The Salary Question: The Quitter Vs. the Non-quitter
Posted by miller on 28 Oct 2006 at 02:48 pm | Tagged as: Personal Finance
I work in an industry where it is pretty well known that if you want to make money, you need to jump companies. In fact, I heard this about my company before I even started working for them! Well, for me and my group of friends, that first round of “QUIT QUIT QUIT QUIT!!!” is happening now.
We’ve all been working for about 3 years, and of my group of 15-20 friends, 6 have quit in the last 5 months reaping new salaries 15-35% higher! For comparison, our company’s average annual raise is around 4%. How much “better” (financially speaking) are my quitting friends doing?
Let’s take a typical example. Jon and Sam are making 60k a year each. Jon decides to quit for greener pastures in the form of a 10k raise. Sam decides he wants to stick it out, earning an average 4% raise. The question is: how long does Sam need to work before he will be making the same money as Jon? The quick answer might be that, well, a 10k raise is roughly a 17% raise. Therefore, it will take Sam about 4 years before his 4% raises add to up 17% (Sam will be making 70.2k a year after 4 4% raises). So, we might say Jon jumped Sam by 4 years in terms of salary by quitting. Well, while sitting my cube two days ago, I came to realize how wrong the above argument is! There is that little thing called inflation… and results just might make you sick.
The first thing I realized is that when we talk about salaries, what we usually mean is “buying power.” And the difference between the two is inflation. So back to Jon and Sam, yes, Sam will make 70k in 4 years, but that 70k in 4 years can buy less than that 70k can now. It has less buying power (again, inflation). So, back to our original question with this in mind: how long will it take for Sam to make the same buying power as Jon got right now by quitting?
The trick is to take into account inflation. One easy way to do this is to speak about all money in “today dollars.” This is also most convinient because we have a good feel for what today’s dollar is worth. This is easily accomplished by simply subtracting inflation from any future growth. This is a common technique is financial analysis. If a fund earns 8% this year, its “true” earning is really 5% (subtract off 3% for average inflation). Well, the same can be done with raises. If Sam gets a 4% raise next year, his buying power only really increases by 1% since the cost of goods and services has inflated 3%.
By thinking about everything in today’s dollars, Jon’s choice to quit starts looking even better. Recognizing that Sam’s buying power only increases by 1% each year, it will take him 16 years before he has the same buying power as Jon has right now. That’s the difference between someone in their mid 20s and someone in their early 40s. I have to say, my non-quitter friends at work were not amused by this result! Here are some other interesting results:
- If you make 50k now, and average 4% raises, it will take 70 years before you have the buying power of today’s 6 figure salary (you would be 92 years old if you started working at 22)
- If you make 50k now and you get 6% raises on average, it will take 24 years before you have the 6 figure buying power
- It will take 14 years of receiving 4% raises to match the buying power of a single 15% raise now
I have plugged these relationships into a simple spreadsheet in case anyone wants to run their own numbers. It is pretty straight forward. Next to each year is a toggle for allowing a larger raise (say, a promotion). A “1″ will indicate a “promotion” raise for that year while a “0″ indicates an “average” raise. Enjoy, and happy job hunting. =)
Wow, this is information is staggering. The calculations are simple enough, but this is the first time I’ve looked at these type of results.
I’ll definitely be using your spreadsheet and results to make any career-related decisions in the future. This will make it easy to compare the relative salaries from two propsective companies.
Thanks
This doesn’t completely take into account the risk of making the jump to a company that offers you a 15% raise and finding that things are not what you expected and/or the company is more precarious than you thought.
A layoff followed by 3 months of job searching at $0 (ignoring unemployment payments) means you’ve just taken a 25% annual pay-cut, with significantly reduced buying power. Even a more realistic month is still an 8% cut, assuming you find another similarly paying job to return to at your level.
You also have to take into consideration that you may not receive the ability to contribute to a 401(k) or buy into an employer-sponosored health plan for a few months after the start of your new job (this varies), which can add to your personal expenses.
Sometimes you have to calculate the value of staying with the evil you know over the evil you don’t.
Rob, I completely argee that there are numerous other variables to consider. Especially something as important as your job! As NLG notes, these calculations are *simple*. On one hand, simple calculations can be the most convincing, but on the other hand, simple calculations may leave out important details. I think the most important thing to take from this is that inflation affects things more than we like to think…
[...] Posted by miller on 31 Oct 2006 at 12:27 am | Tagged as: Personal Finance In continuation to my previous post, a friend of mine made the point that my numbers depended on the initial salary of the person in question. This is true for the example I gave, though there is a more generalized result that does not. [...]
This only works if you’re assuming that the Quitter making 70k the first year is getting also getting an annual raise equal to inflation (3% in your example). Otherwise, his 70k salary 17 years from now is equal to ~42k in today’s dollars, while the nonquitter is (finally) making 71k in today’s dollars. In 4 years, the nonquitter’s salary will exceed the quitter’s salary in today’s dollars; and by year 8, the nonquitter’s cumulative earnings exceed the quitter’s in today’s dollars. Of course, a quitter unhappy with a 4% average raise probably won’t go looking to work for a company where they won’t be getting a decent raise.
Always look at the total compensation package. Salary makes a big chunk of that, but predictable things like health care insurance costs, 401k match, life/disability insurance, bonuses etc can eat into those numbers.
Oh and don’t ignore taxes. $71,950 is the threshold between 25% and 28% for 2005. Although a taxable income of $72k is comparable to a much higher gross salary.
Lisa,you bring up a good distinction. My original point was that it’d take the non-quitter 16 years to earn the same buying power as the quitter has *now*. You bring up the situation where the quitter then subsequentially get no (or very low) raises. I’ve heard this often happens since the company came you so much of an initial raise. Well, each year the quitter doesn’t get a raise, their buying power *decreases* by inflation. So yes, very interesting points!
Poolis, yea, you definitely need to conclude all the benefits. People do often forget to do that. I have a lawyer friend who complains about having to buy over a hundred a month in medical (I pay like $20). But he makes well into the 6 figures, so he doesn’t get much sympathy from me! =)
[...] That was the premise of my friend’s article on salary increases, how people tend to forget about inflation when projecting salaries over many years and I think that applies even more so to investing. See, when you invest $100 today and it appreciates 11% to $2,300 in thirty years, you have to keep in mind that $2,300 in 2036 won’t represent the same amount of purchasing power as it does in 2006 - that’s because of inflation. At 4% inflation, your $100 investment is worth around $761 in purchasing power because it really appreciates at 7%, not the full 11%. [...]
I wish i could jump ship. Sometimes, you don’t have that option. You are already at the max level of income at your job.
Another thing that people don’t realize is that you are trying to establish a reputation within the company. Yes, you may get some more “responsibility” at the new company, but all the relationships that you have built in the old company slowly deteriorate.
You can’t hate on people that want more money if that is what makes them happy, but personally, I’d rather move my career forward now rather than make more money and start over.