Business 101: Back-of-the-napkin Calculations

Your cost is way higher than your salary

I just posted that a programmer who makes $200K costs the company about $200/hour, and a lot of people deigned to "correct" my math. Given that these back-of-the-napkin cost discussions are useful, let's correct that correction.

The first key concept is the notion of "load." When we're talking about people, the "load" is the money we have to spend to employ you over and above your salary. That includes everything from benefits and vacation time to the cost of the space you occupy (if you're on-site) and the cost of the taxes and accountants and HR people who support you. Load is expressed as a multiplier, typically in the 1.5-2.0 range. A "fully loaded salary" is what it COSTS the company to employ you, not what they pay you. If you make $200K, your fully loaded salary (your cost to the company) is roughly twice that. It could be more if you get a lot of stock, though that's opportunity cost (money the company is foregoing by not selling the stock to the public) rather than direct expense.

The other way to look at that is, in the US big-city market, $1M buys you roughly 2.5 programmers for a year. That's true for all companies, including startups, because stock counts as money.

Other back-of-the-napkin numbers: In the US, a typical work year is 250 days (52 weeks * 5 days/week - holidays, PTO, etc.) or 2,000 hours. That number is lower in civilized countries where you actually get reasonable vacation time, parental leave, &c.

So, given a $200K salary, your hourly COST to a US company is ($200K * 2.0)/2000 or $200/hour.

Now, let's put that into practice: Think of that "15-minute" standup meeting. With context-swap overhead, let's call it 30 minutes (I'm being deliberately generous—it's probably more like a full hour). 6 people on the team at $200/hour yields $600 per day; times 250 days is $150,000/year; times 10 teams is $1,500,000/year. That money could be entirely wasted if you're doing the formulaic three-questions nonsense. If you're doing "scatter-gather" development and using the standup for necessary coordination before you all go off on your own, you have to spend that money. However, if you change the way you work to mob/ensemble programming, where everybody works together all day, you don't need coordination planning, so you can save $1.5M/year.

Think like a business person. It's important.