Why Salary Negotiations Are Crucial to Your Success
Just about anyone I’ve ever spoken with remembers the feeling they had when they accepted their first job. I certainly do. I was getting ready to graduate college, signing on the dotted line to join a great and growing firm. It was a wonderful feeling. But before you accept the contract, there’s a critical step that many miss. And it can come back to haunt you if you aren’t careful.
I started financial planning exclusively with Millennials for many reasons, but one of the biggest was that nobody ever taught us about financial topics in school. Certainly, nobody ever taught me about this critical step to accepting your first (or second, or third…) job.
You absolutely have to have a strategy in place to negotiate your starting salary. I’m not just talking about going in and blindly making demands. No, there’s a lot of strategy involved. But, it’s so important that you actually do it. If you don’t, you could be literally costing yourself hundreds of thousands of dollars. Don’t believe me? Read on. (For related reading, see: Should I Pay Off Student Loans or Save for Retirement?)
Millennials Aren't Good at Negotiating Salaries
The good news is that we can fix this negotiating problem that we collectively have. The bad news is that most of us just aren’t doing it. A study conducted by NerdWallet in 2015 indicates that only 38% of Millennials negotiate salary with their employers upon receiving a job offer. More than 60% of them aren’t negotiating at all, even when they are told that the employer expects negotiating as part of the application process.
The most heartbreaking part? According to the study, three out of four employers have room to negotiate salary by as much as 10%, if the new employee asks for it. I get it, it feels uncomfortable. But, the odds are high that your employer is expecting you to negotiate. Develop a strategy, do you homework, and practice before you ask. But you absolutely need to try—there’s too much on the table to avoid it.
It’s About Way More Than Just Your Current Salary
Negotiating an increase in your salary when you start a new job, or even in a job your currently hold, is about way more than just increasing your income right now. That’s a nice benefit, don’t get me wrong, but that only scratches the surface as to why it’s such an important concept.
The key is that your future income is, in most cases, directly based on your current income. Meaning, that the raise you get next year isn’t completely random. It’s based on your current salary. So, if you increase your salary now, your raise next year is going to be for a higher dollar amount than it would be if you hadn’t negotiated. The year after that, your income is going to go up by an even higher number, assuming you get annual raises at your job of course. Thus, if you negotiate your salary upwards as early as possible, your income will grow at an exponentially faster rate in the future than it would otherwise.
How Negotiating a 5% Raise Could Make You $220,000
Hypothetically, let’s say a company makes a job offer to two seniors in college, Max and Jess. Each of them have the same amount of experience, and both are offered a starting salary of $50,000. They are each 22 years old. Max, happy with the offer, accepts a starting salary of $50,000. Jess, however, decides to negotiate, and is able to earn a salary of $52,500—5% higher than the initial offer. Let’s say that they then each get a 3% raise each year. How do their salaries compare as they get older?
Jess started her career making $2,500 per year more than Max, but by the time they reach retirement age at 65, she’s making more than $9,000 a year more. This difference is only because she negotiated a raise before she took the job offer—there are no other differences in their compensation paths. And, of course, this doesn’t take into account that Jess is probably more likely than Max to negotiate future raises, further increasing the difference.
At first glance, this might not seem like a huge deal. Why am I making such a big deal about $9,000? Because it’s about much more than that. If you add up all of the earnings that Jess and Max would take home throughout their career, Jess cumulatively earns over $222,000 more than Max:
Seriously. By making a quick phone call before accepting the job, Jess can earn nearly a quarter million dollars more than she would have if she hadn’t made that call. If I told you that you could schedule a meeting this week that could earn you a quarter million dollars, would you do it? (For related reading, see: How to Start Saving for a House.)
Negotiating Isn’t Just for New Hires
Negotiating salaries isn’t just for new job offers. Depending on your situation, it can be appropriate to negotiate a raise in your current job as well. Again, there’s a right and wrong way to do it. Do your homework and be able to back up your request with specifics about your job performance and industry trends. Get pushback, or still aren’t comfortable with going to your boss to talk about a raise? I’m about to share a secret about how employers base salaries. It’s not a hard and fast rule, but it applies to many firms who work in competitive industries.
Most companies pay higher salaries to individuals who they hire away from their competitors. Think about it. To attract the best workers, it makes sense that the company would want to offer premium salaries to employees that they recruit from other firms. If you’re already working in the industry, why else would you consider jumping to a competitor?
Of course, there are plenty of other reasons you might not want to start looking for a new job. Your company’s people, location, training, benefits, culture … the list goes on and on. It might not be a good idea to jump around in the industry just to bump your pay. But your salary certainly is a factor. What I’m trying to say is this: if you can see yourself making a change, keep in mind that doing so often comes with an increase in pay. And if you’re a super savvy negotiator, having another job offer in your pocket could be a great way to get your HR team to consider giving you a raise to stay!
Plan. Prep. Negotiate.
There are lots of different strategies here, but above all, it’s important to negotiate. It’s about more than your current salary—any increase in pay today will have exponential effects for you down the road. But, it absolutely needs to be done in the right way to give yourself the best chance of success. (For related reading, see: The Financial Advice You Need in Your 30s.)