How Much to Spend on Your Fractional Executive
The Art, the Science, and the Factors to Consider
“Don’t pay the ferryman until he gets you to the other side.”
Song lyric by Chris de Burgh
Do you need specialized leadership and expertise without the commitment of a full-time executive hire? This is where fractional executives come into play, offering their skills and knowledge on a part-time or interim basis. However, determining how much to spend on a fractional executive can be challenging, especially when this is the first such engagement for the business.
I have written a few articles in the past on this subject:
· The Dollar-Per-Hour-Math: comparing fractional to full-time.
· A Blast from the Past: The Commission-Only Sales Rep: when does this model fit and when not?
· Bill of Rights for Fractional and Interim Executives: advocating aligned compensation.
· The Ultimate Guide to Fee Models for Fractional Executives: all the factors to consider.
In one of those I stated that fee models for fractional executives have an art and a science, a balance between multiple factors, and an element of “as-high-or-as-low-as-desperation-takes-you” to it. And that is not too different from the permanent job market: There are job postings for a VP of Sales on Indeed right now, one making $80k, the other over $500k a year.
So, as a founder, owner, or CEO of a business and to make an informed decision, it’s essential to consider the right factors and all available data.
Understanding the Role of Fractional Executives
Before delving into the budgeting aspect, it’s crucial to grasp the role that fractional executives play. These seasoned professionals step in to address specific needs, such as spearheading a critical project, implementing a new strategy, or providing guidance during a transitional phase. Their experience and expertise often make them indispensable assets to the organization, even when they work part-time.
‘Understanding the Role’ also means to look beyond any title and define for the fractional role the goals to achieve, the tasks to execute, all within the first three to six months of the engagement. Understanding how strategic or tactical the role needs to be is critical to identifying the right executive and how to correctly pay for the expertise.
The Cost of Expertise
One of the primary reasons companies turn to fractional executives is to access specialized skills and knowledge without the long-term financial commitment of hiring a full-time executive. The cost of hiring a fractional executive typically ranges from $150 to $500 per hour, depending on their expertise and the complexity of the task at hand. Whether you end up paying by the hour or not, understanding the math is important, especially when the point of comparison is the equivalent full-time role.
Assessing Your Company’s Needs
The first step in determining how much to spend on a fractional executive is to evaluate your company’s specific needs:
1. What is the scope and complexity of the project or task that requires a fractional executive’s expertise?
2. How long will you need their services? Is it a short-term project or an ongoing role?
3. What is the potential impact on your business if the project is executed successfully?
4. What is your budget for this particular initiative?
By carefully assessing your needs, you can better gauge the level of expertise required and allocate an appropriate budget.
Industry Benchmarks
To establish a baseline for your budget, it’s essential to research industry benchmarks and salary data for full-time executives in similar roles. This will give you a rough idea of what companies typically pay for the expertise you require. Fractional executives often command a premium due to their specialized skills, the flexibility they offer, and the cost-savings on benefits and training that come with the contractor status, so be prepared to pay a bit more than you might for a full-time hire.
Consider the ROI
While the upfront cost of hiring a fractional executive may seem significant, it’s crucial to consider the potential return on investment (ROI). Data from case studies and industry reports consistently show that companies that leverage fractional executives for strategic initiatives or critical projects often see substantial improvements in their bottom line.
Risk Mitigation
Another factor to consider is the risk associated with the project or task at hand. If the success of your initiative is mission-critical, it may be wise to allocate a more substantial budget for a highly experienced fractional executive. Conversely, for less risky ventures or tasks, you may opt for a more budget-friendly option.
Negotiation and Flexibility
When engaging a fractional executive, there is often room for discussion. Rates vary between a short-term project or a longer-term commitment. In some roles, e.g., for a Fractional Sales Leader, a variable component like a success fee or commission can de-risk the investment and share the success. And some Fractional Executives are open to the idea of equity. Be sure to discuss the terms and pricing structure with your Executive of choice to find a balance that works for both parties.
Determining how much to spend on a fractional executive requires a thoughtful and data-driven approach. By assessing your company’s needs, considering industry benchmarks, evaluating potential ROI, and accounting for risk and market conditions, you can arrive at a budget that strikes the right balance between cost and expertise. Remember that the value these experienced professionals bring to your organization often justifies the investment, leading to improved outcomes and long-term success.
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Photo by Anne Gosewehr
Originally published at https://www.vendux.org on September 30, 2023.
