Let’s face it. Most of us don’t work for fun. We work for higher pay so that we can have a place to live, put food on the table, be entertained, give to our community, and save for the future. So it stands to reason that we want to maximize how much we earn. But we have been trained over the years to not talk about it. Our employers openly discourage sharing compensation information with colleagues. Very few professional job postings state the salary range. There’s a good possibility that our own parents never discussed money at all. So we are left to figure it out ourselves, by piecing together information and rumors we’ve heard over the years, which most certainly does NOT yield the best results.
So in this blog post, I’d like to lift the veil and share the key things I’ve learned during a long career in corporate leadership. What you need to know. Decisions you need to make. Inflection points that will make a huge difference in building your long-term wealth.
Different Forms of Compensation
First, some basics. For the purposes of this article, we will focus on “exempt” employees, which simply put, means they are exempt from receiving overtime pay. Exempt employees receive some sort of fixed and/or variable pay that is not directly related to how many hours they work. Generally, their compensation can come in four different forms:
Salary – a fixed annual dollar amount that usually scales directly with your seniority or level of responsibility
Bonus – some sort of periodic cash payout, usually measured as a percentage of your salary, that is paid out based on a combination of personal and company performance.
Equity – an award of ownership in the company, usually in the form of stock options or restricted stock shares, that can be cashed in after a defined waiting (vesting) period.
Commission – usually specific to sales-related roles, these are payments based on a percentage of revenue/profit that you personally generate for the company.
Ultimately you need to deeply understand these different forms of compensation and the subsequent opportunities and limitations of each, in order to set yourself up for higher pay in the shortest timeframe possible.
Let’s start with salary. This is the most basic (and sometimes the only) form of compensation received by almost all exempt employees. Having a salary can extraordinarily liberating. You know exactly how much money you are going to make, and exactly when you are going to receive it. You can plan your bills, your vacations, and your big purchases. You can also decide exactly how much you want to save or give, and stick to it. A salary is safe, predictable, and easy to measure. Which is probably why most employees focus on salary when it comes to analyzing their earning level and potential. But you also need to know you are NOT going to get rich from your salary. Why? Because all companies put limitations on employee salaries in order to control expenses and make their own business predictable. Companies base their salaries on competitors, none of whom are terribly interested in raising employee pay dramatically. These same companies usually create job “grade levels” and assign a very tight salary range to each level. And when it comes to budgeting, most companies only allow for an average total salary increase of 2-3% annually, or in other words, the rate of inflation. So all of this is to say, salaries are tightly controlled with very little upside unless you are rapidly getting promoted across various grade levels. And even then, there are limits to how much increase an individual employee is allowed.
So for easy math, let’s assume you make $100K/year. Your average annual raise will be $2500. If you are an absolute superstar at your job, you may receive a $7500 raise. If you get promoted to the next grade level in a given year, you may see a $10K raise. That is the absolute maximum. Don’t get me wrong. This is a good thing and you should strive for salary increases that build over time. But salary alone is not going to drive dramatically higher pay. Which leads us to…
Bonus
Many companies pay out periodic bonuses as a way to reward team members for contributing to overall company success. Bonuses are variable in nature and can be a significant way to boost your compensation in the right circumstance. But there are lots of dependencies. Usually, the company sets specific financial targets at the beginning of the year, and the subsequent bonus payouts are based on the company’s success (or failure) in achieving those goals. So if the company has a great year you get a great bonus. The company has a bad year, you get a smaller bonus or nothing at all. You might remember Clark Griswold in Christmas Vacation. He planned on building a pool with his bonus but ended up getting a membership to the Jelly of the Month Club. 🙂
The amount of bonus YOU receive is generally tied to your salary. A percentage. A relatively junior professional may have a 10% bonus target. Meaning if the company hits the financial target, the employee receives 10% of their salary as a bonus. A senior executive might have a 70% bonus target, which means the money can get real big, real fast. Usually, companies also have what they call “modifiers” at both the company and individual levels. If the company greatly exceeds its yearly targets, perhaps they will assign a 1.5X modifier. So if you were supposed to get a 10% bonus, now you get a 15% bonus. The same holds true for an individual modifier. If you were deemed to be a big contributor to the company result, or are thought to be a “high potential” employee, perhaps you get a personal 1.5X modifier. So going back to our example of someone who makes $100K/year (and now they have a 10% bonus target). If the company has a great year and this person is highly thought of, they could end up with a bonus of $22.5K.
