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Don’t you hate the feeling when you know your colleague is earning more than you? Especially when you know that you work harder and better than they do? Well, often there is one simple reason why: Your Starting Salary.
The general advice parents and teachers give their children is: work hard, show that you are valuable and you will be rewarded. If you translate this into your salary then the logic should be: “Work harder and better than your colleague, then you will get a higher salary”.
In this post, we will show why this concept is fundamentally flawed and that the most important factor of getting a high salary is your starting salary.
Setting The Scene: Pete, Anthony and Blake
Let me introduce you to three fictional characters: Push-Over Pete, Average Anthony and Big Balls Blake.
All three of these guys finished university with a Masters in Accounting at the age of 25 and accepted analyst positions with the same accounting company. In essence, all three of them have the same background, the same experience and the same position.
The only difference: their starting salary.
Push-Over Pete absolutely hates conflict. He does not like to negotiate and is generally quite scared of talking about salaries, because “he does not want to offend anyone”.
So when the time came to negotiate his starting salary, his employer low-balled him with a starting salary of CHF 60’000, despite being willing to go as far as CHF 70’000 in case of negotiations. Pete, afraid that the job offer would be withdrawn if he did not agree to this salary, immediately took the offer.
When the same offer of CHF 60’000 was made to Average Anthony, he pushed back, saying that he would expect a minimum of CHF 65’000 as a starting salary. Without hesitation, Average Anthony’s boss accepted.
Big Balls Blake took a different approach. When he was made an offer of CHF 60’000, he politely refused and said:
“Given the conversations I have had with colleagues working in similar positions and my own research online, I believe that this position should pay somewhere between CHF 68’000 and CHF 78’000 per year”.
In the end, he walked away with a starting salary of CHF 70’000 per year.
Anchoring and Salaries
Before we move on in our example, let me quickly explain how salary increases are generally decided within companies.
Every year when a company does the budget for the next year, they will decide a budget for salaries as well. Generally, this will be expressed as a percentage of all the salaries of last year. For example, salaries will be 2% higher than last year.
Then the boss will look take this increase in salaries and distribute it amongst his employees. The important part is that this is never done in absolute numbers, but in percentages. For example, he or she will decide that Push-Over Pete did a good job this year, so he will get an above-average increase of 3%, not CHF 2’000.
This means your salary increase is “anchored” to your current salary.
In our example, if all three guys performed well in their first year and all receive an above-average increase of 3%, then Push-Over Pete will receive an increase of CHF 1’800, Average Andy of CHF 1’950 and Big Balls Blake of 2’100. That is a difference of CHF 300 between Pete and Blake.
This concept of basing your increase on your current salary is something called “Anchoring” in behavioral finance.
Not only is Big Balls Blake earning more money than his two colleagues, he is also receiving higher salary increases despite doing the same work as the other two.
In year two, the difference in salary increase will be even larger. Let’s assume that all of the guys receive again an above-average salary increase of 3%.
Push-Over Pete receives an increase of CHF 1’854 (3% of CHF 61’800), Average Andy of CHF 2’009 and Big Balls Blake of CHF 2’163. The difference between the increases of Pete and Blake has now increased to CHF 309.
Let us make the simple assumption that all three guys work for the same company until they retire at age 65 (i.e. they have a working career of 40 years) and each year they receive a salary increase of 3%. How do their annual salaries differ after 10, 20, 30 and 40 years of working?
By the time these guys are ready to retire, the original CHF 10’000 difference in annual salary between Pete and Blake increased to CHF 32’620. That is a big gap.
The next thing we need to look at is how much money these guys have earned in total over their working careers:
Already after 10 years, Blake has earned CHF 114’000 more than Pete and CHF 57’000 more than Anthony. Despite just being as good as the others.
Over the entirety of their careers the difference between Blake and Pete is CHF 750’000 and CHF 375’000 between Blake and Anthony. The only difference between these three guys is their starting salary.
What is more important: High Salary Increases or High Starting Salary?
Let’s take this example one step further and assume that Push-Over Pete is an amazing employee, Average Anthony does a good and decent job, while Big Balls Blake does just the bare minimum.
Their boss realizes these differences in work ethic and value that they bring to the company. Therefore, he gives Pete an amazing salary increase of 7% per year, while Anthony receives a good 3% and Blake is left with a dismal 1%.
Let’s take a look at the first ten years of work for these three guys:
Even despite these amazing salary increases, it takes Pete a full 3 years to overtake Blake when it comes to their annual salaries. This basically means Blake can do the bare minimum for three years, while Pete is busting his backside, and still earn the same amount as Pete.
But this is just their annual salary. Let’s see how the figures are when we look at how much they earned in total:
Pete has to work like crazy (and have his boss realize this as well) for a full 6 years, just for him to have earned as much as Blake in total.
