SPECIAL REPORT

This article was published in ASHRAE Journal, February 2014. Copyright 2014 ASHRAE. Posted at www.ashrae.org. This article may not be copied and/or distributed electronically or in paper form without permission of ASHRAE. For more information about ASHRAE Journal, visit www.ashrae.org.

Still on the Road to Recovery?

Understanding Salaries In the A/E Industry

BY KATE ALLEN, P.E.

A rms compensation strategy and philosophy clearly communicate rm leaders expectations and reward systems to existing and potential new hires. Engineers want to know how much pay they should be getting and employers want to know how much they should be paying. As the industry continues to recover from the recent recession, compensation strategies to retain and attract key staff are crucial.
The number one asset in any professional services rm is the staffthey not only bring in the work but they must also do that work in a way that allows a rm to prosper. In the past, compensation analysis may have been more focused on cutting costs, but in todays economy, compensation is a strategic tool used to rebuild and position a rm for growth. Understanding the current nancial position of the A/E industry as well as using benchmarking data can help answer both the engineers and the employers questions. Total compensation, which is dened here as base pay and bonus, has been under substantial pressure in the last few yearsexpenses continued to increase yet net revenues were not increasing at the same rate, resulting in lower protability. Beginning in 2011 and continuing through 2013, net revenues are nally rising faster than expenses; overall prot has improved but is still slightly below the 2009 high of 11.7% (median) and well below 2007/2008 highs of just over 15% (median). Because base pay is an expense and is part of the cost of doing business, many rms adopt a philosophy to pay a lower base pay and make up the difference with bonuses. This approach allows rms to weather variable market conditions and provides a small cushion of protection when the economy goes into recession. However, this approach demands that rms drive prot levels that not only fund retained earnings and pay shareholders a return on their investment, but also award bonuses that ensure that total compensation is in step with the market. The nancial performance of a rm and compensation are an integrated system and the more successful a rm is the more options they have to attract and retain key talent. So what is the nancial position of rms in the A/E industry today and have they fully recovered from the recent downturn? Have compensation levels recovered as well after several years of cuts, freezes and minimal bonuses? Have billing rates been increasing to allow rms to recover costs? Many rms have been in survival mode and not all are on the road to recovery but we can learn more from what the data is telling us.

Overall Firm Performance Impacts Compensation Options

Firms in the A/E industry continue to struggle in this economy fact or ction? Reviewing several key nancial metrics can provide some insight: Direct labor costs are the raw labor costs (without labor burden or fringe benets) allocated to project-related work.