$100K x .10 x 1.5 x 1.5 = $22.5K
Now we’re getting closer to higher pay. And you can see the potential impact of a bonus, above and beyond a simple salary increase. Let’s keep going…
Equity
In some instances (especially the technology industry and/or younger companies), utilizing stock grants as a form of compensation is particularly popular. Typically your access to the stock “vests” over a multi-year period. If you leave after one year, you might get nothing. But if you stay for five years, perhaps you get it ALL plus new grants. This can be very attractive for both the company and the employee, especially IF the stock performs well. Theoretically by providing employees with ownership in the company, stock grants align the interests of the two parties and impact decision-making, engagement, and accountability over an extended period. I have found this to only be partially true. In reality, it usually just means the employees are desperately hoping for the stock to go higher, but it really doesn’t change their day-to-day activities. It can however cause the employees to stick around longer if there is a potentially big payout. And from an employer’s perspective, the expense is low if the stock doesn’t perform, so there is little risk.
While there are so many variables associated with equity-based compensation plans and no guarantees, there is also a tremendous upside. In the right situation and with a little luck, this is where you have the most to gain in terms of long-term wealth building.
Let me start with a story of what NOT to do. When I was graduating from my MBA program, I had no money and one job offer from a young technology company. So there was no question I was going to take this job, but I wanted to do some basic negotiation. Ultimately I was given an option of a $4000 signing bonus, or 200 stock options. Considering I literally had $200 in a bank account, that signing bonus was looking pretty good. And the long-term prospects for the company were encouraging but not overwhelming. So I “shrewdly” went back and told the recruiter that if they increased the signing bonus to $7000, I would take the job. They accepted and I immediately felt like I had won the lottery. After all, I had just increased my net worth by 35 times. Well, it turns out that two years later, after several stock splits, those 200 options would have been worth approximately a half-million dollars. Ouch.
My point is the following. If you ever have the chance to get equity in a company, take it. Of course, it won’t always turn out positively. It may be worth nothing. But generally, the risk/reward will always favor the equity side. It is very likely that whatever cash alternative the company is offering (in my case $7K) will not be life-changing and will have little material effect on your long-term financial well-being. But if you get stock at the right time, it could lead to outcomes beyond your wildest dreams.
Commissions
I won’t spend as long on this topic because it is typically only applicable to sales or business development-type roles. But make no mistake, you can make a decent chunk of change in commission-based roles. Usually, the compensation plans in these roles have a smaller fixed payout (salary) and a targeted variable payout (commission). The variable component is usually tied to how much revenue or profit you directly generate for the company in a defined period (quarter, year, etc.), and is known as “leverage”. The higher the variable component of your comp plan, the higher the leverage. In other words, there is more risk, but more reward, if you perform well. The commission is usually paid out based on your performance relative to an individual target. Exceed the target, make more money. Miss the target, make less money…and eventually get fired. It is these last two outcomes that cause many people to shy away from commission-based plans. There are many variables, some uncontrollable, that can cause earnings to be bumpy. But if you are the type of person who doesn’t mind that uncomfortable element and likes to bet on yourself, there can be meaningful short-term rewards. In the long-term, the rewards can be mitigated due to higher quota setting, economic downturns, and more. Ultimately if you are good, you will still make out better on a commission plan, but the upside might be limited and the stress might not be worth it. A personal preference.
Compensation Plan Takeaways
The real way to achieve long-term higher pay is typically going to be based on bonuses, and potentially equity. That is where you will see big lump-sum payouts that aren’t as dependent on restrictive corporate expense policies. Timing and luck can play a big part in the outcome, and the magnitude of payouts will be greatly affected by your level at the company (executive, manager, etc.), but you need to navigate to the right situation so you can ultimately take advantage when the time comes. You can make many times your annual salary and put yourself on an entirely different financial path. Of course your salary matters for day-to-day living, but don’t focus on that myopically when taking a new job or negotiating, or you will miss big opportunities.
