A new financial model for consulting
Update: We’ve recently improved this version of our financial model. You can read more details on our handbook.
Most organisations have a “behind closed doors” salary setting process between a manager and an employee. This private negotiation can sometimes lead to secrecy and resentment among employees, mainly because some are getting paid more for the same job. This process also favours employees that negotiate well and this contributes to minority and gender pay bias with studies showing that women are less likely to negotiate than men.
Root Systems is a group of 5 developers running a software consultancy with no bosses. We like challenging traditional management processes to find a better way of doing business. Our goal is to make financial flows to and from the pod as transparent as possible and in a manner that allows for members to have a balance of security, flexibility and opportunity in how much remuneration they receive.
Our current experiment is to use a formula with all team members to decide our monthly pay. We use the same formula for all employees to make sure all financial details are transparent and fair for all. For this formula to work it requires the business financial details to be available for all team members to view at any time. We’ve found that this transparency brings trust, honesty and accountability to the group.
Our new formula for deciding monthly pay
$5800 = $3500 + ($500 x 2) + ([(2x5)% of $100] x 130)
This is the monthly amount a member will always receive, no matter what number of hours they work.
The buffer is what enables us to provide security to members, it is cash in the bank. It smooths out the feast-famine cycle that comes with doing contract/project based work. One level of buffer is the sum of how much we take out of the pod as a base salary in a month. In general the more buffer we have the less we need to focus on making money.
Our buffer target is 4 months worth of our collective remuneration. To break this into scale we have 5 states/levels:
Level 0 = We have less than 1 month worth of employees’ base salary in the bank.
Level 1 = We have 1 month worth of employees’ base salary in the bank.
Level 2 = We have 2 months worth of employees’ base salary in the bank.
Level 3 = We have 3 months worth of employees’ base salary in the bank.
Level 4 = We have 4 months worth of employees’ base salary in the bank.
Charge Out Rate
How much a member costs per hour to the client. This is a negotiation with the client and has a number of factors behind it such as the company being values aligned, budget, opportunity for learning and more.
The number of hours a member was billable in a month.
This is just the start of experimenting with how we do business. Going through this process with the team has been a big moment in our culture. Having a flat salary setting process requires everyone to voice concerns, trust in one another and be open and honest. All of that goodness that makes a good team.