Key Insights from the Service Leadership Compensation Report with Peter Kujawa

[00:00:00] We all want to know how much should we pay our people? Service leadership puts out a great

[00:00:08] report. And Peter Kajawa joins me to talk about the research they find. We talked about how

[00:00:13] compensation works, where the increases are happening, remote work, unlimited PTO and

[00:00:19] his favorite data point on this bonus episode of the Business of Tech.

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[00:01:07] Peter, welcome back to the show. Hey Dave, glad to be back. You are my most frequent

[00:01:16] flyer on the show, so I really appreciate you always coming with really cool insights.

[00:01:21] We're going to talk today about the compensation report. For those that are familiar, what's

[00:01:28] given over a few of what the report is?

[00:01:30] Yeah, we launched it last week. We're really excited about it. The quality turned out great.

[00:01:35] We just couldn't be happier with how it turned out. The background on it is service leadership

[00:01:41] used to do a compensation benchmark report every other year. The last year it was done

[00:01:48] prior to a year ago. The last year was 2016. We had tons of requests in 2022 to bring back

[00:01:56] the data because of wage inflation, all the pressures that were on every MSP out there.

[00:02:02] Last year we brought back through a pay-in and had an all-time record amount of companies

[00:02:07] enter their data. This year we were up 50% over last year. The current last year was so well

[00:02:15] received that we made the decision to bring it back as a manual product. We opened up the

[00:02:21] data submission window again in October and November 2023. Anybody who provided their data

[00:02:28] to us worldwide got a free copy of the report last week, and anybody else can purchase it.

[00:02:36] That's the backstory on it.

[00:02:39] Awesome. I've got some questions. I want to hit a couple of the highlights with you.

[00:02:44] So, for 2023 you noted that the top-performing technology solution providers provided lower

[00:02:51] compensation increases compared to the bottom portion. Then you said indicating a difference

[00:02:56] in compensation strategy. I feel like difference in compensation strategies is doing a lot of heavy

[00:03:02] lifting there. Give me a little bit of insight into what you mean by the differences in the

[00:03:07] strategies. Yeah, it's a great question. This generated a lot of buzz last year and it

[00:03:12] generated a lot of constructive feedback from employees whose takeaway was that you're

[00:03:21] teaching my MSP to pay me. First of all, that's not the case. There's a couple of ways that

[00:03:31] best-in-class pay their people on average less. By the way, we saw the data again this year.

[00:03:39] Number one is typically best-in-class providers are much better at using data to make business

[00:03:46] decisions. We saw the evidence again this year that once again the bottom quartile paid the

[00:03:54] biggest increases last year and they were planning on paying the biggest increases this year.

[00:03:59] The same thing holds true. The opposite holds true for the best-in-class. The best-in-class

[00:04:04] held the line the most on their increases last year and they were planning on doing it again this

[00:04:09] year. So definitely data plays part of the decision. If you're not sure what to pay your people and

[00:04:17] maybe you're responding to a number that you heard from one of your employees who heard it from

[00:04:22] a recruiter or some other source that's not necessarily reliable data, you're not necessarily

[00:04:28] going to make the best decisions on compensation. So that's certainly one factor. The second factor

[00:04:35] is that the best-in-class are in a much better position to bring in less experienced employees,

[00:04:41] particularly into staff positions, get them trained, productive and up and running faster.

[00:04:49] And as a result, they have a higher percentage of level one techs and level one engineers,

[00:04:56] etc. So when you look at the best-in-class paying less, it doesn't mean that every single person

[00:05:04] who works at a best-in-class shop is making less money. What it means is on average across a category

[00:05:13] they're paying less. So let's take an example hypothetically. Let's say you have a best-in-

[00:05:19] class shop and they're paying exactly the same amount for a level one, two and three techs

[00:05:25] as the bottom quartile shop, just for sake of discussion. But the best-in-class shop

[00:05:31] employs half of their techs are level ones, 30% of their techs are level twos and 20% are level

[00:05:38] threes. The bottom quartile shop has maybe 20% level ones, 50% level twos and 30% level threes.

[00:05:48] Well, if you're paying the same amount and you add all of those people up, put them into a

[00:05:53] bucket and divide it by your FTEs, on average you're paying more at the bottom quartile and less at the

[00:05:59] best-in-class. So there's a lot of things that feed into it but there is definitely a distinct

[00:06:06] difference between how the best-in-class and the bottom quartile pay their people once again.

[00:06:11] Another big difference is in incentive pay. The best-in-class are tying about 2x as much

[00:06:19] of total compensation to incentive or performance pay for staff positions and about 3x as much

[00:06:28] for manager positions as the bottom quartile. So there's radical differences in what we see in

[00:06:34] the data. Now, you brought up incentives and I want to bring this to think about because one of

[00:06:40] the things that I've been covering a lot on the show these days is the idea the remote work

[00:06:44] is actually a big incentive for a lot of employees. A lot of people are looking for that.

