3 things I learnt from my pay review

No doubt regular readers of my blog are accustomed to my 2018 financial goals. At the foremost was securing a pay rise from my current take-home pay of £3,300 per month to at least £3,500.

I work at a startup where cash is a scarce commodity therefore I never had high hopes for taking home a six-figure salary (for that I rely on my other income streams). I place a much higher value on work enjoyment and share options (which indirectly represent ownership in the business), both directly linked to my overall personal satisfaction. Still, with the coming of WB40 Junior, it’d be nice to have some extra cash every month to play with.
Well I had my annual pay review yesterday and the result was quite unexpected:
I got a 1% payrise with my monthly salary (vs the 10% expected).
However I was granted a substantial performance-orientated bonus that if paid out, would translate to an average take home pay of £3,800 per month (8% more than expected).
Do I feel happy? Absolutely.
Do I feel motivated? Hell yeah.
Do I feel disappointed at the prospect of not being able to take immediate cash gratification? Slightly.
Having done some reflection on the train journey home, here are my takeaways about salary and raises.

1. You aren’t entitled to a pay rise

Everyone expects to receive a pay rise every year. I don’t know the rational reasoning behind this but maybe it’s our innate optimistic mindset hoping that tomorrow will always be better than today.
My view is fairly contrarian:
Nobody is entitled to a pay rise unless they create additional value to the business.
Imagine you are hired to perform task A that generates value B for the business and you are paid C. In order for this to be sustainable, B must be greater than C.
Now if you want a pay rise to C+10%, then there are 2 possibilities:
  1. C+10% < B: so we are back to the previous scenario where the cost of hiring you is less than the value you generate. It still makes a profitable business operation however your employer’s profit margin is squeezed. They may or may not agree.
  2. C+10% > B: then we arrive at a situation where your cost exceeds the value you bring to the business. Very few businesses would agree to this proposition.
So the only way to increase your odds of securing that C+10% raise is to increase the value of B, ideally by more than the % raise you have asked for.

2. Steady raises will make you well-off but won’t make you rich

There are 2 schools of thoughts regarding career progression and remuneration:
  1. Some argue that you should stay with a single employer, develop loyalty, become an expert in your domain and you will be well looked after.
  2. Others believe that regular and strategic job hopping is the best way to boost your earning.
I’m going to offer a fresh school of thought: rather than lingering whether to job hop or not, aim for an annual pay rise of 10%.
You see, here’s the trick:
That 10% compounded over 15 years will more than quadrupled your initial sum (4.1 times to be precise).
This means a starting salary of £55,000 will become over £220,000 at the end. At that level of earning, assuming you aren’t an alcoholic, drug addict or gambler, you will live more than a comfortable life. Furthermore assuming you follow the principle outline in #1 by constantly adding value to the business, a 10% annual pay rise should be achievable.
However here’s the catch: £220,000 annual income is nice but it’s not an enormous amount considering the effort and time you have to put in to earn it and the risk associated with it:
  • You are still dependent on a single employer for providing that income stream unless you have actively sought to diversify.
  • During economic downturns, expensive hires are usually the first to be culled.
These cons nicely bring me onto my last realisation.

3. Develop multiple income streams and give yourself a raise

In a way I have already exceeded my pay rise target this year by developing an additional income stream.
Since January I have developed a side hustle as a freelance management consultant on Upwork, helping entrepreneurs and business to develop their strategy and financial models. I have generated over £1,800 worth of income, averaging £600 per month, which more than exceeded my initial target.
I embrace side hustling for many reasons, chiefly:
  • Risk diversification: by having multiple income streams, I can better protect myself against unexpected surprises in the dynamic modern labour market.
  • Control: through developing and running my own business, I am in control of my own destiny by choosing my earning power, clients and projects, thus creating greater fulfilment.
As a result, I came to the wonderful realisation that I have already given myself a raise and any further increase would be icing on the cake. The knowledge that you are in control of your destiny is a powerful mental booster.

Wrap up

I got a conditional raise this year and I am more satisfied about my job than ever. I think it really came down to:
  1. I am confident in my ability to add significant value to the business.
  2. I have multiple income streams to thus making me be in control my own destiny by not depending on a single employer to pay my bills.
  3. I believe in the effect of steady and compounding raise rather than quantum leaps.
Have you had a pay rise lately? Were you satisfied? If not, what could you have done? I’d love to hear about them! Please comment away.