Wage Inflation Trends, Remote Work Insights, and Retention Strategies for MSPs in 2025 with Peter Kujawa

[00:00:02] He's one of my most frequent guests, Peter Kujawa of Service Leadership joins me. We're talking about the Solution Provider Compensation Report that Service Leadership put out as we dig into the data to give some sense of what's going on with the best in class and what we can learn from those messages on this bonus episode of the Business of Tech.

[00:00:47] We'll see you next time. Get the promo code MSP Radio. Start running backups in 15 minutes or less with Comet Backup. Well, Peter, welcome back to the show. Hey, Dave. Thanks for having me.

[00:01:14] We were laughing before we warmed up here because you always come with data and it's like Christmas for guys like me to be diving right in. So I want to dive right into some of the, you released the 2025 Annual IT Solution Provider Compensation Report. Yes. And one of the things you noted in it was that wage inflation peaked in 2022 and has since shown improvement.

[00:01:40] Give me a little bit of a perspective on what factors you think have contributed to that and what's going on with wage inflation. Well, if you think back to 2020, 21, 22, it was the great resignation. It was the huge transition that we had seen with COVID. The remote work had opened up the possibility for working for companies not located in your area.

[00:02:04] There were all of these different factors that had happened over a really, really quick period of time, 12 to 18 months. Those things added up to a significant amount of turnover. They added up to much higher wages that MSPs had to pay to keep their people and to hire new people. It opened them up to new competition.

[00:02:24] We heard a lot of stories of MSPs that were located maybe in rural markets that all of a sudden their employees were getting offered positions from other companies on the coast or from large tech companies that were on a hiring spree. So all of those things were going on and we saw versions of that all over the world in all three of our geos. The in the US particularly in the last couple of years, that's really cooled off.

[00:02:52] So companies have had return to office initiatives, making it very problematic to work a long distance away. And the remote work trends really cooled off starting in about 2022. We also saw tech companies starting to do a lot of layoffs starting in 2023. And so instead of logging on every day and reading the news about the great resignation,

[00:03:18] techs all of a sudden were logging on and reading about a thousand employees cut here or two thousand cut from this tech company, etc. And when you see those kind of things happening, all of a sudden where you are starts to look pretty good. And so some of the competitive pressures, there's definitely still a lot of pressure. We have data in the report this year for the first time on employee retention rates. And we can talk about that as well.

[00:03:45] But the so there's definitely still some turnover, but it's gone back to much more of a normal time. The only exception is in Europe. Europe is still proving pretty stubborn on wage inflation. And so that's affecting things over over there a bit. But in the US and in Australia, New Zealand, things have largely returned to pre covid levels. Now, you brought up remote work. I'm going to go there before we hit retention rates.

[00:04:10] You know, only nine point six percent of employees are working 100 percent remotely and forty two point six percent exclusively in the office. And so we have to go to the next question. How do you see remote work kind of shaping up as a trend within the MSP space? I think we'll always have it. We we as we are seeing more national MSPs and some international MSPs now through consolidation. I think those are the folks that are the most likely to have full time remote employees.

[00:04:40] And so and and I've had the discussion with a lot of them and they'll say, well, look, I if I have somebody that is joining a team that is across the country, what what do I care if they're in one of our offices or not? If they're in their house, it works fine. And so for some that's working OK. And so I think we'll continue to see it. But what's surprising in the data was when we started to ask that question a couple of years ago, we thought that that answer would be way over 10 percent.

[00:05:09] And just because anecdotally, we were hearing so much about that trend. But definitely the largest trend is still hybrid. The flexibility once employees get get used to that flexibility, it's a really hard thing to take away. But we also have a lot of MSPs out there that returned really quickly to being fully in the office.

[00:05:32] And so I think there's a correlation when I talk to MSPs and every quarter and peer groups, I'm directly in front of hundreds of MSPs. When I talk to them, the correlation that I noticed is how long were they remote before they tried to bring their employees back? And the longer they were remote, the more used to it their employees got, the more new hires came in under that and didn't come in under working from the office, etc.

[00:06:00] And the more difficult the transition has been to being fully back in the office. But for a lot of MSPs, they they were back quickly as soon as within weeks or months of being allowed to come back. They were back in the office and there are years past this. It's hard to believe, but it's been five years since COVID initially hit and everybody had to start dealing with this. So so hybrid is definitely here to stay.

[00:06:27] I think remote is still here to stay, but it's it's much smaller as a percentage than it was a few years ago. And I think fully in the office is still here to stay as well. There's a place for that as well, particularly with those who work closely in a team environment and those who are newer employees to the company or to the workforce in general. So let's talk a little bit about retention.

[00:06:52] You know, the report dove into the fact that employees with one to three years of experience have a threefold higher FTE churn rate compared to those with that eight years and more of experience. Talk to me about what you're finding in terms of retention strategies. What's making a difference for those people early in the career versus late in the career? And what, you know, leaders and those in hiring should be thinking about as it remains, you know, as it relates to retention?