ABOUT THE AUTHOR Kate Allen, P.E., is director of A/E/C Industry Surveys for PSMJ Resources, Inc.
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Net Revenues are the revenues generated by in-house $120 Prot labor. $100 Overhead includes indirect labor or raw labor costs $80 allocated to non-project related work; labor burden, Overhead $60 which includes group insurance, payroll taxes, paid $40 time off, and mandatory retirement plan contributions; $20 and non-labor costs required to run the rm, such as, Direct Labor $0 rent, training and development costs, etc. 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Prot is the remaining earnings after overhead and Net Revenue Breakeven Direct Labor direct labor expenses are paid. Prot will be dened Per DLH Costs Costs Per DLH throughout this article as prot before bonus and taxes, FIGURE 1 Direct labor benchmark trends. due to the vast variation in the allocation of year-end prots from rm to rm. Direct labor costs, direct labor hours (DLH), and net TABLE 1 Comparison of key nancial indicators, 20102013 revenues are all project-related measures commonly (MEDIANS) 2013 2012 2011 2010 used as the basis of key nancial metrics. Figure 1 indicates the variation in direct labor, Net Revenues Per Direct overhead costs, and profit as a function of direct Labor Hour $101.66 $100.32 $94.69 $86.63 labor costs over the past 12 years. It shows that Direct Labor Costs Per reasonable profits were being achieved until 2003, Direct Labor Hour $31.90 $31.31 $30.99 $30.99 when the impact of an economic downturn hit the industry. As the design industry recovered between Total Costs Per Direct Labor Hour (Overhead + 2004 and 2007, firms were able to raise prices, hold Direct Labor) $86.50 $88.73 $86.06 $87.78 the level of overhead costs steady, and generate Operating Prot higher profits. (Net Revenues) 11.42% 9.31% 9.86% 9.49% Unfortunately, as the economic climate shifted to severe contraction and recession, 16% 2010s survey results indicated that prof14% its were being squeezed again as overhead 12% 10% costs increased faster than net revenues 8% over the previous three years. This years 6% results indicate higher profits, though not 4% all firms are enjoying these positive results. 2% 0% Whether these higher profit levels can be 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 sustained and remain for a comparable FIGURE 2 Operating prots as a percentage of net revenues. period of time will be the subject of future surveys. A detailed comparison of these key nancial indicators Compensation Trends During the recent recession, many rms went into for 2010 through 2013 is provided in Table 1. survival mode and some had to freeze salaries while So while Table 1 indicates that the nancial position of rms that practice in the A/E industry is improving, lets others instituted rm-wide salary reductions. The recestake a closer look at prot. Prot is commonly expressed sion of 2006 to 2009 resulted in record job losses and high unemployment across most industry segments. In in terms of a percentage of net revenues which reects 2009, the stimulus plan provided some opportunities invoiced income for a rm (less reimbursable expenses for public infrastructure projects, and in 2010 we began and sub-consultants). The industry is still struggling to see a slow recovery in the private sector as well. Longto earn a reasonable prot, but its headed in the right term capital investment coupled with constructions direction (Figure 2).
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longer lead times tends to buffer the A/E design industry from economic downturns. However, the recent recession lasted longer and proved more severe than the past two downturns. The goal for many rms was to keep as many staff on board as possible while also making sure the rm could ride out the recession. Annually, for the past 31 years, PSMJ Resources, Inc. has conducted a management compensation survey that solicits data from both engineering and architectural rms for 18 management positions, from chairman of the board to junior project manager. Historical Total Compensation is presented in Table 2 for the past ve years. Its important to note that compensation rates generally increase with rm size, so use the information in the table with caution. The table is presented to demonstrate trends only, and for more detailed information a full compensation study would be required. Total compensation generally reached a veyear high in the 2009/2010 time period and a ve-year low in the 2011/2012 time period, for most positions. We see mixed results for 2013, for example, total compensation for CEOs, senior project managers, and junior project managers exceeded 2009 results, but many other positions have not, such as other principals and director of operations.

TABLE 2 Historical total compensation results (median). 2013 CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT OTHER PRINCIPALS DIRECTOR OF FINANCE CONTROLLER BUSINESS MANAGER DIRECTOR OF ADMINISTRATION DIRECTOR OF OPERATIONS DIRECTOR OF QUALITY CONTROL DIRECTOR OF BUSINESS DEV. DIRECTOR OF HUMAN RESOURCES DIRECTOR OF COMPUTER OPS. BRANCH OFFICE MANAGER DEPARTMENT HEAD SENIOR PROJECT MANAGER JUNIOR PROJECT MANAGER 2012 2011 2010 2009

$215,000 265,342 203,913 198,674 145,000 175,000 100,807 78,972 140,246 146,000 143,364 135,229 102,231 104,589 125,521 120,000 102,000 78,285

$212,066 233,000 221,933 200,000 143,415 184,538 101,109 78,630 128,750 137,510 128,750 120,800 100,000 97,000 125,377 120,560 98,315 77,000

$233,589 233,216 224,133 178,092 150,000 175,905 96,000 82,994 80,528 149,740 156,826 108,768 91,655 96,000 118,000 112,677 98,000 76,000

$250,000 247,500 246,500 210,137 146,641 170,226 97,000 95,000 123,668 154,686 182,000 119,724 92,867 100,000 128,608 114,000 95,554 75,000

