When it comes to personal finances, I can sum up everything I know in two sentences:
- If you want to have more money to spend on experiences, you can either increase the amount of money you make or decrease the amount of money you spend
- There’s a lot more potential in increasing the amount of money you make (it’s virtually limitless) than decreasing the amount of money you spend (you can’t spend less than $0)
If you’re employed at a day job, one of the most effective ways to make more money is by negotiating your salary. It’s not hard; In fact, by integrating a negotiation about your compensation into your annual review, it’s easy to highlight your accomplishments from the last year, identify your goals for the coming year, and make an increase in your salary an obvious decision for your boss.
Update: My friend Josh Doody wrote Fearless Salary Negotiation, a book and courses like “How to negotiate your starting salary” that I highly recommend! Check it out!
Lifetime Earnings Update:
Just did the math: Using these strategies, I’ve helped my friends negotiate over $7,500,000 (Seven-and-a-Half Million Dollars) of lifetime additional income.
“Kai literally gave me the words to say to negotiate my $25,000/year raise” — Rachel H.
What are the benefits of negotiating your salary?
The biggest benefit is what I call The Snowball Effect.
A $2/hr raise right now might not seem like that much, but because your salary stays pretty consistent (or increases) when you change jobs, that $2 raise will follow you around for the rest of your career. And here’s the cool part, that $2 raise at the start of your career has a lifetime value of over $150,000.
($2/hour * ~2,000 hours/year * ~40 years/career = ~$160,000).
Small raises, small improvements in your compensation, add up. So by negotiating your salary at the start of your career (and at every other chance you have), you’ll benefit from the recurring increase in your revenue.
Negotiate aggressively. No for-profit company is more morally worthy of money than you are, nor will any appreciate $X0k / N years like you.
— Patrick McKenzie (@patio11) August 27, 2015
“I tell my graduate students that by not negotiating their job at the beginning of their career, they’re leaving anywhere between $1 million and $1.5 million on the table in lost earnings over their lifetime.” — Linda Babcock, Carnegie Mellon University
The usual disclaimer applies: this is my outlook on life and you may disagree with it. That’s cool. I don’t mind. Let me buy you a beer.
How I used these strategies to make $2,000+/hr
At my first job out of college, I made $2,000/hour by using these concepts and strategies to prepare my first annual review. All together, I spent ~8 hours researching and preparing for the review. At the review, I demonstrated such an in-depth knowledge of the problems the company was facing and specific strategies we should use to increase revenue, that they agreed to my request for a $16,000 raise (an increase of $8/hour) and, on top of that, gave me a month of paid vacation in San Diego and promoted me to department manager.
For a small amount of time invested in learning how to better understand the problems my manager was facing and identifying ideas – not full solutions, but ideas to investigate – I was able to demonstrate my high value to the company. And anchored to that high value, it was an easy decision for my manager to make to increase my salary.
Okay, how do I do this?
The secret I discovered at the heart of this strategy is that the easiest way to justify an increase in your salary is to anchor it against your value to the company.
Here’s how that works. Let’s compare two different, hypothetical employees, Sarah and Ted.
Ted and Sarah both earn $50,000/year and are Marketing Directors for a tech company. They’ve both worked for the company for 3-years and receive a ~3–5% annual raise.
Let’s take a look at how they both approach their annual review.
When Ted meets with his manager, they review his work for the past year, identify areas for improvement, and, at the end of the meeting, Ted’s manager says that based on Ted’s work this year, he’s giving Ted a 3% increase in salary.
Ted is happy with the offer, but is disappointed that it’s so small. He asks his boss for a 10% increase in salary instead, but his boss says that there isn’t any room in the budget for that level of increase this year.
When Sarah meets with her manager, she’s done research ahead of the meeting, identifying her manager’s specific objectives and goals for the year. For each goal, Sarah has identified how, specifically, she contributed to her manager reaching that goal.