[00:06:49] But you reported in the data that only 8.7% of employees working in these technology services

[00:06:56] per month are working 100% remotely while 42.8% coming up on 50% work exclusively in the office.

[00:07:04] Now, 73% of them get to spend at least three days or more working in the office.

[00:07:10] What's going on with remote work? What would have expected that number to be like

[00:07:14] the technology space to have embraced remote work a lot more? What's going on?

[00:07:19] Yeah, you and me both. We were shocked at this data. So for years, as has been the case,

[00:07:26] you've had the discussions, you've heard things anecdotally. We're in peer groups

[00:07:32] and we're in front of hundreds of MSPs every quarter in person. So we hear the roundtable

[00:07:37] discussion and different questions that are coming up. And the remote work model

[00:07:43] continued to be a hot topic even last year. So we didn't have any data. We would get asked about it

[00:07:49] a lot, but we're data folks. And so we like to have data on these subjects. So we decided to

[00:07:55] ask about it. And so the option for each position in the survey was 100%

[00:08:02] home, 100% from the office, three days a week or more hybrid, two days a week,

[00:08:09] hybrid or less. And so, and you asked me this when we asked the question,

[00:08:16] my guess would have been, I don't know, 30, 40% would have been 100% work from hell.

[00:08:23] I would have thought it worked from the office would have been the smallest of the four options

[00:08:29] and hybrid would have been the dominant. And you're right. I mean, in the US has the

[00:08:35] highest in the US it was under 10% or 100% work from hanging. So definitely the industry has

[00:08:45] worked its way back into the office. Now, if you add the two hybrid models up,

[00:08:50] those are actually larger than a hundred than the 100% work from the office,

[00:08:55] but not by much. So the key takeaway was employees are back in the office. They might

[00:09:01] be back in the office one or two days a week. They might be there three, four days a week or

[00:09:05] five days a week, but they're back in the office to some degree. And I think that makes sense. I

[00:09:10] think we saw some of the productivity gains in the first year of COVID and as employees

[00:09:17] were shifted to work from home. But the longer that that went on, the more difficult to the

[00:09:22] model that was to sustain and we started to see some of the issues with that model over time.

[00:09:27] So it makes sense that employees are back in the office to some degree,

[00:09:32] but I was equally surprised at the number as your, it was really shocking.

[00:09:37] It's interesting because some of the broad industry data is saying that there is not a link

[00:09:43] to return to office mandates and profitability. Will you be looking at, be able to look at this?

[00:09:48] You guys do the profitability study. Will you be able to do some cross-referencing on

[00:09:52] that going forward? We actually did. So in their report, interestingly, just under 15% of the best

[00:10:01] in class is 100% remote and that's about three times as much as the bottom quartiles. So what

[00:10:09] the data said is that those, though the best in class have the highest percentage of employees

[00:10:16] working 100% remote. So at first you think, okay, well that seems counter-intuitive based on all of

[00:10:24] the assumptions, but a couple things to keep in mind. First of all, it's still the smallest of the

[00:10:31] four models. So even for the best in class, it was less than 15%. So it's certainly not

[00:10:41] the dominant model. In other words, 85% of the best in class employees are back in the office as well.

[00:10:48] The other thing with the best in class is that they have more senior managers and less turnover,

[00:10:53] typically on their managers. They have much better processes. They have tighter tech stacks, tighter

[00:11:00] target customer profiles. As a result of all of that, their managers are better able to

[00:11:06] manage employees remotely and productively. And they're able to onboard employees easier. And those

[00:11:12] managers are in, because they're more seasoned, they're in a better position to work remotely

[00:11:17] fully as well. The last thing is the best in class when they went remote, they didn't just

[00:11:24] allow their employees to do it or not do it. Typically we saw them pull the most cost out

[00:11:30] of their operation by closing down office locations. So it wasn't just that we're

[00:11:35] going to have employees have this model that they can pick from as a per, we're actually going to pull

[00:11:41] significant cost out of our operation. So we think those are the things that have added up with

[00:11:46] the best in class to show that. But again, I wouldn't get too hung up on that number. It's still

[00:11:52] a much, much smaller number than those who are back in the office, even with the best in class.

[00:11:57] Yeah, it leans into the process and management capabilities, much more than it is necessarily

[00:12:02] that's the factor. But it's good to hear from my perspective that it aligns with the broader data

[00:12:06] as well. Now, the other one that got my attention was unlimited PTO. Because you found that best in

[00:12:13] class MSPs and bars are the least likely to offer unlimited PTO. And I'm intrigued by this

[00:12:19] because at some level, unlimited PTO is actually a bit of a headache when we actually dig into it,

[00:12:26] we find employees that are offered unlimited PTO actually in a taking less PTO and it removes some

[00:12:33] level of cost from the organization. Tell me what you're seeing with this kind of this data point

[00:12:38] around unlimited PTO and its relationship to profitability investing class.