[00:07:19] Yeah, I think a couple of things. One is we weren't particularly surprised with the staff retention data. We've long said that you can expect depending on the position that you're going to have staff position turnover around 20%. And that was exactly where it came in 21.5 to be exact. So that that three years or less experience is when you're in the danger zone, you have new employees. And so why do you lose employees during that from staff positions?

[00:07:47] Well, number one is for a lot of those employees, this is their chance to get some experience. And once they have one, two, three years experience in an L1 position, for example, they're much more marketable. And as an MSP, I can only afford to have so many level twos and threes and higher level engineers. It's essential that I actually do lose some some of my level ones periodically for me to maintain that profitability model.

[00:08:14] I can't promote everybody up. So you're going to see some additional turnover because now I've got those employees who are just out of school. And now they've got some experience and particularly at an MSP. That's great experience. That's extremely marketable experience. So that's first and foremost. But second is is training for a lot of MSPs. The first first two, three, four weeks is highly structured.

[00:08:42] They hire a new employee in who doesn't have as much experience or even those who do have experience. They're coming in from outside. They need to learn your systems. They need to learn your customer base, your processes, et cetera. And so for those providers who put the time in to really do that, to assign mentors, they're going to have a lower turnover rate and they're going to have a better odds that that employee stays past that initial learning curve.

[00:09:09] For those that don't, those first first few months can be pretty miserable for a new employee. And so you're you're not setting them up particularly well to succeed. And as a result, turnover rates are going to be higher, whether that's the employee choosing to leave or perhaps the MSP making the decision that this employee is not as good as I thought. Well, why aren't they as good as you thought? And so I think there's a combination of things in that first three years.

[00:09:36] What was really interesting to us, though, was that the turnover rate for for new managers was almost as high as it was for new staff. We expect we expect we expected going in that that rate would be maybe 50 percent of what it is for new man for new staff. But new managers was 18.9 percent. It was right up there with staff turnover. And, you know, it makes sense when you stop and think about it.

[00:10:06] The even MSPs I've talked to who have really well defined onboarding programs for new staff positions. I think the tendency is I hire somebody to be a manager and oftentimes I'm promoting them from their existing role within my business that I'm doing it because I think they're a leader. I think that they are they've shown something they're capable. I'm willing to put some trust in them, et cetera.

[00:10:31] As a result, I probably don't have the same amount of time I'm putting into training, onboarding, mentoring, all those things that I do with a new entry level employee. The expectation on a new manager is go manage, be successful. And so I think that's a mistake. I think we need to all recognize that the retention rates are almost as high for new managers as they are for new staff positions.

[00:11:01] And we need to invest time and training resources and mentoring in those new managers as well. And you looked at retention and how it relates to profitability. What did you find as you dug into that data? Yeah, the data was interesting. The highest turnover was actually in median and that was for median profitability. The lowest turnover overall was for our best in class.

[00:11:28] And the second lowest was for the bottom quartile. And that might seem odd. And it is. It's a bit counterintuitive. But keep in mind, the bottom quartile pays the biggest raises every year. Our data shows that they have the highest wage inflation. They also, on average, pay the most and have the highest cost of their staff. So why? Well, I think bottom quartile shops are not very fun places to work.

[00:11:58] And so they have to throw a lot of money at their employees to keep them. And that fuels the continued downward pressure on profitability. But it is a little bit more effective at retaining some of their staff. The median is getting there. They're doing the right things right more often. But they're probably becoming more disciplined in their compensation practices, according to our data.

[00:12:24] And so they have a little bit higher turnover, particularly for their staff positions. The best in class, not only do they pay the lowest increases on average, their overall pay by category is the lowest. So and they have the best processes, their operational maturity level is the highest. They have the best training and onboarding typically.

[00:12:46] So all of those things, even though they're not paying as high of increases year over year, they're keeping their people because, frankly, they're a more fun place to work. You are getting yelled at less often by your employee or by your customers and your employees are enjoying life more. And you have more standardization and your processes are better. Your tech stack adherence is more disciplined. All these things make life better at a best in class shop.

[00:13:13] Now, that relationship between top performing MSPs providing lower compensation, that was also true in the previous year's report. Is there any major changes to that or is that trend staying consistent? It's it's absolutely been consistent for three straight years. So there's two consistent trends that we see as it relates to profitability quartile. Number one is the best in class on average pays the least per category.

[00:13:41] And we'll talk more about that in a minute because it's really important to clarify how they do it. The second is the best in class pays the highest percentage of total annual earnings as incentives. So they have a higher percentage of my pay is going to be tied to performance if I work at a best in class shop. And those trends have held held year over year over year. So so let's talk about the first one.

[00:14:08] If one of the misconceptions that some folks have reading our report or listening to us talk is that if I go work at a best in class MSP, I'm going to be underpaid relative to if I work at a median or bottom quartile MSP. So an example of that is if I look at the managed services of the managed service category, the average pay at a bottom quartile MSP is about seventy five thousand per position.