Sarah has specific, quantifiable data about how she’s contributed to the company, pegging a dollar value to how she’s been able to increase revenue and decrease costs. By the end of her meeting, she’s able to demonstrate to her manager how, specifically, she helped increase revenue by $250,000 this past year, and has a list of improvements that she could make in the coming year that connect with her manager’s goals.
Then, Sarah says to her manager, “based on the value I’ve contributed to the company over the last year, and this specific list of changes we could make to further increase revenue this coming year, I feel that fair compensation for my role here is $85,000. I’ve researched what other companies are paying for someone who can contribute the value that I’m contributing here, and based on that research, I’d like to request an increase in salary to $85,000.”
The primary difference here is that, based on her research, Sarah was able to peg her request (an increase of $35,000) to her value to the company ($250,000+). Ted, on the other hand, had pegged his value to his existing salary. To the manager, Sarah’s request had an amazing return on investment (“$35,000 for an employee who had contributed $250,000+ to his bottom line and could do it again this year?”) while Ted’s request was just an increase in his department’s cost.
By knowing and understanding the exact problems the company you work for is facing and taking the time to identify specific strategies and tactics to test to solve problems, reduce costs, and increase revenue, you’re able to walk into your annual review and justify whatever increase in salary you request.
To have success in negotiating your compensation, you need to talk in with a list that identifies:
- Specific problems that the company is facing in the coming year (Opportunities to increase the revenue the company is making or decrease the company’s costs)
- Specific strategies and tactics to test to solve the problems the company is facing (Ideas, with specific notes on implementation, on how to help the company, and a timeline on what you’ll test first)
- Your skills that added value to the company over the last year (with quantifiable examples where possible) (How, specifically, you added value to the company in the last year by increasing revenue or decreasing cost)
- What other people with similar roles are getting paid (Your justification for the number you pick)
- What you’ll do if they don’t agree to the raise (Your ‘BATNA’ or Best Alternative to a Negotiated Agreement.)
The first time, I went through this system to prepare for an annual review, I spent ~8 hours preparing. I walked out of the meeting with a $16,000 raise, and additional non-monetary compensation. In total, I earned ~$2,000/hour preparing for that interview.
There are four parts of this system that we’ll walk through together:
- Figuring out what you’re worth
- Highlighting specific, quantifiable evidence of your value to the company
- Identifying problems within the company (and identifying solutions to those problems)
- Identifying a BATNA (Best Alternative to a Negotiated Agreement)
What’s your time worth?
If you aren’t already employed, this question can be challenging to answer. When I graduated from the University of Oregon, I had worked a string of $10/hour student jobs, but I never had a budget or a clue what I needed to earn to afford my lifestyle.
Figure out your budget
Break out a spreadsheet and add up your monthly expenses. Figure out how much you would need to make to make it through the month comfortably. Divide that number by the number of hours you want to work each month. That’s your break even point. Ideally, you’re making a bit more than this, so you’re able to save, but this number is the bottom of your salary range.
Figure out what the market is like
I use salary search sites like Glassdoor, Payscale, and Indeed to let me research what different job titles or job descriptions earn in my area.
When you’re negotiating your compensation with your manager, it can be a huge advantage to use market data like this to show how your pay compares to similar positions in your area. You can anchor your compensation to this market data (justifying the increase in salary you’re asking for) and also use it as an implicit threat if they don’t agree to your increase (“I know what I’m worth, I know what other companies are paying. If you don’t agree to this increase, I’ll have to take other action to earn fair compensation”).
“I want a 10% raise because, based on my research, that represents the average salary for this gig elsewhere in the industry.” — Michael Lope
Ask a friend for salary advice
Take advantage of your social network to understand what different careers / roles / job descriptions pay. If you have a friend or colleague in a similar role at another company, ask what their compensation is like, and mix that into your market data on what other, similar roles pay.
Highlighting your value to your company
Whenever I’m preparing for an annual review, the first thing I do is break down my job description line-by-line to answer two questions:
- What are my documented responsibilities and goals in this position?
- How, specifically, did I meet those responsibilities and achieve those goals over the last year?
