The impact of a pay rise on your employer
Written by Colm Reddy
Every week, I listen to candidates say they want a pay rise and not have a clue where the money is going to come from for it. Let’s shine a light on this to help employees make stronger cases for a pay rise and help employers make easy, practical decisions.
Like any good negotiation, you ideally want the person on the other side of the table to want what you are offering. If you decide you are going to ask for a pay rise, it is in your interest to consider the impact of this on your employer. This will help you make a better argument and increase your chances of getting the pay rise that you desire.
It is never a good argument to mention you have a friend getting paid more than you, and therefore, you want more. Your employer probably knows someone paid less than you, too. Focus on the value you bring, not your friend.
More income for you = more cost to the business = less profit for your employer.
This is bad for your argument.
So, what are the ways around this?
More profit for your employer, of course!
Let’s assume you want a $10k pay rise. On average, accounting firms expect you to generate revenue of 3x your salary. This is typically seen to be roughly evenly distributed across:
- The cost of your salary
- The cost of running the business (for example rent of the office, insurance, your computer, the business support team, etc)
- Profit
Therefore, in this example, you would need to generate $30k more per year to keep the same level of profitability.
But how are you going to generate $30k more per year?
Increasing your charge-out rate, working longer hours or a combination of both? I will assume you would prefer the higher charge-out rate.
Remember, your Charge-out rate x Hours worked x Productivity% = your revenue for the firm. Divide this by three, and you have a good idea of what your salary should be.
Example 1:
If you have a charge-out rate of $200. Your productivity is 80%. Therefore, you can do a quick, rough calculation of:
$200 x 7.5 hours per day x 5 days per week x 48 weeks per year (assuming 4 weeks of annual leave) x 80% productivity = $288,000 revenue per year.
This divided by three = $96,000 salary.
Example 2:
When the charge-out rate is $250 per hour, and the rest remains the same, the revenue jumps to $360,000 per year, and this divided by three = $120,000 salary.
That’s a $24,000 impact on your salary!
But how can you get a higher charge-out rate?
If you have shown you have the technical capability to take on more complex work, and therefore be able to charge your time at a higher rate, this is how you increase your revenue for the firm.
This means the firm has to have more complex work that they are happy for you to contribute to, and you need to be able to perform at this level.
Lots of your existing clients may not want a significantly higher charge-out rate when dealing with you, so you may need to delegate more of your work to others while still being involved in the review work, handling client queries, and meeting clients in person. By doing this, you may sacrifice some of the billings being attributed to you personally. However, the additional free time means you can now take on extra clients, ideally more complex clients at higher charge-out rates. Many of your clients will also be fine paying more if you are doing a good job for them, which means more revenue to you for the same work.
It is worth recognising that as you become more senior in a firm, there is less reliance on your personal billings and more focus on the management of a large portfolio and staff. But to get there, you need to bill productively and profitably in your early years.
If you do not have this technical capability yet to take on more complex issues, and you are not willing to work longer hours, your extra income ends up being an extra cost without extra revenue for the business. This will not go well for you. Remember, extra income for you is coming out of the owner’s pocket, not from the sky. You are not entitled to it by showing up. You must provide an appropriate value for the level of expense you are requesting from your employer.
I would be thinking about how to get to that point where I am ready to take on more complex clients. Think about what training you’d need and request it. Even if that is buying your Manager a coffee at lunchtime to go through questions with them on issues you want to improve on. Whatever will improve your ability to develop and earn more is a good investment.
How to ask for a pay rise
If you want to ask for a pay rise, the easiest way to get a yes is in the future tense. If you can achieve a certain revenue/productivity target by a certain date, could you get a certain pay rise by that date? Assuming your numbers make sense, if you only get it if you have earned it, it is easy for your employer…yes!
This mitigates the financial risk to your employer, which, as mentioned above, helps you get what you desire. I would encourage you to ask what your charge-out rate would be at that point and make sure you will continue being sufficiently profitable. All this helps your case.
Your alternative is to ask for a pay rise for the immediate future. This is a more difficult “yes”, so you will need to come equipped with a robust, logical argument that you can back up with numbers, not just feelings. If you can’t, I encourage the future-tense approach.
If you would like to discuss this or anything else with me, please feel free to contact me at colm@lawsondelaney.com.au at any time. I will always try to help you.
Written by Colm Reddy