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« Spending money to (make/lose) money | Main | Cheating the clock »

Hourly work vs. linchpin work

There's a gulf between hourly work and linchpin work.

You should pay people by the hour when there are available substitutes. When you rely on freelancers you can put a value on their time based on what the market is paying. If there are six podiatrists in town, and all can heal your foot, the going rate is based on their time and effort, not on the lifetime use of your foot.

On the other hand, if there are no short term substitutes, then you don't pay what the market will bear, instead you pay what someone is worth. Big difference.

Consider, for example, someone putting together a series of concerts for which they intend to sell subscriptions or even have the musicians sell tickets.

They could seek out pretty good musicians and imagine that paying them $500 or more per hour is very fair compensation. After all, that's more than a podiatrist gets, and she gives you back the use of your foot.

But when they find a linchpin, someone who will either make it easier for them to sell subscriptions or will bring an audience with them, the question isn't how much time it took for the musician to do her set, the question is what did she bring in terms of value, right? An indispensable person, someone with a rare asset, has few substitutes and an hourly rate makes a lot less sense.

So, if a musician is going to sell 300 subscriptions for you and you earn $200 a subscription from that effort, that person just added $60,000 worth of value. Who cares if it took a minute or a day? What's on the table is who gets what portion of the value added...

I had a college professor who did engineering consulting. A brand new office tower in Boston had a serious problem--there was a brown stain coming through the drywall, (all of the drywall) no matter how much stain killer they used. In a forty story building, if you have to rip out all the drywall, this is a multi-million dollar disaster. They had exhausted all possibilities and were a day away from tearing out everything and taking a loss. They hired Henry in a last-ditch effort to solve the problem. He looked at the walls and said, "I think I can work out a solution, but it will cost you $45,000 if I succeed." They instantly signed on, because if he succeeded, the project would be saved.

Henry asked for a pencil and paper and wrote the name of a common hardware store chemical and handed it to them. "Here, this will work." And then he billed them $45,000. That's quite an hourly wage. It's also quite a bargain.

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