This in-depth focus on the specific responsibilities in my job served as my guide when preparing for my annual review. By using my job description as a framework, I was able to bring to the table specific examples of my experience, successes, and strategies / tactics used over the last year, highlighting how I met (or exceeded) my goals, decreased company costs, or increased company revenue.
When you look at your job description, realize that it’s a specific, line-by-line list of the needs that they have. During your review, focus on the value you’ve added to the company by meeting those needs.
Be specific and quantifiable in your experience
Don’t fall into the trap of begin generic or less specific with your experience and accomplishments because you’re unsure what your boss wants to see.
The problem is that easy, generic descriptions of your accomplishments (“Met with vendors”, “Coordinated marketing campaigns”, “Updated the website”) don’t communicate the specific value of what you’re providing to the company.
When you meet for your annual review, you want to be as specific as possible. Highlight the specific, quantifiable accomplishments you’ve had (“Updated the Website” → “Increased website visitors by 100%”) to make them stand out in your manager’s mind.
By being specific and sharing quantifiable information, you make it easy for your manager to understand what your experience was like and the specific value you contributed to the company. These salient examples of your accomplishments stick out in their mind and make you stand out among your coworkers.
Identifying problems within the company
Negotiation is a discussion of facts. Any offer you make needs to be constructed with the impression that its’ based on data. The best way to find out the intimate details about the company you work for is through frequent conversations with your manager and coworkers about the company, their roles / responsibilities, and the challenges they’re facing.
Make time for a regular 1-on–1 meeting
At every company I’ve worked out, I try and carve out ~15–30 minutes once a week where I can meet with my manager and learn more about their role. As an employee, I see my entire function as making my manager’s job easier for them.
To achieve that, I want to understand the specific problems and challenges they’re facing. If I’m able to solve a problem that’s keeping my boss up at night, I know that I’ll have an easier time communicating my value to the company.
At my first job out of college, I was lucky to have a weekly meeting with the CEO to discuss marketing strategy. With this frequent face time, when it was time to meet with her for my annual review, I had a list of the specific, high priority challenges she was facing. Armed with this, I was able to flip the script on my annual review and change the topic of the conversation from “What did you accomplish this year, Kai?” to “How can we solve the problems that are at the top of your list, Boss?”
Make specific suggestions for improvement
Beyond understanding the specific problems your boss is facing, you want to be able to make specific suggestions on strategies and tactics to test to solve those problems.
These answers don’t need to be absolutely perfect or ready to go out of the gate. What they do need to do is show an understanding of the business goals the organization is working towards and the specific problems that they’re facing as they work to achieve those goals.
You want to come into your job interview with a short list of specific improvements and changes you’ll make, with your boss’s approval. You want to demonstrate your understanding of the problems the organization is facing.
Stress how your priorities align with the company’s priorities
Throughout the review, you want to stress the opportunities you see to help the company grow. If you have a specific career objective for the year (going to a conference, learning a new skill, expanding your department, etc), tie it into the company’s goals, to demonstrate how you’re in alignment with the company’s priorities.
In my first job out of college, I wanted to visit San Diego, and evaluate it for a future move. I knew that I wanted to spend a long time down there (~3–4 weeks), but I didn’t have the vacation time to spend on such a long trip. I knew that a major prospect for the company was headquartered in San Diego, so I showed the CEO how I could spend a ~2–3 week block of time down in San Diego at an upcoming trade show and meeting with high level prospects and clients.
By positioning my goal (visit San Diego) with the company’s goal (expand to the San Diego market), I was able to align my priority with the company’s goal. The end result? A 4-week work-cation in San Diego.
Identifying your Best Alternative to a Negotiated Agreement (BATNA)
Sometimes, for all your preparation, your offer will be rejected. The money won’t be in the budget, the company has different priorities, or they’ve instituted a pay freeze across the company.
Before that happens, you need to consider your Best Alternative to a Negotiated Agreement. If they say no, what will you do?
Why do we want a BATNA?
A BATNA gives us leverage in the negotiation. If they say no and you have another option on the table (accept an offer from a competitor, quit, etc), you’re able to negotiate from a position of strength.
