a time. How has their market value changed, and how is it trending? Could their billing rate be reliably increased? What could you do as a leader to accelerate their value more quickly? If a person's billing rate can be reliably increased, there's a reason. Do it! Then immediately raise their salary, unexpectedly if possible. The result will be increased revenue and profit, improved loyalty and goodwill, and elimination of the cost and risk of getting your pocket picked by a competitor. In an ideal world, every one of your consultants is billing $1,000/hour and getting paid a million dollars a year. And your business will flourish.

Cheers!

Dave

Feedback and blowback are always welcome here: dave@goodnewsfriday.com

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Written by me, not ChatGPT: speed assist and blunder avoidance by Grammarly.