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Chapter Four | Part One - Yes, Money Matters
Your total compensation, including your annual salary, benefits, and perks, is a reflection of your relative value to your employer. I say relative because the method of determining an employee’s annual compensation is usually based on factors that extend beyond the individual’s actual productivity–in dollars and cents–at any specific point in time. (Yes, there are exceptions, but these are typically commission-based salespeople, whose pay is directly related mathematically to their sales volume.)
We’ll talk about each of these factors, but first, let’s discuss how your employer’s expectations impact your salary.
If you're just starting your working career, your employer’s expectations are substantially different than for someone with several years of experience in the same industry. As a new employee with little or no familiarity with the job, your first year is about two things: (1) Learning the ropes, and (2) Proving yourself to management by substantiating their decision to hire you.
As a new hire, you’ll be expected to learn the skills, processes, and procedures associated with your job function, and become intimately familiar with the company and your place within it. Proving yourself to management will be a cumulative process of convincing your supervisor of your dedication and long term intentions to serve the company’s interests.
During the first few months, you may not have the opportunity to show off your talent directly in the form of customer interactions or with direct, hands-on accountability. However, your boss will always be looking for growth in areas of professional competence. She’ll want to see you making consistent progress toward assuming your full job responsibilities and accomplishing the routine duties of your assignment with as little supervision as possible.
Some companies call this a probationary period, the new-hire period, or the initial employment period. During this initial or “trial” phase, your compensation is often little more than a payment toward your future value. As far as the company is concerned, your work doesn’t justify your salary because you’re not working at peak productivity. You’re receiving training, orientation, and gaining experience—at the company’s expense—that will eventually give you the tools and knowledge you need to perform the function for which you were hired. The fact that they’re paying you during this period means they’re investing in the employee you’ll become.
If you’re in sales, you may also find your participation in bonus and commission programs on a temporary hold until you’ve completed training. I’ve also seen sales incentive programs that payout on a staggered or increasing percentage over time (usually a year to eighteen months) until you’re being paid one hundred percent of your production bonus.
Asking for a raise during a probation period is career suicide. Unless there are mitigating circumstances comparable to your rich uncle buying out the company, you’ll need to wait until you can show what you’re made of.
Think you’re the exception?
It’s a common delusion. Here’s a short example:
Acme sales engineer “Bob,” was determined to push the salary envelope from the day he was hired. Because of an unusual circumstance (an unplanned vacancy), he was offered an opportunity to take over a remote branch office right after completing the company’s formal training course. With only four months on the job, this was a real opportunity—and a challenge.
After accepting the new position, he immediately scheduled a meeting with his manager. He planned to demand a raise that was—in his opinion—commensurate with his new responsibility. As he left for the meeting, he turned to me and said, “And the boss had better not insult my ass with a ten percent raise.”
He had nothing to worry about. His ass was never insulted with a raise of any kind; instead, it was given a good verbal kick to ensure he recognized the difference between an opportunity to prove himself and the payment of tribute to placate his ego.
Yes, he admitted that money was discussed, but just long enough to dismiss the idea. The boss responded with, “We’ll talk about it on your anniversary date. That’s eight months from now. That’ll give you plenty of time to get organized, meet the customers, and begin to produce some business.”
In short, he was saying, “Prove yourself first, then we’ll talk money.”
Without a record of performance and productivity, there was nothing to substantiate Bob’s request for a raise based on merit. Even eight months later, the increase Bob received was little more than a cost of living adjustment, because it was simply too soon for the company to make a long-term financial commitment in exchange for future-based productivity.
Fact: Increases in compensation result from establishing your long-term value. In most industries, paying for a specific accomplishment is not the way the system works (unless, as I mentioned before, your compensation is based wholly on commission). While you may receive a boost in your annual bonus for an outstanding accomplishment or meeting a productivity goal, your permanent salary increases are paced to reflect your long term value to the company.
Here’s the company’s reasoning: Just because you rocked it this year and increased the company’s business or profitability, doesn’t mean you’re going to do it next year. And the company knows it. So they look at a long term average of what you’re worth to the company’s bottom line, and they make that evaluation knowing they could replace you—typically for less money—if they needed to.
This usually means raises in salary are contingent upon longevity factored by your ability to demonstrate consistent, long-term performance. Does that mean it’s always necessary to put in the time before expecting a large salary bump? Like I said, that’s the usual situation. However, there’s an alternative to outright asking for a raise that can help accelerate a hike in your income.
Instead of a raise, ask for more responsibility. This strategy communicates your desire to be more involved in company operations and growth. It also diminishes the negative impact of asking for more without proving yourself deserving. You’re not asking for more money to maintain your status quo workload. You’re saying you’re ready to assume more responsibility—your silent request for additional compensation is understood.
Now, here’s what makes this strategy interesting. Declaring your desire to become a more valuable asset to the company usually makes you more valuable—immediately. In fact, your perceived attitude is often more important to your compensation and longevity than your future actions, whether you deliver or not.