If you can’t afford to quit, don’t have another offer, and don’t have any options but to accept their offer, you’re negotiating from a very weak position.
What can you do if the offer sucks?
If their offer doesn’t meet your needs or doesn’t interest you, the conversation isn’t over. Instead, be prepared with a counter-offer and justification for why the counter-offer makes sense.
By having a reason in your back pocket for why your counter-offer makes sense, your counter-offer will have more strength. Compare these two statements:
- Thank you for your offer! I’m very excited to negotiate compensation that works for both of us. I would like a pay increase of 20%.
- Thank you for your offer! I’m very excited to negotiate compensation that works for both of us. I would like a pay increase of 20% because that’s inline with the compensation paid at other, similar companies in this industry.
By having the justification prepared for your counter-offer, you’re able to approach the negotiation from a stronger negotiation point.
What if they say no to your counter-offer?
You can walk away.
My friend Ed was hiring a loss prevention manager for his store. After 3 months of searching, he found his dream candidate. The interviews went great, the candidate’s references check out, and everyone was excited. Ed made an offer and the candidate asked for a day to think about it.
The next morning the candidate called and told Ed that he’d have to turn down the job offer.
The candidate decided to turn down the position because the compensation wasn’t in line with what he was looking for. By walking away, the candidate demonstrated that he understood a lot of the power in the negotiation was on his side of the table. Ed was desperate to hire a qualified candidate and he had already invested 3+ months in the search. The idea of going through another month of searching for another qualified candidate was too painful, so he was able to meet the candidate’s compensation request.
Similarly, if your company isn’t willing to negotiate with you, you can walk away from the position. Politely inform them that you respect their decision, however you will be looking for a position that will pay you a fair market rate for your work.
Think about this from your employer’s perspective. What costs more: saving $10,000 by denying your request for a pay increase or having to recruit, hire, and train a replacement for your position?
Employers are desperate for trained, qualified employes. Take advantage of the power you have by making it clear that you’ll walk away if you aren’t able to come to an agreement on compensation.
That said, it’s best to have an alternative if you’re willing to walk away from a company. A job offer from a competitor, a sizable savings account, or a side-business that you’re going to focus on growing all make it easier to walk away from an unattractive offer.
Negotiating non-monetary compensation
If your company can’t negotiate financially, what else can they do?
An extra week of vacation time, a gym membership, or professional development are all alternatives to monetary compensation that can provide value to you, without increasing your salary.
As you prepare for your annual review, ask yourself “What could they offer me, other than money, that would leave me feeling happy to work here?”
Ask for that.
Using the ‘Door-in-the-Face’ technique
The ‘Door-in-the-Face’ technique is when you make a large, easily turned down request, and follow it up with a smaller request that looks much more reasonable.
When I was researching my salary, I noticed that the average salary for my job title and description was ~$30,000 above what I was earning. When I met with the CEO to discuss my salary, I shared my research. The CEO quickly said the company couldn’t afford to pay that much, but my follow-up request for a $16,000 raise was much more acceptable.
By anchoring the discussion to a higher figure and using the ‘Door-in-the-Face’ technique to rebound from her rejection, I was able to negotiate to my desired salary.
How to practice for your annual review
Negotiation is a skill that you won’t learn overnight, but because most people are afraid to negotiate, you’ll quickly move ahead of the curve. Practice and prepare so when you’re sitting down across from your boss, it won’t be the first time you’ve thought about this stuff.
- Work hard on tangible stuff. Document and claim credit for what you do. (This sounds super obvious, but a lot of people don’t understand the value in owning the work the do and talking about it. Tell people what you did.)
- Before you ask for more money, prepare your BATNA. If they say no, what will you do? You need to know this. Most people don’t make one of these, so if their first attempt doesn’t go well, they’re in trouble.
- Go in and stress how much you’d like to do going forwards. This is huge. Don’t mention what you’ve done in the past, except in the context of how it proves how much more you can do going forward.
You know you rock. But they don’t…yet.