So, for example, if this consultancy found a specialist niche within which it could charge not $165/hr but rather $220/hr, you would not expect to see developer wages increase commensurately.

The assumption that seems to be present throughout this thread is that there is an owner/s (not necessarily the same person as the operator) present who needs to take a percentage from the bill rate. This model is inherently extractive and sets up a really bad set of incentives for the people doing the productive work. (productive in this case is actually writing code/solving client problems and maybe not doing the marketing, administrative, or sales work of the business.)

I know someone is going to raise the point that there has to be an owner to put up the capital/bear the initial risk of starting up, which is totally valid! This will always be true I just think that there should be a route/way for the productive worker to work towards a piece of that ownership pie.

Also, the fact that the bill rate vs pay rate is transparent is actually great. I know many staffing firms/employment agencies that keep that information hidden from thier employees. (Full disclosure I am a member-owner at a worker cooperative staffing startup staffing.coop, so I am biased towards employee ownership in general! )

That this rarely happens in practice should tell you something about where the value in an established consultancy is generated.

When I consulted, delivery was only a portion of the package. Sales work isn't just "Convince the customer to buy the engagement", it often required substantial (and often speculative) work on creating proposals, doing client education ("Why should I even send email anyhow?"), scoping projects, attending conferences, writing publicly (an activity which is both marketing and produced substantial value despite not being directly billable), etc etc. Clients were not strictly buying delivery; delivery came with a bundle of requirements like e.g. having to deliver while being insured. This produces client value, because they sensibly don't want to give a commit bit to someone who could accidentally bring down the business and has no meaningful assets if sued. Warren Buffet will happily take that risk off the client's hands, to their happiness, but he won't do it for free. Clients similarly can't engage consultants without lawyers being involved. Lawyers materially de-risk engagements; de-risking is something both sides very much want; professional labor is not free. Clients benefit from receiving trade credit (the consultancy will advance you $60k of value and you pay them back months later, with no interest charged, minimal underwriting, and functionally no recourse in event of default); trade credit isn't free.

From the perspective of a W-2 consultant, the things you get from the enterprise include having predictable work lined up by people who specialize in getting gigs and scheduling them so that you can focus on delivery. The set of technologists who can deliver is much larger than the set who can both deliver and convince software companies to pay premium rates for their time. (Trivial proof that this is true: look how many delivery-focused technologists say that business owners on HN are blowing smoke about rates clients are happy to pay every time that subject comes up.) The consultancy insulates the consultant from market risk; regardless of whether the consultancy is having a good month or a bad month in pipeline or cashflow management payroll happens on the day everyone expects it to in exactly the amount they expect it to. The consultancy invests in the professional development of their employees and in the specialization of their offering on the marketplace, which specialization increases the market value of their employees while at the consultancy and in the future.

There is a way for delivery-focused employees to get ownership. It is to become a principal consultant. Some firms offer promotion tracks which get one there. The faster option, if a delivery-focused employee thinks that the enterprise is not adding value, is to walk out the door and hang out their shingle. If the delivery-focused employee was right, they immediately have 100% ownership of the enterprise. If they were wrong, oh well, capitalism happens to capitalists.

The assumption that marketing, administration and sales work of business as non-productive is an arrogant view. While as engineers, we tend to think that doing the actual work counts more than the rest, clients actually value the other stuff and would be willing to pay much more for it as well. You can easily see this with enterprise contracts that value $25k to $1m or more, where they usually have account executives, project managers, training programs, etc. in addition to the product.

> eventually get towards ownership is through increasing your billings whereby the client is hiring the productive worker, at which point, it's usually when you become a partner of the company (effectively sharing in profits and losses)

I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

> I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

You're absolutely right and I see it with my experience as well. The highest rewards don't usually tend to fall naturally and equally to everyone whom we deem to be the most productive. And while there may be few incentives to share the power in small groups, one would hope that the goodness of an individual's heart would lead them to do so.

Beyond that, consulting has low startup/asset costs, there isn't much of a barrier to entry. So if a worker at a consultancy doesn't feel like they're getting as much value as they're generating, they can always just start their own. Plenty do.

It depends on the definition of "commensurately", but assume that only some of their developers are able to fill the new lucrative niche. Would it not be in the company's interest to be willing to give those employees something like a proportional 25% raise? If they don't, isn't it likely that a competitor will eventually poach those select employees, causing the company to lose access to the niche?

The mentioned 80-120 range seems like a feasible answer to this. Push for more (or strong bonuses) if utilization is generally high. Obviously the 140% depends a bunch on location / taxes / cost of doing business etc., find out what these are in your neck of the woods and exploit it to negotiate your salary.

The fixed part is that 20% overhead which is to maintain the recruiters, HR, contract admin guys who do all the work so you don't have to market yourself.

As he said, if you want the full rate go off on your own, but before you do that I'd suggest you listen to some guys who talk about it. There's a .NET rocks podcast that talks about this because the guy says you can't work 100% for any given contract. You've got to be working towards the next one. So even if you go work for yourself you either work 40+ hrs or you bill at 35 hr a week and market yourself for 5+ to make sure your next gig is always there.

Also, you have to factor in how much your consulting agency pays you for stuff into your salary. 0 days PTO? Well it seems like you're going to have to bump your salary by 10-15% in order to break even on a salary job? Paid overtime? Well you might knock that down a bit. It all balances out.

It's an awesome approach. He actually tries to find reasons not to work with client, because he's so expensive that if he can offer cheaper alternative they should go with it. Only pay if you really need to.

What sorts of things fall into each of these two buckets?

I feel like I know some of the answers but not all of them.

If it isn't obvious, this is a bit handwavy; particular jurisdictions will have rates/requirements which materially influence the 140% figure, etc.

Paying for an office having light, power, internet, management, and a mailroom is in the 20%.

annual_salary = 600 * hourly_rate

Because 50 * 600 does actually = $30,000.

More importantly, I'd second "A fair salary is the one you shake hands on."

Interestingly, there may be an interesting relationship between the two observations.

We are located in Poland so the numbers are not exactly the same as they are for a US-based company, yet the structure is similar. However, some of the work we do goes through a partnership agency located in US. Some of the work we do directly for US customers. So these are the same people doing the same quality work with the same efficiency.

The difference in the rate for the end customer? 100%+ If they go through US-located partnership they pay double. Note: the whole setup is fully transparent for the end customer so there's no pretending that we are not who we really are.

Should our people expect better salary because there's someone making a huge premium on the top of what we are making? Well, that would definitely make our business unsustainable.

Can we raise our rates to a similar level when working directly with US-based customers? That doesn't work either as the premium is paid for the fact that people come through US-based consultancy.

Is the work done in any different manner? No, it's exactly the same work.

So we end up balancing our financials and we acknowledge that from time to time we would lose an engineer who will either jump on the independent consulting bandwagon (the leverage for them is potentially much bigger than if they were located in the US) or join US-based company remotely.

Ultimately "a fair salary is the one you shake hands on."

Note: we are an entirely transparent company, thus all the financial details are known to everyone and we openly discuss these matters. We also strive for fairness understood as collective fairness, i.e. if I want to earn over what is commonly perceived as the value I bring to the company I'm not getting it. Also, we share the profits with everyone at the company.