Here’s an interesting piece from Kiplinger which agrees with what I’ve said several times about getting annual raises as well as working to grow your career.
I wanted to highlight it because I get a lot of push-back from readers on the issue of annual pay increases. Many say it’s simply not realistic to get higher than 3% raises consistently.
Yes, it is. I’ve personally established it can be done. And I’ve known many others who have done even better.
The Kiplinger piece is an interview with a compensation expert on what’s happening in the job market right now. And it shows that raises well above the average are quite possible.
Average Employees Get Average Pay, High Performers Get More
Let’s begin with this quote from the article:
Companies are forecasting 3% increases, similar to years past. But how that budget is spent may vary by person. Employees with the highest possible rating could see increases in the range of 4.5% to 5%, while low performers get an increase between 0.7% and 1%. Bonuses for salaried employees are projected to be 11.6% of pay, on average, with rewards for special projects or onetime achievements set at 5.6%, on average.
Two points I want to make here:
1. There is a HUGE difference between 1%, 3%, and 5% raises!
If someone begins a job starting at $35,000 a year, here are their earnings over a 45-year career at various levels of annual increases:
- 1% annual increases means they’ll earn $2.0 million over 45 years
- 3% annual increases means they’ll earn $3.2 million over 45 years
- 5% annual increases means they’ll earn $5.6 million over 45 years
As I said, HUGE difference between these three.
2. There are things you can (and should) do to earn the higher increases.
If there wasn’t this ability to earn more, she wouldn’t have even mentioned the possibility.
So how can you earn closer to 5% than 3%? Follow my seven steps for growing your career.
Establish What It Means to Over-Perform
Note that those who get paid more are “employees with the highest possible rating” while those at the low end are “low performers”.
How do you become a high performer? The first step is to determine the expectations for your job.
The Kiplinger article touches on this as follows:
A lot of companies are making the process more about feedback than about performance rankings. That means there’s a real opportunity to sit down with a manager and make sure there’s a mutual understanding: What’s really expected of me, how will I be measured, and how will that impact my pay? The pace of work changes quickly, so ask how your goals are changing.
I highlight the complete process to over-performing in 7 Steps to Millions More: Over-Perform, but the quote above is a nice summary of the first step.
So consider this a heads-up. Many performance reviews are at the end of the year, which means now is the time to begin working on these steps — so in six months when you have the performance discussion with your boss, you’ll be prepared with some accomplishments that will blow her away.
If you want an advantage in the process, consider working on skills that can grow your career and earnings.
And as a result you’ll make yourself much more likely to be a 5-percenter.
P.S. After I finished this post I found this piece from Money Magazine which shows the difference between the top performers and the lowest ones being almost 5% (top performers get 5% raises while the lowest ones get 0.2% increases — see the chart half way down the page.) That’s an even bigger difference than what’s noted above!
photo credit: Hugo-photography Grote schaakstukken via photopin (license)
I can confirm this is possible as well having averaged 9% annually over 20 years with the same company.
Ageee. At my company top performers earn 6% annually and the lowest performers earn less than 1%.
Bonus targets also vary by job grade… so the higher your job grade the more your target. My target is 30% of my salary and I can make up to 110%+ of my target. It pays to push your job grade up to maximize your earning opportunities not only via salary but bonus too.
Stock awards are also aligned to performance. I’ve seen years where as a high performer I receive 120K in stock and years where I perform even higher and am awarded 190K. An average performer at my same grade would receive less … maybe 90-110K in stock- at the expense of my or other’s high performance.
Again the reason to be a high performer is because high performance leads to promotions and promotions lead to higher stock (and bonus) targets. As an example… stock targets range as low at 8K annually to 120K annually… and even higher for VPs. And bonus targets range from 5% to 35% depending on job grade. So as they say… the rich get richer. It’s true.
My summary- you are absolutely right on the value related to focusing on earning as a differentiator and path to wealth.
I agree. Especially after adding in bonuses there is a huge difference in pay ranges for a given role. Being a stand out will make you richer over time. With careful planning it certainly is possible to get large consistent raises. My pay raises came in blocks but I know over 13 years I’ve increased my pay by multiples. 2 percent a year did not do that, as in order to even double your pay at 2 percent you would have to work for 36 years.
This is a tricky one. For me, my compensation annual increases from 1983 to 2010 (27 years) works out to an average of 8.6%. But inflation for those years works out to 2.9%, so the inflation adjusted annual increase is 5.7%.
By definition, most of us are average. I see why ESI gets pushback at the idea that raises over 3% are unrealistic, because none of us wants to admit to being average. Especially when our aspirations are above-average.
I do like ESI’s point, which I take to be this: make yourself a ‘Peak Performer’. ESI did it, many PF blog readers do it. Results aren’t guaranteed, and ‘effort’ is not always rewarded. But ‘lack-of-effort’ guarantees a ‘lack-of-reward.’
