Compensation best practices for TSPs

For any IT solution provider (TSP), labor costs have the largest impact on services cost of goods sold (COGS) and, often, the largest expense for the business. Labor costs can account for as much as 70% of total business expenses when you include employee wages, benefits, payroll, and other related taxes. 

With so much at stake, do you know if what you’re paying your employees is reasonable compared to the market rate? Better yet, what are the top performers in your business model paying their employees? 

The good news is you now have a resource that will provide you with the compensation data to: 

• Recruit and retain talent 
• Keep you competitive in the marketplace (see what your peers are paying their employees) 
• Drive company culture and employee engagement 

The Service Leadership Index® 2025 Annual IT Solution Provider Compensation (Remuneration) Report™ is the leading source for business intelligence about compensation strategies of top-performing TSPs. This 500+ page report gives you total annual earnings (TAE), how much of TAE is variable, hourly bill rate for billable employees, and 2024 TAE increases and those planned for 2025 for 50+ TSP positions by: 

• Three seniority levels, broken down by geographic region, city tier, and, where possible, by metro area 
• Predominant Business Models™ (PBMs™), also known as business models such as managed service provider (MSP), value-added reseller (VAR), etc. 

Figure 1: Sample position chart for a department/practice area

Unlike other compensation reports, which typically include enterprise IT and other positions only tangentially related to the TSP business model, this report only includes data specific to TSPs. The survey participants were from around the world—Australia, Canada, Ireland, New Zealand, the United Kingdom (UK), and the United States (US). This provided us with a global view of what TSPs are paying their employees and allowed us to look into region-specific and aggregated data. 

In addition, because Service Leadership, Inc.®, a ConnectWise company, benchmarks the industry’s financial performance worldwide every quarter through the Service Leadership Index®, we can uniquely correlate compensation data to TSP profitability performance. In other words, we can tie compensation to profitability and show how top-performing companies pay differently than lower-performing ones. Let’s start with that. 

The most successful TSPs tie more pay to incentive compensation 

When we analyzed the compensation and profitability data, we found a significant difference between what and how the best-in-class (BIC) TSPs pay their employees versus those in the median and bottom ¼ quartile. And we found this correlation not just in the US but worldwide. 

The first difference is in the percentage of pay tied to the incentive compensation standpoint. TSP profitability is closely correlated to the percentage of variable compensation paid for staff and non-owner management positions. As seen in the chart below, for staff positions in 2024, the BIC tied 9.3% of TAE to variable (incentive) compensation, while the bottom ¼ tied only 5.3%. For manager positions, the difference was even more dramatic. In manager positions, the BIC tied 15.8% to variable compensation, while the bottom ¼ tied less than half of that, only 6.7%. 

In the comparison between 2015 and 2024, the BIC maintained consistent variable pay for staff and increased it for managers. This is because BIC TSPs understand the importance of a culture of excellence, where employees understand the benefit of variable pay, and exceeding expectations and outperforming can result in receiving higher compensation than market rates. 

Figure 2: Graph of staff and managers variable pay percentage of TAE by company profit quartile within PBM - 2015 vs. 2024

The most successful TSPs also pay their employees less 

A common response to learning that BIC are paying a higher percentage in variable pay is to assume that they are paying more overall. This is due to a widespread belief that more profitable TSPs are more financially successful and pay their employees more. In reality, the opposite is true. More profitable TSPs tend to pay less (lower TAE) for both staff and non-owner manager positions.

In fact, across all departments, the BIC pay about 7% less than the median and 13% less than the bottom ¼ for equivalent positions. Given the impact of payroll costs on services gross margin and sales and general and administrative (SG&A), this is a material factor in how the BIC can attain this level of profitability. 

One key way the BIC accomplish this—for all PBMs—is to narrow their range of technologies marketed and sold by sales, implemented by professional services, and supported by managed services. They also narrow the range of technologies sold and supported by narrowing the range of customer sizes—by user headcount—they will sell to; this is called a target customer profile. These two disciplines materially reduce the number, range, and cost of skills needed and thus allow TSPs to staff their teams with a higher percentage of lower-cost employees.

Is wage inflation softening for 2025? 

Our findings show wage inflation peaked in 2022, with TAE increases getting smaller in 2023 and staying relatively stagnant in 2024. In 2025, TAE increases are planned to be even lower than the 2024 actual increases, suggesting a return to historical norms. This is good news for TSPs as it should positively impact bottom-line profitability in 2025.

Data analysis corroborated the anecdotal evidence of lower wage inflation heading into 2025—across all PBMs and positions—with over 52% fewer positions receiving planned top-level (over 6%) increases than in 2024.

In addition, there was a correlation between company profitability and the size of increases paid by TSPs in 2024. Bottom ¼ MSP and VAR companies issued approximately three times higher amounts of top-level raises to employees in 2024 than those of BIC MSP and VAR companies.

This is a material difference in payroll increases, which are even harder to absorb for the bottom ¼, many of which are already unprofitable. It is telling that the bottom ¼ MSPs and VARS are once again planning the highest percentage of top-level increases in 2025. This will put even greater stress on this already struggling group. These firms urgently need to adopt best practices, including cost management and pricing, or 2025 will be another difficult year.

Why service multiple of wages impacts TSP profitability 

The three “legs” of service profitability for all PBMs are rates, utilization, and wages. A fourth leg—efficiency—exists in only flat fee firms, which is one reason well-run MSPs can generate higher sustained gross margin percentages. Because there is no uniform definition of utilization, we can more easily see a service practice’s effectiveness in generating gross margin by measuring the service multiple of wages.

This is a simple calculation: divide the billed service revenue for a given period by the taxable wages—W2, etc.—of the employees required to deliver that service for the same period. Though the formula is simple, the impact on a TSP’s profitability is pronounced. 

A TSP with a service multiple of wages of at least 2.5 drives BIC profitability, while a service multiple of wages of 1.9 to 2.0 will be needed to break even—or possibly at a slight loss—on their services business, assuming operating expenses are not also out of line. Below 1.9 will likely lead to a more significant loss. 

Figure 3: Chart of service multiple of wages at billable utilization quartiles

As the chart above shows, it’s generally not possible to make BIC services gross margin on any service employee whose TAE is above $110,000.

As noted earlier, the BIC profitability firms: 

• Pay less on average for any given position 

• Have a higher proportion of lower-skilled and lower-paid staff 
• Use a greater proportion of incentive pay within each TAE band 

The impact of these strategies underscores the importance of attaining a BIC service multiple of wages (2.5 or higher) for any TSP, regardless of their chosen PBM, to attain BIC profitability and growth. 

Conclusion 

Understanding how your peers are compensating and what the top performers are paying is critical in running a consistently profitable TSP. Compensation best practices leveraged by the BIC TSPs worldwide can be applied by any TSP seeking to attain and sustain top-quartile growth and profitability. 

The full 500+ page report provides compensation trends in your PBM and region, along with how the BIC are compensating their employees. You can purchase the report here.