Salary's open secret
After one is through with all the client interviews then comes the one of the toughest and confusing part of each consulting employment. This second part of series Understanding Job Packages, where I had explained Job packages.
Let us deduce some terms which will be useful in helping establish a logical relationship between hourly rate of Salaried employment(annual salary converted to hourly rate) and Hourly employment :
1. Salaried Employment:
In Salaried employment, employer agrees to pay X amount/annum + benefits(paid vacation, paid national holidays, medical insurance, 401k contribution etc). If we divide X amount by total non-weekends hours in a year then that becomes hourly rate of Salaried employee.
2. Hourly Employment:
In Hourly employment, employer agrees to pay Y amount/hr to its employees with minimal or no benefits.
3.Standard annual working hours
An average year for consulting industry consists of 365 days, 52.5 weeks. By this assumption there are total [365 - 52.5 * 2 ( Saturday, Sunday) ] = 260 working days in a year which translates to [260 * 8] = 2080 hours.
Though an average year consists of 365.242199 days or 52.177457 weeks, I have taken 365/year and 52.5/year, which is prevalent in the industry, for deducing the total working hours.
4. National Holidays:
United States observes on an average of 11 national holidays each year. However, not all companies and all states are bound to observe all these 11 holidays. Some companies observe 7 days of holidays, some 12 days, some 9 days, and some just 8 days. Lets be little conservative and assume an average of 9 national holidays being observed by a typical company each year.
Different company have different kinds of vacation policy to their employees and when it comes to our desi companies its little more unpredictable. Some compananies have 1 week annual vacation policy some 2 weeks and some even 3 weeks. This also varies with employees longevity with the company. Lets take an average of 2 weeks(10 working days) of annual vacation that a company gives to its employees.
There are different kinds of health insurances in the market. However, one simple rule govers the industry. More you pay, better risk coverage you get. For an induvidual one can get a health insurance from $150/month to $500/month or even more. Lets take average of $300/month as health insurance of individuals. For family this figure doubles or even more.
Employee gets paid for all National Holidays ( 9 working days) , gets 2 weeks of vacation(10 working days) and has to bear 100% of his/her medical insurance
One get paid for only hours you put at work and one has to bear one's 100% medical insurance expenses. Hourly employee doesn't get paid for national holidays and has to bear expenses for annual vacations.
Just to deduce an equivalance between hourly and salaried rate, lets assume employee doesn't work on all national holidays and enjoyes 2 weeks annual vacation(self supported in hourly case and companied paid in salaried case).
Here a Salaried employee works for [2080-(9+10)*8]=1928 hours yearly and get paid for 2080 hours whereas Hourly based employee works for 1928 hours yearly and gets paid for just that many hours.
Lets say H is hourly rate of employee and S is hourly rate of salaried employee.
1928 * H =2080 * S
Or Hourly rate is 7.8% more than its salaried rate.
If S=50/hr then H=53.90/hr (3.90/hr more than its salaried counterpart)
If S=60/hr then H=64.68/hr (4.68/hr more than its salaried counterpart)
If S=70/hr then H=75.46/hr (5.46/hr more than its salaried counterpart)
i.e. Hourly based employee gets an average of 4.68/hr more than its salaried counterpart.
Employee gets paid for all National Holidays (9 working days) , gets 2 weeks of vacation(10 working days) and has to bear 50% of his/her medical insurance i.e. Company pays (300/2)*12 = 1800/year for employee's medical insurance. That is employer is paying 1800/2080=0.86/hr towards employee's medical insurance.
Same as in case 1.
From case 1:
H =1.078*S ----------------------(1)
Adding 0.86 on both sides of (1)[50% medical insurance covered by employer]:
H + 0.86 =1.078*S + 0.86 [ Employer bears 50% health insurance ]
h =1.078*S + 0.86 [ Employer bears 50% health insurance ]
where h being the new hourly rate of Hourly based employee.
Adding 1.72 on both sides of (1) [100% medical insurance covered by employer]:
H + 1.72 =1.078*S + 1.72 [ Employer bears 100% health insurance ]
h =1.078*S + 1.72 [ Employer bears 100% health insurance ]
where h being the new hourly rate of Hourly based employee.
With 50% medical insurance covered by employer:
If S=50/hr then h=54.76/hr (4.76/hr more than its salaried counterpart)
If S=60/hr then h=65.54/hr (5.54/hr more than its salaried counterpart)
If S=70/hr then h=76.32/hr (6.32/hr more than its salaried counterpart)
i.e. Hourly based employee gets an average of 5.54/hr more than its salaried counterpart.
With 100% medical insurance covered by employer:
If S=50/hr then h=55.62/hr (5.62/hr more than its salaried counterpart)
If S=60/hr then h=66.40/hr (6.40/hr more than its salaried counterpart)
If S=70/hr then h=77.18/hr (7.18/hr more than its salaried counterpart)
i.e. Hourly based employee gets an average of 6.40/hr more than its salaried counterpart.
There are many other employer expenditures on its employees that I haven't considered here just to make our case very simple. These expenditure could be in any form. E.g Expenses towards employee H1B filing/transfer, relocation expenses, temporary accomodation expenditure, 401K contribution, life insurance, disability insurance or even increased health insurance to cover employee's family etc.
It can be concluded that as the employer's expenses towards employee increases so does the gap between hourly rate of Salaried employee and Hourly employee. In Hourly based employment employer gives all money to its employee mostly in the form of increased hourly rate whereas in Salaried based employment employee gets the same money in different forms, lower hourly rate(annual salary converted to hourly rate)+benefits.
These views are personal and I take no responsibility for any content errors or other damages arising out of employing these views/tips.