[00:14:37] The average pay at a best in class MSP is about sixty five thousand. So the temptation is to say if I go work at this best in class shop, I'm going to sacrifice my own personal earnings to do it. And that's not actually the right way to look at it. The those are not individual position level comparatives. Those are categories. So what goes into that category at an MSP?

[00:15:04] Well, I'm going to put all of my help desk positions in there. So all of my level one, two and three positions. I'm going to put my knock positions, my service manager. I'm going to put any managed service engineers, anybody who's doing managed service work. My technical account managers will be in there, et cetera. So why is it higher for bottom quartile?

[00:15:27] Well, because they have a higher number as a percentage of their employees of level two and three techs, level two and three engineers. Why? Because they have less standardization. They're supporting more more products in their tech stack. They have less standardization of target customer profile. All of these things add up to complexity in managed service delivery.

[00:15:52] The more complex your managed service delivery is, the more experienced techs you need to deliver those services. So if I'm a bottom quartile MSP, I have a high percentage of level two and three techs. I have a low percentage of level one techs. If I'm my best in class MSP, I have a my highest percentage are my level ones. I have less level twos and I have less level threes.

[00:16:20] It's a triangle that's built on a foundation of level one techs. So if I if I put all of those positions together, I add them up and I divide them out by the number of FTEs. I'm going to have a higher average as a bottom quartile MSP than I am as a best in class MSP. So that's the key point on that. Gotcha. Now, one of the things I wanted to also get a bit of a follow up is this, you know, there's a bunch of different elements to the way that we're thinking about the current modern work style.

[00:16:49] You know, we talked about remote work. We're talking about some of the different pressures. And there could be an argument that traditional compensation models are becoming obsolete or in need of revisiting in the face of these evolving workforce expectations. How would you put classify that? How would you respond to that idea? And do you think that there is a need for changes in compensation structures for MSPs?

[00:17:12] Well, for most of the MSPs that we look at, the need that they have is to do a better job of performance pay. So the best in class are paying two to three X as much in performance pay as a percentage of total annual earnings as the bottom quartile. And that's not just for managers. That's for staff positions as well. So when you look, the staff positions tend to be about two X managers tend to be about three X.

[00:17:43] So so what I would say is, A, most MSPs need to tie a larger percentage of total annual earnings for positions across the board to incentives. And B, you need to look at what those incentives are tied to. And what I mean by that is the easy way to do it is to tie all employees at all at all levels of the organization to things like EBITDA.

[00:18:09] Did we hit our number for the year or revenue growth would be another one that I commonly see. The problem with that is that you want to make sure that whatever you're linking the employees incentive to is something that the employee believes is relatively within their control.

[00:18:26] Okay, so if I'm, for example, designing a senior manager, an executive manager's compensation, well, in that case, I might tie 100% of it to whether we hit our EBITDA target or not. Okay, why? Why? Because that person should be in a significant influence role to be able to influence whether we did hit it or not.

[00:18:49] But if I'm designing compensation plans for techs in my help desk, if I link, if I tie, let's say, 10% of their pay for the year to whether we hit EBITDA or not, is that within their control? Well, you can make an argument that it's a little bit within their control if they're delivering great results to customers, renewal rates will be higher, etc. Certainly true. Okay, so maybe you want to link part of it to that.

[00:19:19] But for most entry-level staff positions, you want to focus on things like their productivity or their team's productivity or CSAT for their customers. Things that are things that are really much more directly within their control. At the end of the day, does that level one tech have a great ability to control G&A expenses? Or does that level one tech have a great ability to influence new sales hunting?

[00:19:47] Things that really do move the needle for EBITDA? Not much. But they have a great ability to affect their productivity every day or even their team's productivity. So, in those cases, we're a fan of a balanced scorecard approach. Have maybe three things that are each weighted and that you evaluate that employee on every quarter that give them an incentive that's worthwhile, that they know what drives it, and it's important for them to hit it.

[00:20:17] Those are the kind of things that I think are more important at this point to focus on. Peter Kajawa serves as the Executive Vice President and General Manager of Service Leadership at ConnectWise Company. Prior to his current role, Peter was president of LockNet, an EO Johnson company where he led a significant turnaround, growing revenue from $2.2 million to $16.5 million and expanding the team from 18 to 85 employees. He's also a good friend of the show, is a frequent flyer here. Peter, I always love having you on.

[00:20:45] I'm looking forward to having you back soon for that profitability report. Dave, I know you geek out with the data. Just wait until you see this year's profitability report. You'll love it. I could not do a better tease than that. Peter, thanks so much for joining me. Thanks for having me, Dave. This episode is supported by Flexpoint. Flexpoint offers a purpose-built payment solution from managed service providers, automating billing operations to enhance efficiency and cash flow.

[00:21:12] With features like accounts receivable automation, branded client portals, and secure same-day payments, Flexpoint streamlines financial management. Integrations with accounting software such as QuickBooks and Xero, as well as professional services automation tools like ConnectWise and Autotask, ensure seamless data synchronization. Experience improved cash flow and client satisfaction with Flexpoint's comprehensive platform.

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