Asking for more responsibility can be a defining moment in your career and should not be left to chance. It's most effective when revealed as a personal or professional goal during a formal performance review. If you have several years of outstanding productivity under your belt, you may even want to suggest a possible target date for promotion—typically a year in the future—then ask your boss if this is realistic. If your manager tells you promotions are limited or currently unavailable, your response should be something along the lines of, “I’d still like to work toward the goal. Even though an opening may not be available for some time, when it does, I’ll be ready.”
If you're willing to make a geographic move, say so. While you may want to mention any regional preferences you might have, avoid reciting a list of places where you don’t want to live. It’s an indication your request for a promotion is conditional, and in effect, you’re already turning down any future offers the company might make that requires a move to a personally undesirable area.
It’s a good idea to periodically determine what you’re worth. Most industries have an average amount of compensation for a specific job function. One way to determine yours is by joining professional organizations related to your Industry. Membership benefits may provide access to organizational data that often includes the current range of salary and compensation, based on job type.
If you perform a sales function, the process is even easier. First, determine your compensation as a percentage of the total amount of sales you generate annually. Be sure to include the replacement value (a dollar amount) for health and life insurance, company contributions to a retirement fund, 401K, or other investment plans, personal use of a company vehicle if provided, and any reward-related travel and trips.
Finally, add in the value or replacement cost of any personal advantages you receive from using company assets, including reimbursable expenses from which you derive some personal benefit. It’s easy to overlook these “minor conveniences,” but that’s because we take them for granted, forgetting the actual cost of calculators, phones, writing pads, desk pens, business cards, and even that morning cup of coffee waiting in the break room. All of these “perks” are something that self-employed entrepreneurs must pay for.
Now compare this total to the national average for compensating an independent sales force in the same industry. For example, if 6% of gross sales is the national average paid to independent sales reps for selling blue widgets, and you’re currently receiving three and a half percent as compensation for selling your company’s version of a blue widget, you can bet your company knows it. And while you can ask for an increase to close some of the gap, it’s doubtful you’ll ever receive one hundred percent of the difference. And that’s intentional.
Why? First, that six percent commission is gross compensation. It’s the total amount a rep receives. And from that, the expenses of an office, administrative services, transportation and travel, computers, phones, office supplies, and all the other requirements of running a business are paid. What’s leftover is the rep’s compensation.
There’s a second reason, and while it’s not as obvious, it’s just as important . . . you and the company MUST have headroom for future salary growth.
Topping out at a “salary ceiling” removes the incentive to do more. If you know you’ve received all the compensation available to you—regardless of how much more business you produce—how motivated will you be to exceed last year’s productivity by twenty percent?
Yes, many companies have bonus programs designed to pay for year-over-year increases, and on the off-chance your employer has an equitable bonus program to reward those who increase company sales and profit, count yourself lucky. But in most cases, as an employee, your total annual compensation—including bonuses—will usually lag behind the gross commission paid to an independent sales rep doing the same level of business.
How do the majority of companies rationalize this “income-gap?” To offset the shortfall, management wants you to believe there are other “value-added” employee benefits that more than compensates for the difference. Most of these tend to fall under the category of the subjective and conceptual, including job security(?), company identity and status, educational resources and support, and the illusion that the company is there for you, and even in a difficult economy, they’ve got your back.
Do any of these things have any actual value? In a word, No. At least not the kind of value you can put a number on. And keep this caveat in mind: What many employees mistakenly identify as intangible benefits are more accurately described as a hesitancy to relinquish the familiarity with the status quo combined with a fear of the unknown. Said another way, it’s a concern that a new job may not provide the same level of comfort or satisfaction provided by the current work environment.
Before we can dive a bit deeper into the comparison between a corporate employee’s compensation and an entrepreneur doing the same type of work, it’s important to understand how large corporations view and administer employee compensation.
A large company operates on a forecasted budget, with its workforce salary being one of its most significant expenses. The company has the on-going obligation to meet an employee’s expectations of receiving a monthly paycheck on time, every time. But does that obligation also extend to sharing the company’s profits? No, that’s reserved for the stockholders or private owners.
“But that’s not fair,” you say. In your opinion, those profits were the direct result of your efforts, and as far as you’re concerned, you should share in the spoils of victory.
Rather than argue the point, let’s look at the situation when your productivity falls. For this example, let’s say your salary is 100K a year. You earn it by being a good mid-level manager. You meet management’s expectations and can demonstrate a record of sustained and study growth in market share and customer retention. This year, you and your team brought in several new large accounts, adding thirty percent to your total business volume as compared to last year.
“I should be paid more money for that,” you say. “My efforts were directly responsible for putting more profit in the company coffers, and it’s only fair that I share in the financial gain.”
It’s a strong argument, based on logic and the bottom line. But before you march into your supervisor’s office and demand “what’s rightfully yours,” keep reading.
Let’s jump a year into the future.
Those new accounts you and your team brought in have decided to revert to their previous supplier. Maybe their decision was based on your company’s inability to meet the requested price or delivery, or one of your salespeople pissed off someone in the purchasing group. Regardless of the reason, you’ve lost those new accounts. But that’s not all. Your most productive salesperson got an offer from your number one competitor and decided to leave, and her customers chose to follow her.