[00:12:43] Yeah, it's exactly as you described. First of all, the number of companies,

[00:12:49] the number of positions that we're offering it was a little less than we were expecting

[00:12:54] based on discussion we're hearing. Second is it's much more for manager positions and it's heavily

[00:13:01] distorted amongst MSPs by owner positions. So if I'm an owner, technically, of course,

[00:13:08] I have unlimited PTO. It's one of the reasons I own the business I can take off whenever I want

[00:13:14] to can travel whenever I want. Of course, as every owner watching this knows, I also rarely do

[00:13:21] it and I'm rarely able to as an owner. So technically, the sample, the sample net,

[00:13:27] the set of managers receiving unlimited PTO is much, much higher than staff positions receiving it,

[00:13:35] which was not surprising, but it's the amount of dominance of owners

[00:13:40] was really skewed that data somewhat. So yes, as you described, unlimited PTO is primarily

[00:13:51] it's primarily an advantage to the employer because I don't have to approve a payout

[00:13:56] upon separation on use PTO. The dominant models are still we have we collected also

[00:14:04] 11 to 20 days of PTO or 21 days plus of PTO. And so there's a lot of data in the report about that

[00:14:12] it's different obviously for managers and staff, it's different based on longevity.

[00:14:17] But definitely the two big models continue to be giving PTO and the 11 to 20 day is the

[00:14:25] dominant model we do see a lot of 21 day but not unlimited as well. Interesting. So basically,

[00:14:32] if you watch your employees philosophically as an employer, you're trying to minimize your liability

[00:14:38] then go on limited PTO. If philosophically, you believe in the importance of taking PTO and

[00:14:48] believe that your employees should use that amount of time off for a year for various other reasons,

[00:14:54] then we'd recommend still giving them that PTO. That's good advice. Now, we're both being

[00:15:01] data geeks, right? So we love getting these back out. What was the data point that you

[00:15:06] found sort of most interesting and notable that you want to focus on?

[00:15:10] Well, so first of all, those are anybody who hasn't seen the survey should understand

[00:15:16] it's about 425 pages or so. And about 300 pages of that are tables on the positions themselves.

[00:15:25] So we're showing positions by region or showing them in the US, we have the top 15 metros,

[00:15:32] we're showing them by experience level. So we really were positioning the data on the same

[00:15:40] roughly 60 positions that are common for every TSP. We're showing that data in a lot of

[00:15:46] different ways. You don't have to reach for all 425 pages or so. So that's the first thing

[00:15:52] is making sure the audience understands that if I'm trying to understand what I should pay a level

[00:15:58] one tech or a CISO or a VCIO or other positions, there's a ton of information I can flip to you

[00:16:06] and get a good idea readily in there. That being said, the other 100, 125 pages is analysis

[00:16:13] where we're looking at some of these trends and where we're showing the correlation with

[00:16:18] profitability and really getting into some of this other information that you and I are talking about.

[00:16:24] I would say for me that the most interesting data point in there is the softening of wage inflation

[00:16:31] that what our data clearly shows is that 2022 was the high watermark for wage inflation.

[00:16:39] It improved last year and it actually improved slightly better than was predicted heading

[00:16:45] into the year by the survey just spent some of the previous year.

[00:16:52] 2023 was not only better than 2022, but it was better than predicted it would be.

[00:17:00] 2024 is predicted to be way better for wage inflation than 2023 was. That's really,

[00:17:07] really good news for the profitability opportunity for every MSP out there that as you know,

[00:17:15] 80, 85% of the expenses of an MSP are as people. It's going to be your labor cost.

[00:17:22] The last few years have been really tough. The price increases have been higher, which is good.

[00:17:30] MSPs have done a good job of passing those increases along,

[00:17:34] but wage inflation hits you much faster and harder than the benefit of price increases.

[00:17:43] If I have a price increase built into a multi-year contract, well when that contract comes up

[00:17:50] for its anniversary day, I'm going to be able to get the benefit of the price increase.

[00:17:55] But if somebody comes in today and said, I've got an offer for 15% more or whatever it is,

[00:18:02] or I've got a new hire and I can't get them at the number because of wage inflation,

[00:18:07] well I start immediately getting hit with that expense starting in the next payroll period.

[00:18:14] So wage inflation is much more damaging than price increases make up for.

[00:18:21] And so seeing wage inflation soften to the degree that we have now in a three-year,

[00:18:27] multi-year trend has been great.

[00:18:31] Peter, this is always super fascinating. People are interested in getting access to the data.

[00:18:36] Where should they go?

[00:18:37] The compensation report is available in two formats. You can get an executive summary for

[00:18:43] free or you can, we'll provide you with that slide, Dave, so you can show that.

[00:18:49] Or you can purchase the full report and that's available today. So you can reach out to your

[00:18:55] Mac-Wise rapper, go to service-leadership.com to the service leadership website.

[00:19:01] And we have links there that will take you to both.

[00:19:06] Peter, this has been Fasse. Thanks so much for joining me today.

[00:19:09] Thanks for having me, Dave. Always a pleasure to come on and talk to you.

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