Why the Difference? Rates Paid vs. Rates Charged

My company pays me $20 per hour as a technician, yet they charge customers $70 for each hour that I work. Why? If involved in a conversation concerning this topic, this article from Brandon Battles will help explain the difference.

Have you ever participated in a conversation that focuses on various aspects of your job? Of course you have. Favorite topics might include a troubleshooting issue on an aircraft, the number of hours that you work, the type of work that you do, the opportunity to learn new skills, the tools that you use, the condition of the facilities in which you work, or the relevance of the four principles of management and their importance. Actually regardless of the profession, conversations will eventually turn to work.

Of course, discussions of this nature are always mixed with facts and the ever-present rumors and misleading information. As a result, and by the end of a typical conversation, you are probably basing certain conclusions on a foundation of information that is less than solid. In some instances that’s probably OK because you don’t have much influence over the final decision or outcome. However, for conversations that are more directly associated with you, having good information or understanding the issues is much more important.

One subject that is relevant and important to each of us regardless of the job or profession is the amount of pay we receive for doing a job. One aspect of pay is best summarized with the following comment and question.

My company pays me $20 per hour as a technician, yet they charge customers $70 for each hour that I work. Why?

Have you heard similar comments? When you were involved in a discussion of this nature, were you able to offer an answer based on facts rather than misinformation? Is there a logical explanation for the difference?

To answer this question, I will use an approach that considers three elements. The first two elements deal with costs. The last element deals with activity. The first element deals with costs that are directly associated with the technician. These costs are not always evident but they are there, nonetheless. The second element deals with costs that are indirect to the technician but are an important aspect of the maintenance department. Not only are these costs not evident, but their value is often questioned. The final element applies the first two elements and helps an organization determine what it should charge for its services.

Direct Costs

Let’s assume a company pays an individual $20 per hour for each hour of work performed. Unfortunately for the employer, the $20 per hour does not represent the full cost of retaining the individual. This is unfortunate because too often employees do not recognize the full value of employment, and employers do not emphasize their total compensation package. In either case, the total cost or value is not evident to the employee.

The following list illustrates the type of costs that are part of this first element; costs that are directly related to an employee.

  • Taxes — Each employee is expected to pay 12.4 percent of his or her salary or wages for Social Security and 2.9 percent for Medicare. Fortunately for the employee, the company is expected to pick up half of this, or 7.65 percent. Multiplying the $20 rate by 7.65 percent, the employer is incurring a cost of $1.53 for each hour paid. If you are self-employed, you would have to pay the full 15.3 percent.

  • Training — Costs associated with training can accumulate quickly when training occurs off-site and requires travel. Oftentimes travel can equal or exceed the cost of the training. If an employee attends a week-long training session, costs could exceed $5,000. If that is a reasonable assumption, then dividing $5,000 by 2,080 hours in a year, the hourly costs associated with the employee for that year is $2.40 or slightly more than 10 percent of the hourly wage.

  • Health insurance — While the direct cost of health insurance has in recent years shifted more to the employee, many employers still absorb much of the cost associated with it. If we assume the employer’s portion of health insurance is $600 per month, then the cost per hour is $3.46.

  • Pension/retirement plan — Traditional pension plans cost employers significantly but recent trends have moved toward 401ks, Simplified Employee Pension (SEP), and other employee-funded or employer-partially funded plans. Using a more conservative assumption, let’s use a retirement plan to which the employer makes contributions in the amount of $3,000 per year.
This content continues onto the next page...

We Recommend