A lot of FIRE blogs talk about the two ways to become financially independent: (a) increase your income or (b) reduce your spending. A lot of them have gone into the math of how frugal lifestyle can accelerate your savings rate, reduce your needs (in retirement) perpetually in turn reducing the size of your required nest egg thereby reducing the time you need to work (Mr. Money Mustache, Root of Good). Not many talk about ways to increase your income and what areas you need to focus on to increase your income. The “ways to increase your income” side of the coin is often dismissed as something not entirely in your control. While you are the only one to decide how much you spend, someone else gets to decide how much you earn? Not entirely true.
I was attending an executive leadership session at Harvard and the professor asked the class to guess the average Industry return of an employee i.e. how many times their cost an average employee returns to his employer? I jumped in and said 10. Boy, was I wrong! The average industry number is 2. What dawned on me immediately was that I was significantly better than the average employee in terms of my return to the employer (or at least I had that perception). Even if you can carefully articulate the value you bring to an organization in dollar terms and show that what you’re paid is a lot less (even if the ratio is 1/10, although the industry average is about 1/2) than the profit the company generates that can be directly attributed to your work, it doesn’t guarantee you a raise. Sure, you’ll get some appreciation but that may not be sufficient for you to get a raise. Superior performance and more responsibilities are the most important arguments in salary negotiations. However, even though you perform like a superstar and continuously enhance your areas of responsibility but have no alternative career options, your salary and title may well remain the same.
The primary factor on which the outcome of a negotiation depends is the BATNA of either party. BATNA is Best Alternative to Negotiated Agreement. In short Best Alternative. At the negotiating table both the employee and employer need to assess their own (and more importantly each other’s) Best Alternatives. Let me repeat. You need to look at what alternatives does your employer have in addition to looking at your own alternatives. If you have an alternative (such as another job offer) the balance of power between the two parties shifts towards you. An employer’s BATNA is to replace you at the same or lower cost. If your skill sets are unique and not easily replaceable you just got another point on the balance of power table. The employer doesn’t have a better alternative than retaining you with a higher pay.
It is all too well known that the rich keep getting richer, and the C-suite leader and the vice presidents keep getting more and more. So unfair? right. But have you thought about why they mostly end up winning in the salary negotiation arguments more than the average Joe? Because the Employer doesn’t have a BATNA. Because, the VPs and C-suite leaders (or for that matter all the highly paid employees) have skill-sets that are unique and are not easily replaceable. It is the unique, irreplaceable (or not easily replaceable at least) skill set that shifts the balance of power to the employee’s side of the table. And this is the root cause of what may seem to be such an unfair remuneration system where the rich keep getting richer. i.e. the higher the base pay of an employee the better the chances of him or her walking out with a raise.
These factors are not the only ones that impact the BATNA of an employer or an employee. I’m positive I consistently delivered value in excess of 10 X my annual cost while I kept getting paid in $100K range. I worked on sharpening my skill sets and I focused on learning as much as I could. At one point (5 years into my job and my base pay must’ve been around $115K) I was considering going to B-school and I broached the topic with my supervisor. The very same evening someone from the C-suite called me to congratulate how great a performer I had been and was awarded stocks that would vest in 3 years. No negotiations, nothing. Just the fear of losing a valued employee was sufficient for the employer to take action. That just opened my eyes. More so, I realized that I had been underpaid. Two years later, I negotiated an expat assignment in Asia (because I wanted to be in Asia to be close to parents). See the climb in my money trail in 2013. You should focus on the entire package and there may be room to move on other things than just the base pay. You can negotiate “other perks” to not disturb the pay range established by the company for your “grade” or “level”. I was able to negotiate $20K in annual travel allowance for my family. Pretty good eh.. but I knew in my heart that I had strong skills and that I brought value in multiples of my cost (as high as 40 or 50 x in some years). Ambitious people always tend to stay ambitious. Few years later in 2017 I negotiated an expat work from home agreement working from home office in Asia in a country where the company barely has a presence. I ended up with a superb location arbitrage (paid in US and spending in a low cost of living country) that resulted in me seeing my savings swell. This was a win-win for both my employer and myself. Why ? Because I was still creating value well in excess of my cost so the employer still considered me a good investment, and on the other hand I got to work on my terms which I considered a good price for my services. Win- win. It was OK for the company to pay me more than my range under the pretense of an expat assignment and it did not shake up the “pay range for a grade” thing.
Such options can be limited when the only negotiation points are base pay and number of holidays. You cannot be preferentially treated (beyond a reasonable difference) on these items within the same salary range. Even though promoting you and raising your pay may be good investment for the employer, they may choose not to do so if doing so significantly upsets the “grade pay range” and has a cascading effect on other employees eventually raising the cost of the company to appease everyone.
Salary negotiations should never be need based. Because your expenses have increased and therefore you need a pay raise is never going to get you a pay raise. Ever. To sum this up the best way to have an upper hand in negotiations and to work on your terms you should always be focused on improving your skillset in the early parts of your career (and later), especially on the one that makes you unique and irreplaceable. The one that makes you different from others. The one that later in your career becomes your brand.