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Salary Negotiation – How a Small Increase Becomes Big Money

salary negotiationSo you’ve found yourself a job and have progressed to the salary negotiation phase, congratulations! The job may be yours but there is still work to be done, it is of critical importance to get yourself the appropriate starting salary right from day 1.

For those working in the corporate world, most companies have a salary range that they are willing to pay for a new hire. Jobs that require less experience will have a tighter range ($45,000-$55,000) whereas management positions may have much bigger ranges ($100,000-$125,000). Companies use ranges so they can be flexible when hiring as candidates may come in with more or less experience than others. Businesses that are under financial pressure might need to hire less experienced people at the same level of seniority than a company whose fiscal house is in order.

Getting a good base salary early is important for a number of reasons. The obvious answer is your base salary will be higher if you negotiate more money. This is only one aspect however, we also need to consider the benefits of compounding, pension contributions, bonuses and other benefits. To really illustrate how important it is to get the highest salary in the range possible, we’ll use an example.

Job Level: Experienced Professional – (1-3 years)
Salary Range: $45,000 – $55,000

Salary offered by employer: $45,000
Salary achieved through negotiation: $50,000

What first appears to be a small increase ($5,000) is actually quite substantial. First of all, an extra $5,000 is 11% more money. There are few opportunities in life where you can simply negotiate your way to making 11% more!

If 11% doesn’t sound like all that much, keep in mind this is only over one year. If you are in the early phase of your career, you could potentially have 30-40 working years ahead of you. Imagine what a difference this makes over the course of a lifetime! Rather than looking at a long time horizon that is difficult to envision, we’ll use a more realistic period.

If you negotiated an extra $5,000, after 5 years you’ll have earned an extra $25,000. Now things are getting more interesting. Since you are a reader of She Thinks I’m Cheap, I’m going to hope that you’ll invest this extra $5,000 per year. Over a 5 year period with the money earning 5% interest (compounded), you’ll end up with $34,009.56. Even more interesting, and we’re not finished yet since there are many other parts of the compensation package that might be linked to your salary.

Employer Pension Contribution: 8% of base salary
Bonus: 10% of base salary
Employee share purchase plan: 2% of base salary

These extras will add an additional $1,000 per year to your total compensation. After 5 years of 5% compounded returns this will turn into $6,801.91.

Note: I’ve added a handy compound interest calculator to my resources page so you can try out some calculations on your own.

This means that in 5 years, an extra $5,000 on your base salary is worth over $40,000! Keep in mind that you will need to pay tax on this amount.

An extra $40,000 (or it’s after tax equivalent) is a very substantial amount of money. It could be used for debt repayment or to add to a down payment on a home. One could employ the 80/20 rule and spend 20% of the money and invest the rest.

Any way you look at it, negotiating even a seemingly small increase in salary makes a huge difference over a few years. While salary discussions are key when you are joining a new company, end of year pay discussion are just as important.

Remember, companies want to find and retain the best possible people. Your job performance is the pivotal factor when it comes to negotiations. Since the main driver of performance is overall job satisfaction, we also need to keep in mind that it’s not just about money. Finding a job you enjoy going to every day is what’s most important, the monetary rewards will flow from there.

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3 Responses to "Salary Negotiation – How a Small Increase Becomes Big Money"

  1. Mr. Gray says:

    Great post here. It’s astonishing how many people will accept the first salary offer they get when securing a new job.. Perhaps this could be down to fear of losing their new job before they’ve even started, but +$5K annually is +$20K in 4 years? That’s A LOT of money.

    “You don’t ask, you don’t get!”

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