Let’s Talk About Different Pay Rates for Contract and Permanent Jobs

April 24, 2017

 

One of our biggest beats at the Argentus blog is the world of contingent staffing. More people in high-skilled, white-collar industries like Procurement and Supply Chain are taking on contingent roles for 6-18 months. Many of these are strategic professionals who are making a conscious choice to exchange some of the job stability of perm employment for high bill rates, tax advantages, and flexibility. They’re taking the opportunity to work in a variety of industries, on a variety of projects, and building their careers in an alternative way. Some of them are dedicated to contract, and some – when that “goldilocks” fit with a company comes along – eventually transition back to perm employment. It’s pretty common for a company to envision a role as a contract, and then the candidate works so well that they offer to bring them on perm.

Let’s talk about that for a second: The transition from a contract role to a permanent role at the same company.

From the candidate’s perspective, it can be exciting if the role is right. It’s a sign of validation, and a sign of the company’s long-term investment in your abilities. It means you’ve outperformed expectations, you’ve made yourself indispensable, especially if it happens in a role that the company wasn’t intending to make permanent originally.

It’s a good thing. But there’s one important thing to understand, and it’s a misconception we see fairly often at Argentus:

You can’t expect a permanent full-time salary to meet the hourly pay rate for a contract.

Here’s what we mean: say you’re up for a contract position for a year at a rate of $55 an hour. That’s not a bad contract for a mid-senior Strategic Sourcing or Supply Chain professional. The rule of thumb is approximately  ~2000 hours for a year of full-time employment. You do the math and realize that the contract works out to about $115,000 for the contract.

Great! You start the job, excel, and six months later the company offers to bring you on full-time for $100,000.

“What?” you say. “How could this company undervalue me? I’m a $115k candidate!”

Hold the phone. The thing is, a perm salary isn’t always as high as a contract pay rate for a few reasons:

  • As recruiters, we do a lot of searches on both sides of the perm/contract divide. It’s a fact that the supply of contractors is lower than the supply of permanent employees, because a contractor is either someone who is 1) unemployed, or 2) one of those awesome people who chooses contract as a lifestyle choice. The numbers of the latter are growing, but they’re still few and far between. And in today’s economy, the number of unemployed – especially in Procurement and Supply Chain – is shrinking. It’s Economics 101 that less supply means a higher price, so the price of a business contractor is higher than a permanent employee.
  • Hiring contractors is often a bit more flexible than permanent employees – requiring fewer interviews and less vetting. The timeline is tighter. Still, the company is taking on more risk when they hire on contract because of the possibility that a permanent offer will come along and entice the candidate away with stability and commitment. If that happens, the company loses all the resources they’ve invested in the hire. So they often offer higher hourly bill rates to help offset this risk and ensure the contractor stays on for the duration.
  • Contract hires often come from a different “bucket” of funding from perm hires. For short-term projects, companies will often hire contractors at a higher hourly rate than existing perm employees because of the reasons mentioned above. Because it’s short term, it’s not a pay equity problem. But when you move into a permanent role, a company’s HR needs to take into account pay equity, and they can’t pay more than an existing perm employee who’s been there a long time.

Lots of people take up business contracting as a lifestyle choice, hopping from contract to contract and enjoying higher hourly bill rates at the risk of having a few months of down-time here and there.  But anyone who uses contract as an interim choice before moving to perm employment needs to understand that the salary will likely be lower than the hourly pay rate. Not always, but it happens. In return? You gain stability, you have benefits, pension, you have vacation, you’re (hopefully) being worked into bonus structures. This is part of the choice you make when swapping back and forth, and both have a lot to recommend themselves.

Something to keep in mind! 

 

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