I was recently speaking to a group of IT business owners about team member onboarding at XChange Nexgen. A question regarding technician compensation arose as a tangent, and since I had the time, I addressed it. I was surprised that my answer became the central topic of conversation with many follow-up questions and pens writing furiously on notepads. I’m taking that as a sign that you may want to learn about my response, too.

First, the question centered around “How do you know how much to pay?” and “What is fair compensation?” The short, no-frills answer is “whatever the market is paying.” However, as an outsourced IT provider, we have so much data already in our hands, that this should be a very simple answer. To get started, I focused my answer about fair compensation on the people we as MSPs currently employ, as this can also guide us in determining salaries for future or new hires.

My answer is what I call revenue attribution. It’s a formula compounded to determine exactly how much of your revenue you can attribute to a specific billable resource in your organization. Simply put, it helps you figure out how much money your company makes from a specific employee.

Time & Materials Formula

In the olden days that we call Time & Materials, this was a pretty easy formula. A billable hour was worth your billable rate. You added all those together for the month and that’s how much revenue you can attribute to the resources that billed those hours.

Hourly rate * Hours = Revenue Attribution

So, if Technician A billed 3 hours at $250 per hour they earned $750.

$250 * 3 = $750 Revenue Attribution

That’s a pretty straightforward way to determine hourly revenue attributed to a technical resource.

Fixed-Fee Formula

This formula is still true today, though it has gotten more complicated when we introduce all-you-can-eat or fixed-fee style managed services agreements. The good news is, there is a formulaic way to calculate this revenue attribution as well. Here’s the formula:

First: (Agreement Revenue) / (Total Hours recorded) = ($/hr value) (similar to Earned Hourly Rate or EHR) Then: ($/hr value) * (Hours specific team member recorded on this agreement) = Attributable Revenue

In this case, billable or non-billable don’t matter, because the revenue won’t change. Since all recorded hours come at a cost to you, and the revenue won’t change, simply use all recorded hours to calculate the revenue attribution. Now, you may have dozens, hundreds, or hopefully thousands of agreements, and this is where I promised the formula would be “compounded.” You simply apply the formula for each agreement for a specific member and add it all together.

This exact formula also works for all fixed-fee projects and tickets, not just fixed-fee monthly agreements. It could be a fixed-fee project or ticket with the same math. Let’s use an example. You do a server migration Project A for $10,000 in labor. You may have estimated it would take you 50 hours to complete, but it actually took you 80 hours. The revenue of $10,000 divided by the total of 80 hours equals $125 per hour. Technician A showed up to install the server in their rack and only recorded four (4) of those hours, so their revenue attribution for this fixed-fee project is $500.

First: $10,000 / 80 = $125 (EHR) Then: $125 * 4 = $500 (Revenue Attribution)

Adding it all together

Let’s take a look at how we put all this together for a single report. We’ll continue to pick on Technician A. Here is the data we should have at our disposal.

One Full Month

Fixed-Fee $ Type Total Hours Tech. A Hours
$1000 Agreement A 100 50
$5000 Agreement B 10 8
$10000 Project A 80 4
$500 Ticket A 3 3

Here are the calculations with this data:

Type $/Hr (EHR) Tech. A Revenue Attributable
Agreement A $10 $500
Agreement B $500 $4000
Project A $125 $500
Ticket A $166.66 $500

We calculate the dollars per hour ($/hr) by taking the fixed-fee amount and dividing it into total hours. We then multiply Tech A's hours by the $/hr to find out how much of the revenue is attributed to Tech A’s effort. In this case their total is $5500.

Unfortunately, we are not quite done. You may still have some, or even a lot, of hourly billing. In this example, we invoiced 50 hours of labor from Technician A this month at our standard hourly rate of $250. This adds an additional $12,500 to the $5,500, making the total revenue attributable to Technician A $18,000.

It all just keeps adding up. A simple formula made complicated by the number of pies of which we have to calculate their cut.

pies

Targets and Quotas

Knowing how much a technician has earned the company is a giant step toward understanding the fairness of their compensation. Based on this intelligence, how do we determine how much to pay them? While there is no perfect answer, we now, at a minimum, have a ceiling. We can’t pay them more than they’ve earned. In fact, I use a rule of thirds to help me understand compensation. It’s an old wisdom that professional services should earn approximately one-third of what they bill. I also like to describe it as approximately one-third for them (pay), one-third for the business (overhead), and one-third for profit. Keep in mind these are very rough approximations, but it makes it easy to understand numbers with these guidelines in mind.

So if Technician A has a salary of $60,000 per year, their monthly salary is $5000 per month, and their target, or quota, would be three times that, or $15,000/mo. Given that we ask them to perform non-billable work sometimes, they understand that their salary is guaranteed, even when below quota, though consistently performing below quota may cause a discussion on how to fix it. They now also have upside potential to make sure they don't forget to record or bill their time.

Bonus Strategies

I love sharing the wealth with my team. If they are earning more than we need to cover their salary (3x), then I give a percentage of everything over the target to the technician. In my previous MSP, I would offer technicians 10% of everything over their quota.

For our example, Technician A had a quota of $15,000 but earned us $18,000. Since I’ve promised 10% of the overage, We take their revenue attribution of $18,000 and subtract their quota to leave $3,000. We then take the promised 10% of the $3000 to land at a $300 bonus. The formula looks like this:

(Revenue Attributed) - (Quota) = (Overage) x (Bonus %) = Bonus

$18,000 - $15,000 = $3000 x 10% = $300

Technician A has earned a $300 bonus this month on top of their guaranteed salary. That equates to a 6% bonus.

*Note: I’ve made exceptions to the 3x rule before for highly compensated engineers. Since they are frequently mentoring our team, I use 2.5x for their quota. *

Setting Pay based on Revenue Attribution

Now, if a technician is continually earning a bonus, it makes sense for us to discuss a raise. If someone is coming to you for a raise, you can use these formulas to help determine if you can afford to give a raise or not. This also becomes one of the few KPIs that hold each revenue-producing team member accountable.

Conclusion

Conversations about pay can seem daunting and rife with the potential for conflict or hurt feelings. Yet, these conversations can be quite powerful when you are transparent about how you derived them. Clear measurable metrics such as these, also become great motivators for performance especially when you make it easy to see how they are doing at any given time.

Look for a business intelligence (BI) tool. MSPbots, BrightGauge, Cognition360, MSPCFO, PowerBI, and built-in reporting are just a few BI tools you should look into if you are becoming a data-driven decision maker. Specifically, MSPbots now has an Eureka Process app that includes the dashboard ready-made for you. I also believe that MSPCFO has a similar report that can be customized for your needs.

If you’d like some one-on-one help understanding your business and finding ways to make it even better, let’s hop on a call and see if Eureka Process’s consultative and supportive approach may be right for you!

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