I have been trying to understand the concept of  fixed salary and ideas of bonus or profit sharing in  software consulting assignments especially where billing happens on the basis of number of hours instead of fixed budget projects.  

What happens, as a software developer, when the company bills dedicated developer time to the clients ? A lot of developers like to be paid certain percentage of numbers of hours put  instead(or,in addition) of fixed monthly salary.Their thinking is that if you work for hours, you should get  paid in some way for that hour.  But, then there are companies that offers bonus if that dedicated developer files over , say X hours.  In that case, you get salary but, there is a carrot hanging to file more hours. So I get a salary all the time and if I bill over 150 hours in a month I get a bonus that’s a percentage of whatever’s over 150. 

Having a bonus or better appraisal for the ability to file more hours doesn’t sound right to me. In that case, somehow the company gives an incentive to the developer to fiddle his hours, since doing so affects his paycheck. This bonus/appraisal clause will have been removed in few cases after the company realised that some employees have been booking hours simply to get a bigger paycheck.

Companies paying fixed salaries need to somehow ensure that the developers work efficiently, i.e. maximize their billing. Whether this is by carrots , or by regular appraisals, it is wrong to think that fixed salaried employees do not have incentives to over charge the client. The advantage of profit sharing  to the company is that the fixed salary costs of the senior developers who are the more expensive employees are converted into variable costs. This makes balancing accounts easier, particularly when there are less projects. Companies paying their developers fixed salaries will, if work drops off, have to cut those salaries.  Both systems respond to business scenario, but when the salaries are closely linked to the billing, the response is more immediate.

In that case, perhaps you should ask yourself whether you really want to work for a company whose prime focus is maximizing dollars (with no incentives for quality of work or customer satisfaction) and couldn’t even come up with a sensible reward system. In general, the employer – employee relationship may be such that invariably the employer feels that the employee is not working as hard as he could ,  and the employee feels that he is underpaid or not . A system where the developer’s take-home pay is directly affected by the number of hours billed, may tempt to fiddle the number of hours billed.

In case of specialized skills, dev shops paying a fixed salary will not pay more than the minimum needed to attract and maintain software developers. Devshops paying a percentage will pay the lowest percentage they can get away with. The programmer usually will move to the firm where he /she can earn more.Also , the employees engaged in fixed salary basis assumes the connection between their salaries and billing therefore, have a motivation to create separate profit centres inside a company taking the firm into a hub employing freelancers on a percentage basis in long term.

From the client perspective, the important issues for the client are the skills and the work ethic of the specific developer and the standards of the firm for whom he or she works.  Clients have to trust that the developer of the company, does not fiddle the hours. 

There is a definite distinction in the case of software engineers who are paid fixed salaries, and have motivations anywhere between “incentives to bill”, and “incentives to overbill”. Obviously, developers must accurately bill their work, and their time must be efficiently invested in billable hours. Is operating otherwise  irresponsible and stupid ? Definitely Yes. However, developers must also know that overbilling can immediately backfire at them. Companies who want to maintain a fair and long-term relationship with their clients must ensure that the correct balance is maintained, so that all time spent working for clients is billed and, at the same time, no benefit is derived by the developer or project manager from billing even an hour more than he has actually spent.

This is definitely a deep topic to be thought about and I have just scratched the surface.

 

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P.S. I have been trying to solve daily "real" issues which educators face while integrating technology in their curriculum. Click one of the icons on the right sidebar to join the growing community of educators reading this blog by RSS or by email...