Why You Should Negotiate Salary
The salary is probably the major factor that motivates you to seek new job opportunity. According to a survey conducted by Indeed.com, only 19% employees are comfortable about their current pay rate [1]. Apparently, not very many people are happy about their salary these days. Of course, who doesn’t want more money? it is important to negotiate salary when you think about your lifetime income potential.
Also there is a stark contrast between men and women regarding salary negotiation. Linda C. Babcock, a James M. Walton Professor of Economics, conducted a research [2] that how the gender will affect the motivation for salary negotiation. In the study, only 7% of women attempted to negotiate their salary when they received a job offer while 57% of men answered they did.
As always, new job offer is always exciting to hear after stressful hiring process. Your hard work paid off and thrilled to start first day. But are you happy about your salary offer? Good news is you have a job offer and what bugs you is that you might not be fully satisfied about new salary. You might start regretting that you didn’t try to negotiate salary.
1. Starting salary affects the lifetime income potential
Most cases, your next salary is based on current salary that you might feel it’s lower than your expectation. Having a higher salary will increase the potential of your future income. Here is the example of 2 different income schemes. Let’s compare the one with staring salary of $50,000 (salary A) and another one with $55,000 (salary B), assuming the annual increase of pay rate is kept at 2% increase during these period.
30 Year Salary Comparison
| Year | Salary A | Salary B | difference |
|---|---|---|---|
| 0 | 50,000 | 55,000 | 5,000 |
| 1 | 51,000 | 56,100 | 5,100 |
| 2 | 52,020 | 57,222 | 5,202 |
| 3 | 53,060 | 58,366 | 5,306 |
| 4 | 54,122 | 59,534 | 5,412 |
| 5 | 55,204 | 60,724 | 55,20 |
| 6 | 56,308 | 61,939 | 5,631 |
| 7 | 57,434 | 63178 | 5743 |
| 8 | 58,583 | 64,441 | 5,858 |
| 9 | 59,755 | 65,730 | 5,975 |
| 10 | 60,950 | 67,045 | 6,095 |
| 11 | 62,169 | 68,386 | 6,217 |
| 12 | 63,412 | 69,753 | 6,341 |
| 13 | 64,680 | 71,148 | 6,468 |
| 14 | 65,974 | 72,571 | 6,597 |
| 15 | 67,293 | 74,023 | 6,729 |
| 16 | 68,639 | 75,503 | 6,864 |
| 17 | 70,012 | 77,013 | 7,001 |
| 18 | 71,412 | 78,554 | 7,141 |
| 19 | 72,841 | 80,125 | 7,284 |
| 20 | 74,297 | 81,727 | 7,430 |
| 21 | 75,783 | 83,362 | 7,578 |
| 22 | 77,299 | 85,029 | 7,730 |
| 23 | 78,845 | 86,729 | 7,884 |
| 24 | 80,422 | 88,464 | 8,042 |
| 25 | 82,030 | 90,233 | 8,203 |
| 26 | 83,671 | 92,038 | 8,367 |
| 27 | 85,344 | 93,879 | 8,534 |
| 28 | 87,051 | 95,756 | 8,705 |
| 29 | 88,,792 | 97,671 | 8,879 |
| 30 | 90,568 | 99,625 | 9,057 |
| Sum of Difference | 211,897 |
As shown in the above chart, the difference of lifetime earnings between these two income schemes is $211,897. That’s a lot of money you will earn or lose. Let’s say, you invest these annual differences into an index fund with CAGR (compounded annual growth rate) of 8% every year. At the end, the cumulative interest that you are going to earn during 30-year period is $244,541. The total difference will be $211,897+$244,541 = $456,438. Nearly a half-million dollars of difference just because of $5,000 starting salary difference.
Cumulative Savings w/ 8% CAGR
| Year | Cumulative of Difference | Cumulative Interest |
|---|---|---|
| 0 | 5,000 | 400 |
| 1 | 10,100 | 808 |
| 2 | 15,302 | 1,224 |
| 3 | 20,608 | 1,649 |
| 4 | 26,020 | 2,082 |
| 5 | 31,541 | 2,523 |
| 6 | 37,171 | 2,974 |
| 7 | 42,915 | 3,433 |
| 8 | 48,773 | 3,902 |
| 9 | 54,749 | 4,380 |
| 10 | 60,844 | 4,867 |
| 11 | 67,060 | 5,365 |
| 12 | 73,402 | 5,872 |
| 13 | 79,870 | 6,390 |
| 14 | 86,467 | 6,917 |
| 15 | 93,196 | 7,456 |
| 16 | 100,060 | 8,005 |
| 17 | 107,062 | 8,565 |
| 18 | 114,203 | 9,136 |
| 19 | 121,487 | 9,719 |
| 20 | 128,917 | 10,313 |
| 21 | 136,495 | 10,920 |
| 22 | 144,225 | 11,538 |
| 23 | 152,109 | 12,169 |
| 24 | 160,151 | 12,812 |
| 25 | 168,355 | 13,468 |
| 26 | 176,722 | 14,138 |
| 27 | 185,256 | 14,820 |
| 28 | 193,961 | 15,517 |
| 29 | 202,840 | 16,227 |
| 30 | 211,897 | 16,952 |
| Sum of Interest | 244,541 |
2. Base salary rate affects other income
On top of that, the pay rate of base salary affects your 401(k) matching as well. The pay rate of incentive plan or bonus is also based on your base pay rate. The difference of base pay rate will make a significant influence on the potential of lifetime earnings.
3. Think about the future and always seek an opportunity for higher salary
Especially, if you are a college graduate and looking for a job opportunity, keep this in your mind. You may be very thirst to get your first job but hold your ground. This would affect your retirement and certainly, you should not be paid lower than what you are supposed to be based on your background, skills, and type of industry and employer even though you don’t have any experience yet. The employer’s goal is to keep the cost down and they don’t have any justification to pay more. If you don’t take initiative, they are going to take the advantage of it. Under certain circumstances, it’s possible that the salary is not negotiable but try, you don’t lose anything.
If you are already in the mid-career and if you feel you are not paid fairly, try to ask a higher salary when you have next annual performance review or promotion opportunity. Mention your accomplishment or something you did that your supervisor is not aware of. Even if it doesn’t work out any way, it’s worth of trying. If it didn’t work out, professionally show the attitude that you understood and will further improve yourself to exceed your supersedes’ expectation. This will leave a good impression to your superior. Bring some courage to negotiate salary.
References
1. Report: How Satisfied Are U.S. Workers With Their Salaries?
2. Linda Babcock, Sara Laschever, (2007)
“Women Don’t Ask: The High Cost of Avoiding Negotiation–and Positive Strategies for Change”, 1st edition, Bantam
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