$240,144 250,000 231,061 200,500 149,327 171,290 100,500 77,845 85,280 150,000 178,500 130,523 99,309 105,500 130,742 115,752 97,500 73,883

Billing Rate Trends

3.20

Compensation is directly related to hourly 3.10 billing rates. The billing rates are intended to 3.00 recover all design rm costs (including direct Net Revenue Decit labor and overhead) and provide for prot. 2.90 Reimbursable expenses are recovered from the 2.80 client directly and not included in these billing rates. If compensation rates exceed what can be 2.70 Target Direct Labor Multiplier recovered in billing rates, then prots may be Achieved Direct Labor Multiplier 2.60 negatively impacted. 2.50 Many are familiar with the 3.0 target direct 1978 1985 1990 1995 2000 2005 2010 2013 labor multiplier which held steady for decades, FIGURE 3 Target vs. achieved direct labor multiplier (net revenues decit). meaning that most rms at the end of the day are targeting fees that are triple their direct or exceeding their target multiplier, which results in labor costs in establishing their billing rates. The target reduced net revenues (net revenues decit) and an overmultiplier began to rise in 2005 and has remained at or near 3.10 since 2007. However, as shown in Figure 3 many all reduction in prot. In 2013 the results are beginning to see improved performance and the market is either rms achieved direct labor multiplier is not meeting
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allowing rms to charge fees that cover their costs or TABLE 3 Historical trends median hourly billing rates. project management is improving and more projects are 2013 2012 2011 2010 2009 being done within budget. Whether these higher multiPRINCIPAL $185 $177 $178 $183 $175 plier levels can be sustained will be the subject of future surveys. ASSOCIATE 149 146 145 150 152 Annually, for the past 28 years, PSMJ Resources, PROJECT MANAGER 140 133 130 131 132 Inc. has conducted a fees and pricing survey that PROJECT ENGINEER 125 124 120 120 120 solicits data from both engineering and architectural firms for 17 different positions. See Table 3, SENIOR ENGINEER 140 135 125 125 130 Figure 4, and Figure 5 for the historical trends for ENGINEER 108 105 99 101 100 billing rates for common engineering JUNIOR ENGINEER 90 90 90 90 90 positions. As expected, billing rates hit a five-year high in the 2009/2010 time period and a five-year low for most $200 positions in the 2011/2012 time period. $180 $160 Nearly every position reports that billing $140 rates increased between 2012 and 2013, $120 which reinforces the thought that the $100 $80 A/E industry is recovering. In fact billing Principal Associate Project Manager $60 rates for all engineering positions have $40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 exceeded their 2009/2010 time period high.
FIGURE 4 Historical management staff hourly billing rates.

Conclusion
Quality engineering talent are becom$160 $140 ing harder to find each passing year; the $120 number of graduates is not keeping pace $100 with the number of retirements or peo$80 ple choosing to leave the industry. This $60 situation was exacerbated by the recent $40 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 downturn when many of those that were laid-off left the A/E industry for other . . Junior Engineer Project Engineer Senior Engineer Engineer career options. Engineering firms are going to continue to be challenged to do FIGURE 5 Historical engineering staff hourly billing rates. more with less yet still attract and retain quality talent, and a firms compensation options are dramatically expanded with strong Understanding the financial position of the indusprofitability. try as well as key data trends can help both the engiThe industry is improving but has not fully recovered neer and the employer to better understand their from the recent recession. Prot levels are still below compensation options. Firms that are growing and all-time highs, compensation rates for many positions prospering are in the best position to move away have recovered to 2009 rates, and target multipliers from industry trends and develop compensation are on the rise, which results in higher billing rates. strategies that allow them to differentiate themHowever, if the project work cant be done within that selves from their peers to attract and retain high rate, then prot is compromised as well as the overall quality engineers. nancial health of a rm (Figure 3). Small improveNote: If you are interested in participating in PSMJs 2014 surments in the achieved direct labor multiplier can yield veys you can nd out more about the benets of participation at: signicant improvements in protability. www.psmj.com/surveys-research/participation.cfm.
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