What to Ask? Contract to Permanent Salary

So you’ve been offered a job at a company where you are doing contract work. That’s great news! You’ve shown them your value and they trust you and want you on the team permanently. But you may be thinking, “Am I at a disadvantage in negotiating a salary? The client already knows what they are paying me and the full time position may entail additional or different responsibilities. How do I convert my contract rate to a fair, permanent salary?”

I imagine this question will come up for a lot of freelancers like me particularly in the United States as the uncertainty in the private health insurance market forces us to consider moving to a full time job with an employer provided plan. A Facebook inquiry from Louis Rosenfeld of Rosenfeld Media prompted an interesting discussion of the relationship between contract fees and full time salary.

Rate negotiations are always delicate conversations. As a freelancer, I have a standard rate chart with adjustments for my role (UX of one or part of a team), length of contract (fees go up the shorter the term) and whether I expect to develop new skills or increase my network (fees may go down). My fee schedule isn’t public. It’s a set of starting points that make sense to me based on what I’m offering to do.

But the talking points get trickier when you are negotiating a full time salary with a company where you already have a contract. Many people use a simple fraction to convert an hourly rate to an annual salary, with reasonable justification for the conversion, and expand that to a range that takes into consideration various perks and responsibilities at the new job. But in this case, your client already knows what they pay you and may or may not utilize a similar conversion. The goal is to find a range of numbers in which both you and your client are comfortable and negotiate from there.

Start with a Rule of Thumb

Here are some rules of thumb suggested by friends of Lou, starting with an average $100/ hour rate, as reported in the IA Institute’s 2015 salary survey:

  • Multiply your hourly rate by $1,000, e.g. $100/hour = $100,000/year
  • Multiply your hourly rate by 2/3 then multiply by 1000, e.g. $100/hour x ⅔ = $67; $67 x 1000 = $67,000
  • Multiply your hourly rate by 50-60% then multiply by 1000, e.g.
    • $100/hour x .5 = $50,000
    • $100/hour x .6 = $60,000

The above calculations give you a range of $50,000 to $100,000 for a contract rate of $100/hour. This is a rather broad range, but will give you a sense of where your client might think you should fall. You don’t want to be too alarmed when they offer you the lower number, but the higher number may not be in the company’s budget. There is clearly a lot of room for negotiation.

Then Make Some Adjustments

What is the total cost of your freelance business now, not just in expenses but also in risk? Some freelancers charge a premium rate for short term contracts or for speculative work to offset the risk of missing out on a steady opportunity or the risk that a project may not go through to completion. If you joined a relatively risky project your contract rate may be on the high end of what a more established company would be willing to pay.

Is your contract full time? If so, it is possible that your rate is somewhat lower than if you were called in for a shorter term, or faster turnaround. If you are not typically 100% billable, and include this in your current hourly rate, you may wish to make an adjustment to reflect the fact that you will be 100% employed in a full time job. (As a contractor, you may or may not already be putting in 40 hour weeks).

Andrew Boyd in Singapore suggests that in a big company, the salary offer would likely be a “market rate,” based on their standard “role banding” matrix, which is then adjusted to facilitate a conversion. These role bands are likely rather fixed at an established organization. There may be some wiggle room in a startup or a new or restructuring practice. For example, there was a time in my previous life when my department was restructuring its salary matrix after a corporate reorganization. When they released the new matrix I realized that, unless I was promoted, I would be ineligible for a raise because someone in Houston in the level above me negotiated a terrible starting salary, which they decided to use as a base for that level. There were no positions available to promote me to so I could have been stuck there for years, if I hadn’t brought it up with senior management. If a salary matrix confines what the client can offer, a tactic could be to negotiate for the next higher level position, if agreeable and you can draw out a plan for what you add to the team at that level.

Don’t be surprised if your client has already considered a potential conversion to full time salary when they negotiated your hourly contract rate. Depending on where they work in the company, they may also have no clue what the full-package value of their offer is. Again, this is tricky, but it could be helpful at that point to have a conversation with someone in the HR office, something that may be easier to request if you are already working for a company than if you were applying as an outside candidate.

Equity and Other Perks

Another thing to consider is whether your rate includes adjustments for health insurance, training, conferences, office space and other administrative expenses that you have as a freelancer that normally would be provided by an employer. I was able to justify taking many lower rate nonprofit clients for years while I was on my husband’s employer-provided medical plan, because medical insurance wasn’t an issue and my administrative costs were low. I increased rates significantly (and alas took on fewer nonprofit clients) when he started consulting from home, because our overhead increased significantly.

Health insurance may not be an issue where you are. Because health care is nationalized in the United Kingdom, the above calculations will also be different. Our friends Ian Fenn and Elizabeth Buie offered a calculation for UK rates: 50%. That means a rate of £100/hour would be £50,000 per year.

A good reminder from Kaleem Khan is to consider whether the benefits being offered are in fact ones you will use. “It depends if you’re talking about cash/base salary or the entire package,” he said. “One needs to look at both frames of reference. A lower salary can be justified if one will maximize benefits but you’ll leave money on the table if a package has benefits that will not be used.”

Below are additional questions to ask, any of which may be factors in your negotiation:

  • Are you a direct 1099 contract or did an agency place you? If an agency placed you there may be an additional fee the client is paying (something like 15-25% of the total hourly cost of hiring you) that may or may not be on the table when negotiating a full time salary.
  • Will you get an equity share or other profit sharing package? If so, is there an employer match? When do contributions vest?
  • Is life/disability/medical insurance included? Some companies, particular smaller startups, are not required to offer these benefits. (Companies that employ under 50 employees in the US are not required to provide health insurance).
  • How many days off can you take? Some employers are generous with vacation and personal time off. Others, not so much.
  • What other benefits are offered to full time employees? Gym memberships, marketplace discounts, financial advisory services, meals and other perks may also be included.
  • Is there a probationary period? Benefits may become more attractive the longer you stay with a company.
  • How often are employees evaluated? Frequent evaluations could mean frequent opportunities for pay increases or promotion.

I hope this has been helpful in figuring out what a reasonable salary might be for contract staff. And congratulations on your offer!