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Being Overpaid Is a Curse

Imagine you are working on your personal budget. If you want to figure out where you are going to save some money, where might you look? Are you going to start with small expenses, or are you going to look at the larger expenses first? Well, when companies do this on an organizational level, they first target the highest expense, namely people.

As strange as it may sound, when you are working for a company, unless you are the CEO, being the highest compensated person in your peer group is a perilous place to be. This concept can seem strange at first blush; most people associate having a very high salary with happiness and security. There is no shortage of articles on the Internet about how to get a raise and so forth. So how can this be a bad thing?

When times are good, being overpaid generally is not a bad thing. The downside to having the highest salary in your peer group does not really become evident until you start thinking about layoffs. At this point, you start to really wonder whether you are bringing in enough money to cover your salary, benefits, and other ancillary costs.

  • Survival Strategy #6: Being overpaid is hazardous to your job security during a recession. If you don’t bring in revenues equal to at least 1.4 times your salary, you are probably overpaid. Consider volunteering for a pay cut.

The way technology consulting companies do layoffs is as follows: Generally, the office of the chief financial officer (in a smaller firm, this means the chief financial officer) looks at the individual utilization rate and, more importantly, the profit that each consultant has brought to the company over the past 12 or so months. Even if you have been consistently billing, if you are a highly compensated person who finds yourself on the bench during a downturn, and your rates have been slipping as a result of the economic conditions, you need to be aware that you are at risk.

On the other hand, people who are paid less generally have a better means to survive because the firm sees them as more profitable. If you don’t stick out as having a cost that is high compared to what consulting revenues you are bringing in, you are much less likely to be let go. Indeed, in technology consulting, like most other business endeavors, there is a trade-off between risk and return. When the downturn hits, taking a lower return (salary) results in less risk of layoff, assuming equivalent skills.

Now, this isn’t linear, per se. If you are the highest paid person in your firm, and your billings are not only consistent, but your profit margin is also higher than most others, you are safe despite your higher cost. If you make a substantial salary, you should not just volunteer a pay cut right off the bat. On the other hand, if you can figure out how much you have billed over the past year, and that number is less than your salary times about 1.4 (at least!), you might want to consider the proactive move of offering to reduce your salary.

Yes, you read that right: If you are overpaid, you should offer to reduce your salary. Although some firms will be happy to offer salary reductions as an alternative to layoffs, most are of the opinion that they would rather let someone go than ask someone to take a salary cut of more than a few token percentage points. The reason is that many believe that for reduced pay, someone will, in turn, put in reduced effort. However, if you offer to work for a reduced base salary plus a bonus that gets you even more if you hit a number like 90 percent utilization, for example, you accomplish a couple important goals.

First, you demonstrate some flexibility and understanding of the situation that the consultancy finds itself in. By stepping up to the plate and volunteering, you again seem like the “adult in the room” who is sacrificing himself or herself to make the company successful. Demonstrating you can take the pay cut helps the company understand that you are probably able to operate your household on less money. If you weren’t, you probably would not make an offer like that!

Second, if you really are as good as your pre-pay-cut salary indicates, if you can strike a deal that gives you a bonus based on hitting or exceeding your old revenue target, you actually give yourself the opportunity to do better than you would have in the first place! By formalizing the exchange of risk for reward (you had the risk already), you at least give yourself a chance to capitalize on the situation.

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