How to Adjust Pay When Converting Contractors to Full-Time
“When converting a contractor to a full-time employee, how should you adjust their hourly pay?”
A common mistake is assuming you need to pay the same hourly rate that you paid the contractor. Don’t do that. Paying the same rate plus benefits makes the employee significantly more expensive.
Here's how I approach converting a contractor to an employee:
What's the going rate?: Look at how much the market is paying for this role as a full-time position. Then consider the expertise of your contractor and decide where they fit within the salary range. Leave room to raise their salary without breaking the bank.
Keep it fair in-house: Make sure your offer plays nice with what you're already paying folks in similar roles. Trust me on this one -- if the new kid on the block is doing the same job but getting paid more, morale will drop quickly. There's no reason to pay someone more if they're doing the same job.
Factor in Total Compensation: Time to crunch some numbers. Calculate the total compensation package, including salary, benefits (health insurance, retirement contributions, vacation days), and employment taxes. As you may already know, benefits typically add about 20-30% to the base salary. Below is a table to show how these calculations might work.
Consider Cultural Fit: Sometimes contractors are great when they're on the outside, but they don't jive so well when trying to integrate them into your culture. Give some thought to whether they align with your company values, can contribute to company decisions, and have the potential to grow with the organization.
Let's crunch some numbers
Say you have a copywriter you're paying $75 an hour. This works out to about $150k annually if we assume 2,000 hours per year. Now, of course you don't pay that amount now because you only hire them when you need them. As it stands, you only incur those costs when a client is paying you. Once you bring them on full-time, they become part of your overhead.
So, if you were to offer a total compensation package worth $150,000 (matching what they'd make as a contractor), you need to account for the cost of the benefits package which is about 25 percent of their salary. Here's how that math works:
Total Compensation = Salary + Benefits
$150,000 = Salary + 25% of Salary
$150,000 = 1.25 × Salary
Salary = $150,000 ÷ 1.25 = $120,000
Here's the takeaway
Don't fall into the trap of just converting their hourly rate into a yearly salary. It's not that simple. Instead, take a step back and think about market rates, your in-house pay structure, the whole compensation package, and how well they'll fit into your team. That's how you'll land on a number that's fair for everyone.