That one negotiation at the beginning when it came to defining your starting salary, gave Big Balls Blake a huge head start over the Average Anthony and Push-Over Pete.
In essence, no matter how much Pete loves his job, from a pure financial point of view, he is much better off looking for a new job and renegotiating a new starting salary. Working ultra hard to get those higher raises will take so much more time getting to the same level.
Why Your Starting Salary Is So Important
Of course the examples above are very simple. You will never have the same level of salary increase for your entire life. Also promotions will factor in to this journey and are often accompanied with major salary jumps.
What this example shows however is that your base is important. The same as for compounding interest, your increases will always be based on your current salary. The higher your current salary, the higher your increases will be.
Therefore your starting salary, which is your very first base on which you will get increases, is the most important.
By the way, your starting salary also has an impact on the salary you will get when you are promoted. If you are earning CHF 70’000 as an analyst and get promoted to manager, they might increase your salary to CHF 80’000 (14% increase).
But they will never increase it to CHF 90’000 or CHF 100’000, even if these would be the normal market rates. Why? Because these would represent increases of 29% and 42% which your boss would never be able to justify to HR.
How Do You Negotiate A Good Starting Salary
First of all, I am not an expert in salary negotiations as I am still at the start of my career. But the following steps do seem the most logical for me:
Get In The Right Mind-Set
Make sure that you are mentally ready to be the Big Balls Blake and not the Push-Over Pete of our example. Be ready to negotiate.
Understand that a company is offering a job because they want YOU. Not someone else. This means you not accepting the job is a loss for them as well and they would have to go with a worse candidate.
Also know that negotiation is part of the game. Everyone has a salary range they are ready to offer (for example CHF 60’000 to CHF 70’000). Someone trying to hire an employee will always start at the lower end of the range.
Do Your Research
You need to know how much companies on the market are paying for the same position you are applying for. There are multiple ways to do your research:
Check online portals such as Glassdoor where people put anonymous reviews about their employers, positions and also their salaries.
Talk with friends or colleagues who work in similar positions at other companies. Go for coffee and ask them about tips and tricks for the application process. Then make sure to inquire how much their position is supposed to make.
Do not ask for a specific number, but ask them for a range. This way you avoid putting pressure on them to say exactly how much they are making.
Apply to the same position at different companies. If you are lucky enough to get multiple job offers, then you will get a feeling for how much different companies are willing to pay. This way you can benchmark.
Define A Range
From all your research, make sure you know what is the minimum salary you expect. If a company is only willing to pay a salary below this minimum level, be ready to walk away and not take the job.
Again this is a mindset which you have to adopt.
Also define a maximum level which is at the high end of salaries for your position.
Talking about salary is nerve-wrecking and not a conversation many people enjoy. This is why you need to practice it.
Who should you practice with? The best would be to practice with someone who already has a similar job. But in general anyone will do.
Your parents, your siblings or your friends are good options. Worst case practice by talking to your dog or the mirror.
Just make sure to do it.
The final step is to actually negotiate. Some of the things that I would recommend:
When you are asked the question of how much you expect to make in this position, do not state a figure but a range. The same as Big Balls Mike who originally said that he would expect to make somewhere between CHF 68’000 and CHF 78’000 per year.
Make sure the range you state is at the high-end. If your minimum salary is CHF 65’000, make sure the lower end of the range is somewhere around CHF 70’000.
Think about not stating your salary for the first year but for the next two years. Something along the lines of: “I would expect to make between CHF 75’000 and CHF 80’000 within the next two to three years”.
This way you give an indication of the salary you want today, but you also already have negotiation tool for salary increases in the next two years.
The last tip is that when you state your range, wait for a response. When you say: “My research shows that this position pays somewhere between CHF 70’000 and CHF 80’000 per year”, make sure to stop there and shut up.
The next word has to come from the opposite side. You need to give them time to think and respond. Otherwise your run the risk of you saying something along the lines of: “but if this is too high for you, I am willing to go lower”.
Puff, all your negotiation power is gone.
Your starting salary at a new job is immensely important. It far outstrips the importance of salary increases in the future.
The main problem is that salary increases are anchored to your current salary which always starts with your starting salary.
When you go in for negotiations make sure you have a plan and the right mind-set. Often the right mind-set is the difference between success and failure in these cases.
Also do not forget that you can also negotiate other elements such as sign-on bonus, relocation packages, stock options and bonus levels.
- Compare your current salary against the market (e.g. on Glassdoor)
- Define a salary range for your current job. If you are below this range, consider applying to other companies.
- If you are about to start a new job, practice negotiating salaries with your friends, parents, siblings or dog
What are the salary negotiation tactics you have implemented? What pitfalls have you run into? What has worked particularly well? Did you even negotiate your starting salary?Let me know in the comments or send me an e-mail at firstname.lastname@example.org. Any questions, concerns, feedback and constructive criticism is highly appreciated.