Let’s start with some basic terminology:
* Gross Margin and Gross Profit can be used interchangeably. Just be sure to say “Percentage” when you mean Gross Margin/Profit %.
DETERMINING BILL & PAY RATES:
Ultimately, where we set the bill and pay rates determines the company’s gross profit as well as your commission. Your ability to negotiate rates is an important aspect of closing a deal whether you are an account executive or a recruiter.
In some situations, you will know the bill rate before finding a candidate, in others you will know the pay rate before discussing the bill rate with the client. In either situation, giving yourself some flexibility to adjust pay or bill rates later down the road will go a long way in finalizing a deal.
Pay Rates:
The simplest way to start negotiating pay rate is by determining an appropriate annualized salary for the position when considering the following: candidate’s desired rate of pay, the client’s potential bill rate, the client’s conversion salary if they it’s a contract to hire position, the overall market salary for the specific roll, geographic location and skill set.
Let’s assume that your candidate is applying for an Application Development role where the appropriate annual salary is $100,000. To come up with an hourly rate, simply divide the annual salary by 2080 (40 hours a week times 52 weeks a year). In this example the hourly equivalent is $48.07.
You now have a good starting point to begin your negotiations with the candidate. This is just a starting point because there are other things you will want to discuss with your candidate to ensure they feel you have their interest at heart and feel adequately compensated.
Other pay items to be considered (based on candidate expectations or current employment offerings)*:
Overtime
Paid time off and Holiday pay
Price of health insurance
401k matching
Tuition reimbursement
Bonuses outside of base compensation
*We have robust salary to hourly calculator you will use to talk through most of the other considerations with your candidate.
And since we are explaining in detail to our candidates why they are getting paid a certain amount, don’t round pricing! If a fair pay rate calculates to $51.76/hour don’t round up to $52.00.
Now that we have configured our hourly pay rate, we can calculate a reasonable bill rate to present to the client. While there will always be exceptions to the rule, at the end of the day we want to achieve a gross margin of 28% or higher.
A few equations to remember when calculating the Bill Rate
Gross Margin = Bill Rate – (Pay Rate x (1 + Burden))
Gross Margin % = Gross Margin / Bill Rate
(The percent we keep!)
A good rule of thumb to price a deal is to use a markup of 1.60. While the final markup may be higher or lower, you can quickly determine bill and pay limits while targeting a 28% gross profit and not having to do much math.
If you were to find a W2 candidate that was willing to take a role for $52.25/hour you could quickly figure out that the least we should bill the client.
Pay Rate x Mark Up = Bill Rate
$52.25 x 1.60
$83.60 = least we should bill the client
Gross Margin
Bill Rate – (Pay Rate x (1 + Burden))
$83.60 – ($52.25 x (1 + 14%))
$83.60 – $59.57
$24.03 = Gross Margin
Gross Margin Percentage
(Gross Margin/Bill Rate)
$24.03/$83.60
28.74% = Gross Margin Percentage
In another scenario, your client informs you the most you can bill for the role is $95.00/hour. Now you could quickly figure out that the MOST we should pay the consultant.
Bill Rate / Mark-Up = Pay Rate
$95.00 / 1.60
$59.38 = Most we should pay the consultant
Gross Margin
Bill Rate – (Pay Rate x (1 + Burden))
$95.00 – ($59.38 x (1 + 14%))
$95.00 – $67.69
$27.31 = Gross Margin
Gross Margin Percentage
(Gross Margin/Bill Rate)
$27.31/$95.00
28.74% = Gross Margin Percentage
In both scenarios you have generated a gross profit at 28.74%. No matter what the bill or pay rates, it will always come out at 28.74% for W2 employees when using the 1.60 markup. In addition, if you have to give or take a little at the end you should still be able to end up at or above a 28% gross margin.
While the markup method is great for on the fly pricing, our organization does provide an Excel based calculator to help run different and more complex scenarios during client and consultant negotiations.
Let’s Practice:
Utilize the GP Calculator to answer the 5 examples below. After you determine the Gross Margin Dollars & Percentage, write if it is defined as a good or bad deal.
Commission
Now that we understand how to price Bill & Pay Rates, let’s talk about how you get paid!
For a Standard Optomi Placement, Technical Recruiters and Account Executives each get allocated 100% of the Gross Profit from their placements before commissions are calculated. For Acadomi Recruiters, who have sourced the candidate and passed them off to a Senior Technical Recruiter / Coach, the gross profit is split 50% between the Acadomi and Technical Recruiter.
Take a look at our commission plan below to understand what your % cut of the gross profit will be:
*Direct Hire is simply paid as a flat percentage of the fee earned from the client. The fee from the client is typically a % of the candidates first year base salary.
As you can see, you earn a bigger commission % when the gross margin dollars are larger. For example, if your first placements gross margin was $13.24 your commission would be 4% because it falls into the “<$15.00hr” bracket. Likewise, if it was $27.35hr you would be paid at 7% because it falls into the “>=$25.00hr” bracket.
As you place multiple people, you’ll start to see your commission rates go up as you grow your total Producer Bi-Weekly GP.
Let assume you have the following placements after a few months working at Optomi as a Technical Recruiter.
As you can see, your first 3 placements generate over $5,000 in total Bi-Weekly GP. This will put you into the second commission band on all of your placements ( “$5k- $10k”), effectively giving you an additional 1%.
In total, you are now earning $341 every paycheck from your work so far. That may not seem like a whole lot at first, but on an annual basis it’s the equivalent of giving yourself an $8,867 raise ($341 x 26 paychecks a year).
As you continue to grow your book of business the commissions continue to accelerate. Using a gross profit close to the company average of $23/hour, you can see the impact on your annualized income in the chart below.
This is important because like a Technical Recruiter or Account Executive, you should anticipate the majority of your income to be in the form of commissions. As such, you’ll want to know what it means on an annual basis to understand your true earning potential as well as how much to spend on things like rent, car payment, savings, vacation, etc. Or if you just have a fantastic goal of making over $100,000 a year in commissions alone, you can see you should be targeting approx. 23 people on billing to get there!
In addition to growing your personal commissions reaching $20,000 in Bi-Weekly GP for 13 weeks qualifies you for Cobalt status and achieving over $40,000 in Bi-Weekly GP for 13 weeks qualifies you for Platinum status. With each of these statuses comes additional incentives such as wellness credits and more paid time off. When you get there, you’ll know you’ve earned it!