Take Advantage of Your Leverage
In this case, we are talking about a different kind of leverage. Not commission-based pay. But rather, in this case, leverage is when you have an advantage in negotiation over your employer or prospective employer. Perhaps you have a specific skill that they desperately need. Maybe they are having trouble hiring people and will have trouble replacing you. Or maybe you find out your compensation is on the low end of the industry, or even the company pay scale. Or in some situations, as a manager, you may make less than people who work FOR you. All of these situations represent examples of leverage.
I am not suggesting that you immediately go put the screws to your employer and demand higher pay, “or else”. That will backfire on you. Even if you get some sort of immediate pay increase, when the company gets the chance they will make sure you can’t put them in the same situation again. Ultimately it might affect your long-term earnings by limiting your future growth potential at the company. Instead, be patient. Play the long game. Go have a conversation with your manager or the HR rep and make sure they know that you know. Don’t make demands. Don’t bombard them with evidence. But also don’t be afraid to talk about it. Chances are they already know you are underpaid. But rarely will they volunteer to pay you more without prodding. Once you bring it up (and if you are a keeper), it will kick off a sequence of background (invisible) conversations about how they can rectify the pay issue. You don’t need to go back a week later and ask for an update. If it’s a sizable company they are likely wrestling with restrictions and approvals that take time. If you don’t hear anything about it after a month, consider following up at that point. Keep it professional but stay adamant. Eventually, you will get an answer. And if it’s not the one you want, you can start looking at the alternatives.
Leaving Your Company
Staying at your current company is NEVER the way to maximize your paycheck. Ultimately you will have to leave because in this case, the grass IS always greener. I can’t tell you how many people have come to me and complained that they can make more money by leaving. That is true, but only if they actually leave.
In fact, it is almost universally true that another company will be able (or willing) to pay you more than your current company. Usually significantly more….like 20-30% more. Because new hire pay scales are often different than existing employee pay scales. The rules are different. The hiring manager can convince HR that he/she MUST have you and that there is nobody else in the market as good as you. Even though they really don’t know that much about you. They see the good things about you during the interview process, but they don’t really know the downsides. On the other hand, your existing company is probably taking you for granted to some degree. They see you as “locked-in” and they feel in control. And they know your flaws. And they need to keep things equitable. So they just aren’t going to pay you as much.
You probably get 2-3 chances in your career to make the leap. If you jump companies every few years you don’t build a track record, and prospective hiring companies see you as a risk. They may still hire you, but are less likely to make a huge financial bet. If you make the job changes strategically and less frequently, you can take advantage of those big pay increases to create a new baseline for yourself.
Yes, it is a risk to leave a comfortable environment and enter the unknown, which is why most people would rather stay…and complain. But in the spirit of making more money, you will need to do it a few times, or risk being left behind.
The Initial Negotiation
So you’ve got an offer for your dream job at a new company. Congratulations! Now the fun begins. You need to know that the initial offer is NEVER the best the company can do, no matter what they say. Like most things in life, the offer can be negotiated. In fact, they expect you to negotiate. No doubt the hiring manager and HR representative have gone back and forth on what sort of compensation package is likely to get you to accept. So they have likely created a range of options that may include different levels of salary, equity, bonus, benefits, vacation, and more. They initially offer you something in the lower end of those ranges but have pre-approval or agreement on the highest they are willing to go in each area.
Your goal is to find a way to get to that maximum offer while still maintaining a cordial and professional relationship. Don’t forget you will eventually have to work with these people. In my experience, I have seen a few candidates that handled the negotiation (and the people) rudely and as a result, never got what they wanted and did not end up in the job.
Let’s assume you have the right attitude. Now you need to take two important steps:
- Determine what aspects of the compensation plan are MOST important to you – are you focused on a high salary? Do you want to maximize the equity opportunity because you really believe in the company? Do you want a work/life balance, so you really want four weeks of vacation? Whatever is most important to you is where you want to focus your efforts. Prioritize each potential negotiation point, and use that in your conversations. You won’t get everything, so make sure you are happiest with what you DO get.
