Best of the ISP-Lists

Why Pay Employees?

Members of the ISP-Investor list pull out their calculators and discuss the percentage of an ISP's revenues that cover the costs of the company's employees, including benefits and holidays.

[September 5, 2001]

On the ISP-Investor list in August, TR inquired,

"What percentage of your revenue goes toward employee salaries and benefits? I'm currently using an outsourcing company to run my entire operation, and it's costing about 25 percent of all income to pay for this service—is this a good deal?"

A number of respondents shared the percentages they're currently putting towards salaries:

[JM offered] "We're at about 25 percent. Normally, your largest cost in operating any business is payroll."

[DK added] "We're at 27.5 percent for all wages, including the President and CEO."

[BP observed] "We are in the 33 to 36 percent range, which I think is about typical."

Others noted that there are lots of other factors to consider:

[HA suggested] "You've got to specify the size of your business. For a large ISP, 25 percent is way too high, while for a small one it would be reasonable. I would define small as about 5,000 dialup users. An ISP with 50,000 users should not have their payroll exceed 20 percent."

[JK agreed] "Smaller companies will have a bigger percentage of payroll to revenue. But if you check companies that are profitable, whether they are public or private, you will discover that the total revenue per employee runs in the range of $200,000 to $300,000 in annual revenue per employee. Of course, if you have an average salary of about $35,000, then that would result in employee cost, with matching taxes, insurance, unemployment, etc., of about $50,000 per year. That would put the true percentage somewhere between 17 percent and 25 percent; really profitable companies are closer to 17 percent. Presently, we run at total employee expense of just under 15 percent, and about $290,000 in annual revenue per employee."

[CS added] "I think in the range of $150,000 to $200,000 per employee would be a better number. For example, an employee that you were able to bill out at $100 per hour for the entire year (100 percent utilization) would result in $208,000 in total revenue. If you subtract out holidays, vacations and non-billable time, you will be down about $150,000. I use an employee cost including benefits of 33 to 38 percent of direct labor. Here's my formula:

 Now, you can reduce some of this: no 401k and no Health Insurance will knock 15 percent off. Giving one week of vacation and no sick days will also reduce your cost, but in our market we could not do that."

— End