Perm To Hourly | staffing.IQ

"How Do You Convert a Permanent Package

into an Hourly Rate?"

A Seemingly Simple Task

No matter who I ask this question to (staffing professionals, procurement folks, hiring managers, etc.), an overwhelming response has been to simply take the salary and divide it by 2080 (the amount of work hours in a year).

While theoretically the math works with this formula, it does not address the core nature of contract work. These differences will result in undervaluing a candidate by 10s of thousands.

End result?

Opportunity Costs

If you explore this idea a little more, you'll realize there are fundamental differences between how a consultant and a salaried employee is compensated.

[ 1 ] Workable Hours

Consultants only get paid for the amount of hours they clock. While there are 2080 work hours in a year (52 weeks * 40hrs/wk), there is no possible way for a person to work all these hours even if they wanted to.

Consultants don't get compensated for holidays. So when your company shuts down for July 4th, salaried folks are paid but consultants get shafted. They also don't receive PTO for vacation, so when they catch up on some R&R, it’s on their own dime. Sick Time, unless mandated by law, is also not on the table.

If we use the popular formula of dividing salary into 2080, we'll get $48.08. Now, because the consultant only worked 1800 hours a year, he'll only make $86,544 per annum. The consultant would be earning $13,456 less because of bad math.

An average person takes 35 days off work a year (holiday, vacation, illness/family, company shutdown), which brings our 2080 workable hours to 1800. In order to make $100k a year, a consultant would have to earn $55.56/hr ($100k/1800).

[ 2 ] Benefits / Perks

Consultants receive little to none. Insurance cost has increased drastically over the years and while corporations subsidize healthcare for their employees, consultants are left paying the full amount. Other items include 401k matching, pension, equity packages and reimbursements like education funds.

[ 3 ] Exceptions to the Rule

There’s been a movement toward providing consultants with some PTOs, Holidays and better perks, but those companies are far and few in between.

"So What's the Correct Formula?"

Itemize out all components of the perm package
Find the monetary value of each component
Convert each component into an hourly rate.
Pay the consultant the Sum of all hourly rates

Let's say a person makes 100k base salary and their package includes: 10% bonus, 100% matching on 401k up to $6k, 2 weeks' vacation, 11 holidays, stocks, no pension and pays $200 per bi-weekly paycheck on insurance for the entire family. How do we go about converting this into an hourly rate?

Calculations

Salary

Take the annual salary ($100k) and divide it by the amount of workable hours in a year (2080). The hourly equivalent of $100k is $48.08/hr. We will be using $48.08 as the base number for other calculations.

Bonus

10% bonus of $100k is $10k. $10k/2080 = $4.81/hr

401k

The company matches 100% of our contribution but only up to $6,000. We'll assume the person takes full advantage of this matching. $6,000/2080 = $2.89/hr

Holiday

11 days is worth $4,231.04 (11 days * 8 hrs/day * $48.08/hr). $4231.04/2080 = $2.34/hr. So even though consultants can't work on holidays (and won't be paid), by giving them an extra $2.34/hr, they're basically accruing extra pay to account for the loss.

2 weeks of vacation is worth $3,846.40 (10 days * 8 hrs/day * $48.08/hr). The vacation is equal to $1.85/hr (3846.40/2080). We are basically giving them accrued vacation time. * If your company offers unlimited PTO, then I would consider using 3 weeks.

Vacation

Stocks

These are a little more difficult to calculate. If your stocks are:

Stock Options: unless there's a secondary market to fence these shares, they're basically worthless. If they are looking to leave a startup, then there's a greater issue at hand (as in, why are they leaving such a great startup - being sarcastic here). Rule of thumb, if you can fence it, then count it. If you can't, mark it as goose egg. Zippo, nada. That's what they're worth. More on stocks here.

RSUs: Figure out their vesting schedule, % that will be vested this year and the equivalent number of shares that provides. Take the average of their 52 wk high and low stock price. Multiple the number of shares by that price. That will give you a rough estimate of what they're leaving on the table. Now take that number and divide it by 2080. You'll get an hourly rate of what the RSUs are worth this year.

ESPP: Review section on ESPP to figure out how to estimate gain. Divide that number by 2080 to find the worth of ESPP for this year.

I treat these like Stock Options. Any number promised is worthless because once you quit, you're leaving it all behind. You either waste your years behind a pair of golden handcuffs or bail and put yourself into a better situation.

Pensions

Healthcare

Find a comparable plan that closely resembles your candidate's current plan. Figure out cost of your plan (let's say it costs $1000 per month for the entire family). Determine the delta of what the candidate is currently paying and how much they will pay under you. In this scenario, the candidate pays $200 every 2 weeks, or $400 a month. Your plan costs $1000, so the delta is $600/month. Divide $600 by 160 hours a month and that gives you $3.75/hr. By paying the candidate an extra $3.75, they will not incur any extra healthcare expenses.

1. In the scenario above, we asked for an hourly equivalent of a person making 100k salary, 10% bonus, 100% 401k matching up to $6k, 2 week's vacation, 11 holidays, some form of stocks, no pension and a $400 monthly insurance fee.

2. We followed up with examples on how to break down each component into it's hourly counter-part.

3. Now all you have to do is add it up and boom, that's your equivalent. Salary (48.08) + Bonus (4.81) + 401k (2.89) + Holiday (2.34) + Vacation (1.85) + Stocks (see above) + Pensions (none) + Healthcare (3.75) = $63.72.