Are you good at negotiating your salary? Salary negotiation is the topic that we are going to talk about today. Let’s know why it’s so important to regularly negotiate your salary. Then second, I will talk about specific salary raises. So what you can do if you’re already in a job or have a business deal and then wanna increase your salary within your current role. And then lastly, we will share some thoughts on value creation on how you can jointly create value with your employer in a salary negotiation.
The importance of salary negotiation
The importance of salary negotiation is really underestimated by most people. First of all, it really matters for your lifetime earnings. It makes a huge difference. And research has shown that people who consistently negotiate their salary over their entire lifetime earn about $1 million more throughout their entire career.
Let’s start with getting more. I want to show you a simple theoretical example that illustrates how salary negotiations really impact your salary and how it increases your earnings over your entire lifetime. In this case example, we have two fictional people, Christian, who does not negotiate a salary. So for him, I assumed a 1% increase basically in line with inflation over each year. On the other hand, there’s Theodor, who negotiates his salary every three years, and she is a 5% average negotiation success which is really in line with what you can expect.
By the end of his career, Theodore will earn about $140,000 each year. At the same time, Christian will be stuck at roughly 80,000. So this is already a huge difference. If you add up all the years where Theodore earns more and more money than Christian throughout that entire career, the difference is enormous. In this case example, it’s about $1.2 million. I’ve oversimplified this, obviously, but it really proves the point of how important it is to not be afraid of negotiating a salary.
Don’t be afraid to Negotiate your Salary
Usually, your employer will respect you more If you ask what you are worth. – So the one thing is to freshly negotiate your salary once you get a new job. But the other thing is once you’re already in the job, then also to be able to negotiate regular raises. And this is the topic that we are going to talk about in this article. I wanna talk about what is realistic? What can you ask for a raise? Because this is indeed the question that I get most frequently when I discuss this topic with friends and colleagues. And hear it all from the head. So really help you with some data.
Relation between Inflation rate and consumer price index
And the first thing to be aware of is, of course, the inflation rate measured by the consumer price index. This measures how much prices increase on average for the consumer every single year. Of course, these venues differ significantly from country to country. So you should take this into consideration depending on your geography that you work in.
So putting some data for Germany, you can see here that the values pretty much fluctuate between one and 2% per year. And this is exactly the average that you can expect for most developed countries. So one to 2% per year, annual consumer price inflation. So make sure to research this value for your country. The index might be called a bit different there might be different indices measuring concepts like this as well for your country. So look it up in a second. A similar index that might be helpful here is the labor cost index. The choice you’ll have much on average, the price for labor. So the salaries in the country have gone up over time. And often these values are more or less similar in some countries.
The one might be higher than the other, but here again, if on average salaries go up by 2% every year, this is where it can give you a certain indication of what you should target. Then, of course, you should not really be happy with just getting a salary on the level of inflation. Because if you exactly meet the inflation number, you do not really have a salary increase.
Are you getting salary raise that meets inflation
And just the fact that now you can buy next year as many things with your money as last year. Or, to put it differently, If you’re not even managed to get a salary raise that meets inflation, you will lose purchasing power. You pretty much lose the value of your money year on year. And for these reasons, compensation for inflation should pretty much be the minimum amount that you ask for and that you get when you go into these conversations.
So if this is the one end of the spectrum, then what is the other end of the spectrum? And just to give you a ballpark figure here, one number that you can expect to receive if you work in a so-called accelerated career environment such as consulting or banking is roughly an average salary increase of 10% per year. So I’d argue that there are only very, very few careers, very, very few roads that you can get a long-term average salary increase of more than 10% per year. So aim for this 10% in this very high pace accelerated career environment. Of course, there’s a reason that these people get this type of money of course and these jobs often need to work a lot.
The performance pressure on you is quite significant. So if you are out in a more generous stand at nine to five corporate job, probably this is a battalion should be then adjusted to a bit of a lower number. So one to 2%, this is the minimum that you should get. This is all such what some companies provide just by themselves as a yearly inflation compensation to the employees. And then, on top of that, you should ask for an increase that is up to 10% based on the type of career that you’re in. And of course, here, the importance is also to see this as a long-term average. So it’s absolutely okay to maybe one year not get that much of a raise. If then after two years or after three years, you get an even higher salary increase maybe if you step up to the next higher position. But make sure that, on average, these are the targets that you can achieve.
Value creation and negotiations
Welcome to this section in which we will talk about how to increase the overall value for both sides of the table. This concept is called value creation and negotiations. And it’s a very important concept that you can also apply to salary negotiations. So far, we’ve really simplified the salary negotiation and only talked about your total compensation as a $1 figure.
But actually, there are many, many different elements that make up your total compensation, and you can make leverage use of these different elements to create value in the negotiation. It is really a common trap or mistake people make in salary negotiations because they simplify the many different elements into a $1 figure, and this way, they go heads on with their employer instead of thinking about clever and nuanced ways to create value.
The key insight
The key insight here is the following. You should aim to negotiate for salary components that are worth more to you and worthless to your employer. In this way, you can basically create value. This will enable you to grow your total compensation by a lot. Your employer might be bound by certain salary bands that are very specific to your role. And maybe you just barely missed the qualification for a more senior role, and it would also have a different salary range, of course.
In this case, you can try to negotiate for a much faster review of your current role and your promotion. This gives you a much faster runway to the next promotion and, therefore, much faster access to a higher salary. Another example would be maybe you want a different job title because you know that if you switch jobs, it will give you a much better salary range. This will actually cost your current employer nothing.
Suppose they can defend it against other employees, of course. But it could be worth a lot to you. To give you some ideas of salary components that you can negotiate for and that other people have negotiated for, I will now show you a brief overview. Besides the overall component, of course, your annual cash compensation, you can negotiate for vacation days. You can negotiate for a sign-on bonus in case you are switching to a new employer.
Another common type of compensation component can be your relocation coverage. It could be a tuition allowance, your job title, as we discussed in the previous example and could be an early review. It could be a company card or maybe a mobility budget, or in case of particular smaller companies or startups, maybe you can negotiate for a visa package or an equity option package that gives you a really strong incentive, in the long run, to stay with the company which is also, of course, interesting to your employer.
You can really extend this list to many other elements. I’ve shown some here on this slide. Maybe if you already are a father or a mother, you can negotiate for childcare support, a parental leave, or maybe for other people’s awareness or fitness program.
Just look through all the components I’m showing you here on this slide and get creative. You will find that by opening new opportunities for your employer to compensate you in some sort of way, be it money monetary or in case of job titles giving you future possibilities and future options. You can really create a lot of value for yourself in the negotiation. As you’re preparing for your next negotiation, write down the different salary components that would be relevant for your negotiation now.