I’ve had this conversation at probably thirty different conference dinners. Someone at the table — usually the owner of a mid-market MSP, usually on their third bourbon — makes the same complaint: “I keep losing people to the competitors who pay more. I don’t know how they do it.” And every time, I ask the same question: “Are those competitors more profitable than you?” Long pause. Usually, no. That conversation just got a data set. Service Leadership — the ConnectWise benchmarking division that has tracked IT solution provider compensation for years — released its 2026 Annual Compensation Report this week. And buried inside 60-plus roles worth of compensation data is a finding that should make every MSP owner sit up straight: the most profitable IT solution providers in the industry consistently pay their employees less than their less profitable peers. Not a little less. Consistently less. Year over year. The report doesn’t hedge on this. “There is a widespread belief that more profitable IT Solution Providers pay their employees more. The reality is we consistently find the opposite to be true.” I’ve been in this industry for twenty years. That sentence doesn’t surprise me. But I’ve been waiting a long time for someone to write it in a formal report.
The numbers behind the paradox
The top-line finding from the 2026 report: MSP and VAR leaders expect just 8.1% of salary increases to exceed 6% this year. Last year, 16% of salary increases cleared that bar — double what people anticipated going in. That’s a significant cooling. Three consecutive years of wage normalization after the 2022 spike. But the more interesting data is in the performance cuts. Top-quartile MSPs — the firms killing it on margin — lost more than 10% of their workforce in 2025 at a rate of 38.6%. Compare that to bottom-half firms, where the rate was 22.8%. The firms making the most money are the ones losing the most people. And then there’s the PE angle. Private equity-backed IT solution providers are the most extreme version of this model. 54.6% of PE-backed firms lost more than 10% of their workforce in 2025. The report diplomatically notes that PE firms have “organized their operations to accelerate hiring, training, and onboarding processes to address these trends.” Translation: they’ve optimized for churn. High-velocity hiring, fast onboarding, standardized training. Not because they’re bad at retention. Because they’ve made a deliberate decision that fast-cycling talent at lower cost beats premium retention. The math works. The profitability numbers prove it.
Why this model works (even though it shouldn’t)
Here’s the thing that took me a decade to really understand: retention is expensive in ways that don’t show up on the income statement. When you keep a senior engineer who’s been with you for eight years, you’re not just paying their salary. You’re paying the weight of their institutional expectations. Their opinions about what the company should be doing. Their resistance to process changes. Their relationships with clients that belong to them, not to you. Their compensation trajectory that keeps bending upward because you’re afraid to lose them. None of that shows up as a line item. But it adds up. The high-churn MSP model isn’t saying “we don’t value people.” It’s saying: “We’ve designed the business so that fresh talent with the right certifications can deliver on our service model within 90 days, and we’re going to build variable pay structures that reward the outcomes we actually need.” It’s a factory model. And for a certain type of MSP — commoditized services, well-documented runbooks, standardized tooling — it genuinely works better than the artisanal shop full of long-tenured expensive generalists.
AI is making this easier
There’s another data point in the report that deserves attention. For the first time, more IT solution providers decreased headcount in 2025 — 43.5% — than increased it — 36.4%. In 2024, it was the reverse: 51.2% increased headcount and only 35.7% decreased it. Service Leadership suggests that AI may be beginning to backfill open roles rather than companies hiring to replace people who leave. This is the quiet part of the AI story in the channel. Not the dramatic “AI is eliminating jobs” narrative. Something more subtle: the headcount that used to justify a replacement hire is now getting absorbed by automation. The Level 1 ticket that used to require a warm body is getting handled by an AI agent. The monitoring alert that used to wake someone up at 2 AM is now resolved before anyone knows about it. For the high-churn MSP model, AI is a structural accelerant. You can push the automation floor lower and lower, which means the roles you do retain need to be operating at a higher level, which means you can continue paying less for headcount while productivity per employee actually increases.
What this means if you’re building a team right now
If you’re an MSP owner reading this and you’re in the “pay more, retain better” camp: I’m not saying you’re wrong. There are real advantages to a stable, experienced team. Client relationships, institutional knowledge, morale. Those matter. But be honest about what you’re buying. If your retention spending is really about avoiding the operational discomfort of constant onboarding — rather than delivering genuinely better client outcomes — you might be paying a premium for your own comfort, not your clients’ results. The firms at the top of the profitability table have made peace with churn. They’ve built businesses that can absorb it. They’ve standardized everything they can standardize. And now, with AI absorbing the bottom of the work pyramid, they’re pulling further ahead. The data didn’t invent this playbook. It just confirmed it’s working. Twenty years of conference dinner conversations just got a citation. Sources: Channel Dive — Channel partners curtail salary increases · GlobeNewswire — Service Leadership 2026 Annual Compensation Report · IT Brief — ConnectWise unit maps IT pay trends, automation push Mike Callahan is ChannelPulse’s Industry Correspondent. He covers channel economics, enterprise deals, and carrier relationships with twenty years of field experience behind every take. Share {})”>📤 Share LinkedIn X [Email](mailto:?subject=MSP%20Profitability%20Paradox&body=Worth a read: https%3A%2F%2Fchannelpulse.io%2Farticles%2Fmsp-profitability-paradox-2026.html) this.textContent=‘Copy link’,2000)“>Copy link