Labor v. Talent Compensation
Many of us have unique talents that are in demand and not easily reproducible. This typically happens in relatively new areas, and businesses open positions that are not fillable as the people for them do not conventionally exist. This was the case over a decade ago in social media. People that were experts in social media were self-taught. The problem they had was getting established businesses to recognize them as talent instead of drop-and-place labor.
A colleague of mine experienced this first-hand. A company hired her as a project manager, where they accessed her expert knowledge in social media. She was treated as an employee rather than as a consultant. Being entrepreneurial, things eventually worked out, but it was a valuable lesson in selling your talents at a discount.
When you try to figure out how much you’re worth, go beyond thinking of it as a labor rate for renting your time. Think like a business!
It’s common for a person who’s spent a lifetime having an employer manage their career to think of compensation only in terms of salary. A naïve approach is to divide your annual salary by 2087 hours to figure the labor rate in $/hr. This approach excludes benefits and other compensation. Therefore you need to calculate what your total compensation looks like.
If the employer doesn’t pick up all your expected benefits, you need to include additional fees and costs. For example, I once had a crafty recruiter entice me with a job offer by floating a favorable salary. When we got down into the details, I learned the proposal didn’t include health insurance. It wasn’t a problem; I countered with a higher salary to compensate for my cost of carrying health insurance. Other items like time off and training are equally negotiable. Think in terms of TOTAL COMPENSATION.
When a business sees you as labor, you are a dollar-for-dollar replaceable body. You can go to salary.com and get an idea of how you line up with others in your field by geography and get a good idea of what is commonly offered in terms of benefits, bonuses, etc. You should do this at a bare minimum to understand your cost structure as this sets your lowest negotiable point. You might be willing to trade salary for more in bonus, stock options, or even a unique career experience, but should avoid working below this if you have other options.
When a business sees you as talent, on the other hand, you’re an independent consultant that’s running a business. As a general rule, an independent consultant billing rate is about 1.5x to 2.0x the expected take-home salary. The billing rate is close to what most staffing companies charge a client to offer you as a contractor. You could think of that rate as your retail labor rate. It wouldn’t necessarily be your rate as a business.
The tempting mistake is to use this retail labor rate for yourself as a business. That may work, though there’s a better way to look at it. If you think in terms of Gigonomics, where each job you take is a Gig, your retail labor rate is the minimum profit you would expect. As the leader of a Gig, the labor is actually what other people would charge you to perform under your guidance. If the job came with an office, PC, software, secretarial staff, office equipment and supplies, telephones, etc. – then your side of the cost structure is thin and you could get by with your retail labor rate. On the other hand, if any of these items are not provided, you need to markup your compensation to cover.
Calculating your rate as a business can be complex, and the more complex it becomes the higher the profit margin needed to cover risks and uncertainty. This approach is a non-starter for most clients and should stay in your back office to understand your internal cost structure. The problem with a billing rate approach is it has no value proposition to the client.
A critical difference between labor and talent is the later takes ownership of outcomes. This means putting the Gig together in a manner that speaks from the client’s perspective. Instead of offering an hourly rate, consider value-mirroring. It will need to be something easily stated in terms of an outcome. For example, an attorney can work by the hour (say $220/hr), or by a fixed-fee (say $5,000/contract at 1% of a typical $500,000 real estate deal). The client ceases seeing you as labor at an hourly rate to manage and avoid open-ended expenses. Instead, the client considers closure at a fee tied to outcomes in their own terms.
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