5 Key Principles to Nail Your Next Salary Negotiation

Salary negotiations have a significant impact on long-run wealth accumulation. Here are five key principles to nail your next one.

I will talk a lot about ‘Big Wins’ on this blog: those key sources of wealth accumulation that must be front and centre of a financial independence plan in order to make it a reality. There’s no off-the-shelf template here, but perhaps the most important of all these Big Wins is the maximisation of salary increases.

Yes, in a harsh twist of irony, that line of work upon which you are trying to reduce your dependence is often one of the best options to achieve independence. And to add insult to injury, if you want to optimise your financial gains from said job, just being brilliant at it won’t cut it.

Now, serious talk: Your approach to salary negotiations can be the difference between hundreds of thousands of dollars of income and investment accumulation over your working life. Put another way, it can be the difference between many years of dependence or many years of independence. Read that again if you need to.

Before we get to these salary negotiation tips, let me caveat all this preamble. I’m no expert. I’m just a guy who has made a number of avoidable mistakes – and I’d like you to avoid them. These tips aren’t a silver bullet for guaranteed negotiation brilliance, but they have worked effectively for me in several cases and should have worked effectively for me in several earlier cases – had I not been an idiot.

So, with that, let’s get to it.

Principle #1: Get over the social discomfort

For many people, the idea of salary negotiations makes them wince. The social discomfort of the back and forth. The anxiety that it might undermine the whole job offer. Sometimes our psychology can derail a negotiation before it has even started.

If you’re one of these people, I have a simple piece of advice: you need to get over the social discomfort for your future self’s sake. Why? Because squeezing out incremental gains can have a profound impact over a career of earnings – and therefore a profound impact on your future quality of life.

You are shortchanging yourself in the long run to preserve your sense of mental stability in the very short run. A ludicrous trade-off.

Principle #2: Don’t jump at an offer

Guilty. Back in the first few years of my career, excitement (misplaced it turns out) cost me a sizeable chunk of money. I had received what seemed like a good offer for a role in an exciting multinational business. Finally, after several years wanting to work for this business, I had an offer tabled in front of me. It would give me a substantial pay rise from my role at the time.

So you guessed it, in my excitement at the pay rise and the opportunity, I accepted the first thing they offered – without a great deal of thought.

My career was taking off and all the hard work was paying dividends. But after a few months something interesting happened. I stumbled across some shocking information. Among my peers, whom were doing equivalent-level jobs across the department, I was near the bottom of the financial pile. And we weren’t talking small margins here. My peers were earning materially more than me every month.

Of course, I was furious – not with the business, but with myself. I had dramatically underestimated my market value. I had let my emotions do the decision making.

There are a few lessons here that are worth distilling into a small list:

  1. Don’t immediately accept an offer. If you don’t want to immediately jump into a negotiation, buy some time. Think it over. Nobody is going to judge you for consulting your pillow.
  2. Lowball starting salaries set a precedent. Once you’ve entered an organisation, it becomes more challenging to achieve substantial salary gains. Sure, new roles will bring big gains, but your negotiations will likely work from that lower baseline.
  3. They don’t need to know your current salary. An outside organisation doesn’t need to know your current salary. They may ask and you don’t need to give the specifics. You might say, for example, “a salary that is competitive with the current market for that role”.

The next key lesson is a principle all on its own, and a lesson I’d learnt the hard way.

I’d impose a range of inhibiting questions that ultimately prevented me from asking for more. How do I broach the subject? What should I ask for? What if I throw away the job opportunity by asking for too much?

Principle #3: Know your value

You can’t go into a salary negotiation without some form of benchmark. You need to know what you’re really worth.

That means having a good idea of what the market pays for your experiences and talent, and even being ready to make this evidential case in your negotiation.

There are some simple ways to better understand your market value:

  • You can browse salary ranges on job search engines like Indeed and Reed.
  • You can read salary surveys for your industry and profession.
  • Websites like Glassdoor typically provide job reviews and salary ranges for comparable roles in large organisations.
  • Friends and colleagues who are open enough to talk about money might have some useful insights.

Bottom line: Use all the resources available to get to a number that is a fair reflection of your market value and expectations in the current market. If we’re in a highly inflationary period, I encourage you to also reflect this in your valuation.

Principle #4: Set your red line

Once you have your target figure, set your ‘red line’. In other words, there is likely a figure below which you should decline based on all that research you have done. Of course, some people aren’t lucky enough to have the flexibility to set a high ‘red line’, so this will all depend on personal circumstances.

If your valuation is fair in the context of the current market, it’s likely that a company will have reasonable scope to flex. Your red line is really your last resort eject button.

Principle #5: Don’t price or talk yourself out

Remember that when substantiating your valuation, you may need to talk beyond simply market valuation. For example, this might mean demonstrating the financial value you have created in a previous business and showing how you can create specific value in the prospective business.

But there is a core principle that stands here: Don’t blow it by pushing your valuation into ridiculous territory. If you’ve done your research and you’re confident in your personal valuation, don’t overdo it.

Your counteroffer should be sensible and well-reasoned in the context of your prior research, and it should keep all options on the table. Do not deliver ultimatums. It is a process they are leading.

It’s also worth thinking about other angles if a logjam is reached on salary. For example, are there some non-financial extras you could negotiate, like education to strengthen your longer-term marketability or private healthcare enhancements?

Again, do not push this too far. Always remember that if you want to work for this business you need to preserve a strong relationship with Human Resources and your potential future manager.

What if it’s a no?

Sometimes employers say no, but this isn’t a moment for panic. If you’ve stuck to the above principles you should be clear on what you’re worth in the current market, what your red-line salary offer is, and when it is right for you to accept or decline a job offer.

This can be especially difficult if you’re in financially trying circumstances or if you don’t have other options on the table, but hopefully these principles provide a good framework for making a decision at that point.

Bottom line: keep your eye on the prize. Getting the salary you merit in the current market is critical if you are serious about early financial independence. Stay focused on the end goal and be sure to assess the longer-term financial implications of any decision you take during negotiations.

Good luck!

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