Now you’re numbers suck. You’re down forty percent compared to last year, and even if you factor out the loss of the new accounts, you’re still down a good ten percent due to your previously loyal customers switching brands to maintain their relationship with your ex-employee.
Should you expect an immediate salary cut to sixty thousand a year? Seldom do large companies penalize their employees with reductions in annual base compensation. If the loss of business was preventable or resulted from incompetence or irresponsible behavior, they might (and probably would) terminate and replace. However, if the lost business was truly beyond your control, it’s doubtful they would take that kind of drastic action.
It’s very likely they would continue to send the same paycheck, in the same amount, every month. And so you—a mid-level manager with sucky numbers—would continue to pay your bills while maintaining the same lifestyle and income expectations you’ve always had.
Large companies pay their people based on the long haul. Employers know there’s going to be good years and bad, with a few outstanding years thrown in to help boost the average. And that’s also how they calculate employee compensation. The good years provide a cushion of cash for the not-so-good years. Peak and valleys are always averaged to show a more accurate representation of the marketplace. Instead of the periodic ups and downs, it’s the trend that’s important. Steady growth over time. Just like the way a corporate salary is administered.
Although this is a relatively straightforward concept, you can’t believe the number of employees who lose sight of the big picture. Even those who receive a portion of their compensation in the form of a bonus or commission often feel slighted when comparing the dollars they received to the gross dollar value of the business they generated. In effect, it’s like an investor who becomes obsessed with the day-to-day performance of his portfolio rather than the long term growth.
“But my base salary hasn’t moved up in several years,” you argue. “They’re taking me for granted.”
Yes, there are always exceptions, so let’s do the math. If your job assignment provides you with a direct correlation between your performance and salary (again, sales is always an excellent example), and you can rationalize an annual income of $150,000—based on your long-term, historical performance—but you only receive $120,000, that’s thirty grand a year you’re stockpiling for the company’s benefit.
But that doesn’t necessarily mean you’re being underpaid. To know for sure, you’ll need to compare your compensation to your competitive counterpart, both inside and outside your company (within the same industry).
If all mid-level managers are making about the same as you, regardless of performance, then the answer is simple: Your company is using a functional compensation system. In short, you’re being paid to perform a function, and that’s the value your company is willing to pay to get it done. While there’s little doubt your productivity in dollars and cents is worth more, your company hasn’t structured their compensation program to recognize a direct relationship between productivity and compensation, at least not for your specific position.
Does that mean it’s time to start sending out your resume? Not necessarily. And certainly not immediately.
The first year you recognize a discrepancy between your compensation and productivity, use your performance to justify asking for a raise at your next review. You’re not going to ask for the entire shortfall, but half of it is a reasonable request. And no, that doesn’t mean you should expect to receive half. It’s just a place to start the negotiations.
If the company wants to keep you, they may grant you an increase. Then again, they may not, especially if meeting your request raises your income above the “norm” for your industry position or job description.
If you like your job and want to stay, accept the situation for now and track your performance for another year. Remember, the company evaluates your performance in the long term, which is also the way they pay you. You may need more time (history) to rationalize your request as being commensurate with the longer-term averaging of the peaks and valleys of your performance.
But what if, after three or more years, you find yourself continuing to fall behind in compensation? It happens. The productivity of true superstars can easily outstrip the company’s capacity to pay for consistently outstanding work. If you find yourself in this situation—your performance significantly and repeatedly exceeds other company employees in the same position, and yet, you’re paid an amount similar to that received by your co-workers—it’s an indication you’ve outgrown your job.
Bottom line, your company does not have a payment structure to compensate you and other exceptional employees like you.
Your first clue will be management’s attempt to justify their refusal for a salary increase by citing the limitations of the pay range associated with your position. And if a promotion isn’t available due to a lack of room at the next level, your manager may try to placate you with promises of long-term career positioning and the virtues of patience.
The result? You begin to feel the effects of negative motivation, resulting from management’s determined stand to ignore the obvious incongruences in your compensation by feigning indifference and disinterest when confronted with the numbers.
How long do you allow your compensation to lag behind your performance before you take action? Knowing when to draw the line is different for each individual. It depends on your personal situation, professional goals, and job alternatives.
As I mentioned above, allowing a substantial lag in compensation to go on too long will eventually affect your attitude and performance. While you may tell yourself you’re building future job security, it’s a hard pill to swallow, especially when you realize your future employment is always subject to the silent risk of termination from buy-outs, reorganization, and lay-offs.
In general, after three years of taking it in the shorts, it’s time to evaluate your relationship with your employer. You can start by finding out what you’re worth on the open market. Being able to show a history of consistent growth in sales, profit, and productivity is a valuable commodity, and if your current employer refuses to pay you for it, a competitor usually will.
Coming up next from Better Mondays: Chapter Four, Part Two - Yes, Money Matters
Thanks for reading,
Roger Reid | Success Point 360
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Roger A. Reid, Ph.D. is a certified NLP trainer with degrees in engineering and business. Roger is the author of Better Mondays and Speak Up, and host of Success Point 360 Podcast, offering tips and strategies for achieving higher levels of career success and personal fulfillment in the real world.