During my day as a recruiter in the Healthcare IT consulting industry, I talk a lot (!) about employment styles specifically full time employment versus hourly contracting. For some background on the differences between them, check out this post I wrote a few months ago. Shameless, self-promotion moment.
Of course, the main difference is compensation, salaried usually with bonus and benefits versus an hourly rate respectively. Obviously hourly contractors are earning more dollars in the bank each week; however, have you ever really looked at what paid vacation, holidays, and a 401K match is worth? Below is a brief, hypothetical analysis of the two compensation models using typical salaried and hourly rates, bonus percentages, and benefit(s) costs.
For our example, let’s say use a full time salary of $140,000 vs. an hourly rate of $100/hour. Using a standard Human Resources working year, 2,080 hours per year, that’s $140,000 = $67.31/hour and $208,000 = $100/hour. When comparing annualized earnings, that’s a difference of $68,000, a deficit for the full time salary. Wow, that’s a lot, but is it really?
It’s important to consider other elements in a compensation package such as benefits, 401K with possible company match, paid time off, cell phone reimbursement, and utilization and discretionary bonuses. If you are a full time employee in consulting, you’ll have a base salary and bonus potential usually based on utilization and then secondary factors such as add-on sales, management objectives, or performance incentives. A reasonable bonus percentage is 15% of base salary. Using our $140,000 example, you could be looking at $21,000 in bonus(es).
Let’s say benefits are $100/month as a salaried employee with a benefits package included in your total compensation. Hourly contractors often must seek out their own health insurance or the insurance through their staffing agencies are expensive. One of my former recruits paid $450/month independently for his health coverage.
Don’t forget about 401K plan matches! Most hourly contractors don’t have employer-matched 401K plans while full time employees have a match and let’s use 4% as our example. That’s an annual match of $5,600.
Finally, vacation and holiday pay is usually missing from hourly contractor compensation packages. As an hourly contractor, if you don’t work, you don’t get paid. So how much is that really worth? Using our $100/hour example, if you take a week (40 hours) of vacation unpaid, that’s $4,000 you’ll lose. Two weeks = $8,000 and three weeks = $12,000. Plus, seven unpaid holidays = $5,600 lost.
Now for some math:
Full Time Employee:
$140,000 base salary
+ 21,000 in bonuses
+ 5,600 in 401K match
+ 1,200 in cell phone reimbursement
– 0 losses for vacation taken
– 0 losses for paid holidays taken
– 1,200 for health plan
$166,600/year in total compensation
$208,000 annualized salary based on $100/hour rate
+ 0 in bonus
+ 0 in 401K match
+ 0 cell phone/technology compensation
– 5,400 for health plan ($450/month)
– 12,000 for unpaid vacation time
– 5,600 for unpaid holiday time
$185,000/year in total compensation
Therefore we can then conclude that full time employees and hourly contractors are compensated more closely than the original difference total. The deficit between each employment style is now down to $18,400, the winner still being hourly contracting. However, if you’re considering opportunities, it is worth an in-depth analysis to see how much you’d really be earning.