JayCeezy – I personally think that you can out work and out hustle the most innately gifted. The reality is most people are average, because most people are lazy. Just because you are an average performer, doesn’t mean you have an average intellect. I know some really smart people that are really lazy, and for that reason they will never be Peak Performers.
Yes, luck does play a role in every success, to varying degrees. But we live in a time that I believe you have a big role in creating your own luck.
One of the biggest roadblocks I see to those putting in the hustle required to be a Peak Performer is the unwillingness to be assertive in those “more money” conversations. They are uncomfortable, but they get easier over time. The reality is that those that ask for more money, make more money (assuming they can back it up with the value they add).
You can’t expect anyone to care about your financial success more than you. So, holding out for people to do the right thing and promote you and give you the raise you have earned, is a losing strategy.
Cheers!
Dom
Agree with all you say, GYFG. Hope you can see your way to understanding my point about the ‘3% pushback.’
Was thinking of ESI, you GYFG, and Financial Samurai as I wrote ‘PF readers’ (bloggers included), as you all have exceeded ‘average’ and made yourself into Peak Performers. Cheers to you, too, and continued success!
I absolutely see your point and do agree.
I would just change the verbiage slight to say that most people are average, but those in the PF community would be (in my opinion) mostly above average.
At least from my experience thes past 3 years.
Here’s an awesome quote left on Twitter by a reader:
“I recommend focusing on these skills more than a side hustle, esp early in your career, to max $$$.”
Good stuff!
FYI, you can follow me on Twitter at https://twitter.com/ESIMoneyBlog and on Facebook at https://www.facebook.com/ESIMoneyBlog/ if you are so inclined. 🙂
I can tell you right now that the odds of you getting a 10%+ increase is WAY higher in smaller to mid sized companies. I’ve gotten a lot more than 10% raises the past, every year, for the past 8 years at my current employer. Although, it’s not completely apples and oranges in my situation because these weren’t just annual increases. They were promotions. But again, it’s easier to do in smaller places where the raises aren’t as set-in-stone as bigger companies. If you become so valuable that senior management can’t ignore you, you have all the leverage. Which is what I did (especially more-so if the company culture is not seniority-driven). Worked my way up from Will Call / Customer Service, to be VP in roughly 6 years. At a mid-sized company, with zero connections, right out of college, through a job posting I found on career builder (or was it monster? I forget, it was one or the other). All this as an immigrant to the US. I love this country!
Nice work Tim!
Thanks for sharing, ESI. I just ran the numbers since I started working full time in 2011. I’ve averaged a 10.7% increase year on year over the last six years. Here are my key recommendations.
First, develop good relationships internally at work. Not only with your boss and your boss’s boss, but with your colleagues. Second, complete your work on time and push yourself to find other value added activities you can complete at work. What is key is that you discuss the value added activities you complete with your boss to show him or her you are motivated to grow within the company. Finally, everyone says you should ask for a raise. I haven’t asked for one raise at my current company – they’ve offered to give me a raise. What I have done is come prepared to meetings where I thought I might be offered a raise. In cases where I felt like the raise, they were providing me was adequate, I came prepared to defend the raise amount I felt justified to receive.
TGE,
“push yourself to find other value added activities you can complete at work”
I think your quote hits the nail on the head. You have to go above and beyond and have initiative to add value above and beyond your assigned role.
One of the things I am currently doing is starting a new service line for my company. After playing a support role for most of my career, it is time to shift to revenue producer to keep the raises robust.
Over 11 years, my salary has tripled (10.6% annually). More importantly (and more exciting each year) is that my bonus has gone from essentially nothing in my first year or two to 70% of my salary last year (more than double my starting salary 11 years ago), and growing each year. While my raises have settled down a bit (averaged about 6.6% the past 4 years), bonus/profit-sharing has gone up 7x or more.
Luck played a huge part in all of this – I ended up on the ground floor of a small and profitable consulting firm at its inception – but from there I worked hard to add value to the company and quickly distinguished myself as the “star” employee. I have great relationships with my superiors and they are very appreciative of what I’ve done for the company.
As a doctor I experienced a large pay increase and then it has leveled out over the past few years.
There are a lot of factors that play into my pay rate that I have little control over. My groups rate negotiation and the whims of the hospitals and the coverage they want is beyond my control in a lot of areas. My income at this point could only increase significantly if I explore outside opportunities. So that is exactly what I’m doing.
I just finished calculating my average annual rate of return from my first year of work in 1993 to now and it is 37.7% so at least I’m staying ahead of inflation. 😉
I have had to move jobs to get pay raises. At this point, 3 years from retirement and working for a large county, I doubt I get a raise of more than 1% in the 3 years. At this point, I am an admin chimp and just trying to do the minmum required. I busted my butt for 3 years under my boss on the understanding when I was hired that I was taking his spot and that didn’t happen, so I am pretty unhappy worker with 3 years to get to the magic pension vesting number. Oh well, we have a large net worth and it should hit $5.5M by the time we retire. I will do my best to get the pension. Why throw away $38K a year if I don’t have to, but if I get really mad and quit, I won’t be crushing to our retirement.
