- Written by: Patrick Bollinger
- Created On: 2023-10-11
- Last Update: 2023-10-11
There are a lot of assumptions floating in this article, please bear with them as I try to convey my thoughts.
Have you ever wondered, "Why are salary increases so high when switching jobs?" I have and what I have determined is that salary increases when switching jobs need to be higher than your typical raise, assuming all else is equal. The reason being, you will come into the new job off their typical review cycle.
For example, say a company performs their annual reviews on the second week of January, and you joined the company in February. Most likely, you will get an annual review the following year because your tenure is close to one year at the company. But, what if you joined in September? If you joined in September, you would only have 4 months of tenure at the new company, so it might not be enough time to warrant a full review. So, your review is delayed until the following year, and your salary remains the same for the 1 and 1/3 years. We will put aside the ideas of, "Couldn't the employer give a raise without a review," for now since I suspect that is atypical. This is just one example, but how long could you remain at your current salary?
This is why I believe salary increase can be so high when switching jobs. It's in the best interest of the employee to maximize their salary potential because it will remain stagnant for at least 1 year to probably 1.5 years. This also triggered thoughts of when determining a salary for a prospective job, think of the value of money in the future rather than value of money today. Inflation goes down at times, but mostly it goes up, so we have to make sure the value we are receiving for our work is not decreasing as time goes on. Which brings me to the other half of my musings, raises.
How should you think about raises for an existing job? It's not perfect, but I'm developing a mental framework as we approach review season. Taking the thougths from above, salaries accepted for a new job should be set for the future value of money, we should take the same approach with raises. But, what does that mean in practice?
For the past 50 years, the United States inflation rate is averaging 3.87% year-to-year. This data was calculated using the data U.S. Bureau of Labor Statistics' CPI for All Urban Consumers. Let us assume your salary at the time of review is $100,000 per year, to make calculations easier. Then, to maintain the same value that you are currently receving, your new salary should be $103,870 per year for the next year. I don't think we should stop our thoughts here though, because most compensation adjustments are tied to performance since "tech is a meritocracy".
Given that 3.87% is the average inflation rate, what does it mean if you get a 2.5% raise as an employee? At this point of time, to me it indicates that the value you are producing the business is lower than it was a year ago. This is counterintutive though, because you have gained a year of specialized knowledge about the company you currently work for. There may be other factors, like the business is not making as much money this past year, but should that warrant the non-verbal expression of, "We value you less," now?
Following is a rough table that you could think about when it comes to discussing your raise:
| Inflation Rate Factor | Company's Opinion of You |
|---|---|
| < 1 times | The company does not value your contribution to its growth. |
| >= 1 times but < 2 times | The company values your contribution but is not invested in your personal growth as much. |
| > 2 times | The company values your contribution and wants you to grow with the company. |
These are very rough ideas, and maybe not the right numbers, but the main idea is a company that gives you raises higher than inflation sees you as valuable and wants to give you more buying power so you can grow with it.
The last question you might be thinking of is, "How do I determine inflation rate?" Assuming you have been using future value of money to determine your salaries, then you can sum the month-to-month inflation rates since your last compensation change.
There are many factors when it comes to compensation and preceived value. This is only one factor, so please don't lose sight of the other things your company may offer. As an example; if you were paying out-of-pocket for health coverage and then, in the midst of your first year, your company covered 100% of your health coverage costs, this would likely act as a raise. In this example, I wouldn't expect a raise much larger than inflation because my buying power was increased from not needing to pay for health coverage.
What do you think? Am I being to "Eat the rich" with my thoughts? Most software engineers are in a fortunate position to have a good salary compared to their friends and family who are not in the field. I do believe we produce a lot of value based on the growth of many tech companies, so why not spread it?