- Gather as much information as possible – the more data and context you have for the negotiation, the better the negotiation will go for you. Perhaps you have a friend at the company. Talk to them and find out everything you can about the compensation plans and how they work for most people. Also, look for third-party information. Remember that most companies base their compensation on industry or competitive benchmarks. You may be able to find salary ranges for the role, or other helpful tidbits. Bottom line – the more prepared and knowledgeable you are, the better chance you will know what to ask for, and how hard you can push.
Once the negotiation begins, stay positive and communicative. You are partnering with them to find the best outcome for both parties…or at least that is the vibe you are projecting. Make sure they are clear on the items that are most important to you, or even non-negotiable. I advise that you don’t play the “walk away” strategy unless you are really willing to decline the offer.
Ultimately you will get some, if not most, of what you are seeking. The more leverage you have (see above) the better chance you will maximize the offer. And once you start working, and have been at the company for a period of time, all of this negotiation will be forgotten. Managers will change. Organizations will change. And you’ll be caught up in all the existing compensation policies like everyone else. So it is CRITICAL that you get everything you can BEFORE you start. Believe it or not, that is when you have the most leverage.
Contracts
You probably hear about contracts all the time on the news. It’s common for athletes, entertainers, and other high-profile roles. You rarely hear about contracts in the corporate world, but believe me, they exist. Many times, candidates just don’t know to ask.
Granted, contracts generally only become a possibility at the executive level. But not just CEOs. Almost any executive can at least legitimately ask for one. Now, why would you want to need a contract? Usually to provide you with a safety net if things don’t work out, because presumably, you are leaving a comfortable (and possibly high-paying) situation already. Any contract is going to be “custom” to you and your situation, so again, determine what’s MOST important to you and start that conversation.
Here are some stipulations I’ve seen included in executive contracts over the years:
- Guaranteed salary for a fixed period of years regardless of employment status
- Agreement that candidate will never be asked to re-locate
- First-class airfare (company policy was everyone travels economy)
- Amount of required travel
- Large severance payout and immediate stock vesting if dismissed from the company
- Specific office/workspace accommodations
- Healthcare and wellness opportunities beyond standard company offerings
You can ask for anything reasonable to be included in the contract. That doesn’t mean you will get it. But it won’t be a surprise that you are asking, and often you will be surprised at how accommodating the employer will be.
When Should I Sell Stock?
Let’s assume that you were lucky enough to get some sort of equity in your company….options, restricted shares, or some other form of partial ownership. The question I get most often is “when should I sell it?”
Well, of course, there is no one right answer. That is a deeply personal decision based on your financial situation, appetite for risk, future goals, and more. But I can say this. I have seen many friends and colleagues sell stock to buy a new watch or a new sports car…only to be disappointed later when they figured out how much potential money they forfeited when the stock price rose. Alternatively, I have seen people be equally disappointed when they stubbornly held on to stock even as the price slid downwards over a long period of time. The fact is, you can’t predict the stock market, so it’s best to have a strategy you are comfortable with…and stick to it.
The best piece of advice I ever received in this regard came from a friend who told me to “sell when the proceeds will be enough to make a real and meaningful difference in your life”. Whatever that means to you. Perhaps you sell stock to pay off the mortgage. Or fund a college education. Or buy a car. Or hit a retirement savings milestone. And so on. Whatever subsequently happens in the stock market, you’ll be able to live with it either way.
Wrap-Up
Regardless of your life and financial goals, achieving the highest pay possible (as quickly as you can) is a reasonable goal. You should immediately go understand your legitimate value either by researching, speaking to recruiters, or by any other means necessary. If you believe you should command more compensation, then have the confidence to go for it. That might mean talking to your current employer or looking for a new one.
The sooner you do this the better. Establishing the highest baseline possible will have a huge positive impact on your future earnings…as all of the future negotiations and calculations are derived from current earnings.
Let’s do another quick math exercise. If you are 35 years old and have total annual compensation of $100K, by the time you are 55 years old (assuming a 5% annual average increase) your compensation will be $265K. Alternatively, if your annual compensation at age 35 is $120K, then by age 55, it will be $320K. That doesn’t even factor in the compound interest effect on what you saved in the meantime…nor does it include a 20% one-time increase when you change companies.
So the point is…there’s no time like the present. You are armed with the information. Now go make it happen!
To learn more from Jay or other mentors, visit mentorforce.com!