Sounds like you have a plan. If at all possible it would make sense to stick it out to collect on that pension. If you got mad and quit, any impact at the office would likely only last a week or 2 then they would just move on. You would only be hurting yourself. Just do the basics, leave on time, and plan your exit date so as to maximize any possible benefits. Ex: Get your next batch of personal/ vacation days, paid holidays, bonuses, and pension.
No bonuses here, but I have my next two years of vacation planned out. It’s a good thing I married well. My wife is eligible to retire next year and will get her pension at 58. If she lasts the same amount of time, her pension should be $10,000 a year more. When we got married 18 years ago, she was making $85K, now she is well over $450K, so I think she has done well.
I agree with you that more pay goes to the best performers. And I’m sure the rate varies from company to company as far as the difference between top performers and warm bodies.
What I’ve been thinking about recently though is that it might not be worth the extra increase to work harder. The marginal benefit may be too low compared to the amount of blood, sweat, and tears you put in. Is working an extra 5 hours a week and missing your family worth the couple percent increase in your annual wage. I mean chances are you won’t be with that company five years from now anyway.
What’s more attractive to me are the big jumps you can get if you change jobs completely or focus on taking on entrepreneurial risks.
Question…I just looked at my annual social security statement (history of reported income by year since I first reported income) and in particular I focused in on how much I have earned since graduating undergrad. I was shocked. I have made just short of $6M since 1999 (17 years) which includes the 2 years I was laid off and/or going back to school for my MBA. How much do you think I should have saved by now as a percent of what I have earned? Have others ever looked at it this way? It was indeed shocking! I am just curious where I am relative to where I should/could be or where others are. I am definitely thinking about what this means and/or could have meant for earlier retirement (than planned). I would appreciate your thoughts even though I know there is no right or wrong answer. Cat out of the bag…I have saved ~$2.3M so far which feels low relative to what I have earned but maybe not when you consider what was left after the government took their share. Thanks for the feedback!
The Millionaire Next Door lists a formula for how much you should have saved based on your income. Google around a bit and I’m sure you’ll find it.
Thank you
Very helpful…
They recommend the following formula:
Target Net Worth = Age X Annual Pre-Tax Income / 10
Another author recommends changing the denominator
Target Net Worth = (Age – 27) X Annual Pre-Tax Income / 5
By both of these rules I am well above target. Hmmm…Surprising…
You can also look at it by how much you have made and how much you have saved.
For instance, I’ve earned $3.9 million as detailed here:
https://esimoney.com/the-value-of-an-mba/
And my net worth is almost that high — as detailed here:
https://esimoney.com/the-first-million-is-the-hardest/
In other words, I’ve been able to turn almost every dollar earned into net worth. Just an FYI.
GREAT conversation though! I think it might be post material!!!!
Thank you. Do you think time plays into that though? I’m 41. My biggest miss is that I’ve only been saving for 7 years…so I lost a lot of time (and therefore money)….but I am also still young and got 9 years before 50…and 19 years before 60. Hoping I can catch up since I save 60 percent now!
you are going to save another $2M in the next 9 years. You can retire in your early 50’s if you choose. We are retiring in 3 years and should have between $5.5M and $6M dollars. It will grow to $20M by the time we are in our early 70’s.
Sounds about right. I have another 800K+ in unvested stock right now…so I think I will have 6M by 50 (assume $3M doubles) less any additional savings between now and then which is a huge underestimation….
This is of course assuming the upcoming market correction doesn’t destroy me temporarily causing me a delayed retirement. Fingers crossed!
Thanks for the financial banter!
SS is before taxes, correct? I haven’t earned that much, but I made up most with marrying well. We save about 40% of our income and are now over $4M. We basically started with 100K when we got married 18 years ago.
Yes…my 2.3M is 7 years of savings only. I wasn’t saving before that…only spending:(
If your income has been $350K since 1999, I would think you should have more than $2.3M with investing/compounding.
Yes- this makes sense…I only started saving in the last 7 years ago sadly. I think this is why I am so off from where I should be…. And realizing how meaningful better saving would have positioned me by now. Ugh. What a waste! Proof that high earning alone won’t make it happen!
I hope the parties were memorable. 🙂 or the vacations. 🙂
By the way I completely agree with this article. Excellent advice. Earning was always my focus and when I paired that with savings beginning in my mid-30s the whole landscape (of my savings/net worth) change for me.
The invest piece has been the last addition of my efforts; I begun focusing here in the last few years (and I outsource this effort)…definitely a slow and steady game vs earning and saving which seems to have been easier to create an exponential curve line. These are core to the equation.