Benchmarking Salaries: How much Salary is Enough? (Part III)

Chart 1 Chart 2

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Chart 4

Benchmarking Salaries: How much Salary is enough? (Part III)

The earlier posts have dealt with benchmarking salaries against experience and the critical mass theory which speaks about how ultimately every one ends up some what rich anyhow.

Signing the cheque

Firstly, this is not a first-time-heard-never-existed –before sort of thing. One of my earlier bosses and mentors had mentioned this thing about “signing the cheque”. To put in some detail, it is the realization of your salary potential. More often, this comes along with changing your organization and joining another. It is a sad part of life that employees who have stayed in organization get only 10-20% increment per annum (and that too is an optimistic number) and yet when the same employee jumps his organization, the salary leap is about 25% or above. Conversely, companies would prefer giving older employees 10-20% per annum increment, where as for a recruit they would be ready to pay 25-30% over the recruits earlier salary. There is the tool of “positioning” of employees, which actually helps this during the recruitment process. Well actually, the job market along with the head-hunter organizations exist because of this.

So we get back to the “Signing the cheque”. Flash back to this chart that we had made basis the Experience- salary Continuum.

Chart 1
Its been 5 years and the salary line trails the benchmark line (The Red Salary line trails the Blue Benchmark line). However, the 5 years that have passed have added onto your experience continuum. Other companies seek your understanding of work and business. So for all the less pay, you have been subjected to, here is an equalizer opportunity. You can cash on the experience that you have build up. And the act of putting a monetary value on the experience gained so far is called “signing the cheque” i.e unlocking the potential.

So if you are thinking of a job shift, what do we target? How much is enough? How much is good? How much is unsatisfactory?

We can discuss three leading scenarios for the salary after the job change
Red (Salary line) trails Blue (Benchmark Line)
Red (Salary line) equalizes Blue (Benchmark Line)
Red (Salary line) leads Blue (Benchmark Line)


Red (Salary Line) trails Blue (Benchmark Line)

Chart 2
At the end of 5 years, your red line was lagging the blue benchmark line. You took the jump at 30% growth. You may end up better off, but is that enough? 30% is a good-to-hear figure, but it doesnot take you past your blue line. Whats worse? An increment of 15% annually also doesnot add effectively in pushing your Black line past the Blue one. You are stuck where you started. Except that you are marginally better than where the red line would have taken you.

Does not provide any gratification and within the next 2/3 years your salary is obsolete. Worse is the fact that it is difficult even to make the high jump after 2/3 years. The equalization of the black anad the blue becomes a pipe dream. So you have pretty much missed the Blue line for ever, unless there is a stroke of luck or genius that guides you. Don’t count on such things though! If you are stuck in such a situation, it would be wise to probably re think the multiplier. The fact could be that you have a very high multiplier where as your experience and skill sets do not support that multiplier.

Red (Salary Line) equalizes Blue (Benchmark Line)
Chart 3
Ok then, your new job looks good and you have hit the blue line. Life seems to conferring on you what you truly planned for your deserving self. However, ask yourself, are you there yet? You may have caught up with the blue line once, but your multiplier happens to be much higher than your increments. You have a choice, either to decrease your multiplier or take another jump in ¾ years under a similar set of circumstances. Initially the going is actually good, but it may not give you the stickiness you may want to augment your learnings and experiences. Going forward the nagging will increase. I will not ditch this option as I ditched the first one. It is better than the first one, but please remember, its not a salary salary continuum, it is a experience and salary continuum and the more higher you go, the more you would need to stay put and gain experience.

You need to beat the blue by a long mile because eventually it will catch up. So then, the third option emerges:

Red (Salary Line) leads Blue (Benchmark Line)

Chart 4

Mark the salary line in Black. The jump from 6th year salary to 7th year salary is substantial. Its almost 2.5 times. Even when it evens out in 8th and 9th year, there is enough stickiness in the salary for the individual. So apart from gratification, pre-poning the critical mass point, it also gives huge amount of stickiness provided there is a culture fit. The stickiness in here is critical to augment your learnings and your “new” experience. Probably after the end of these 2/3 years, you would get the next level/ platform to add another dimension.

Most of us would tend to believe, whether a 2.5X jump is practical. It is difficult and this jump presumes that you are “A” quality on your role, learnings, teamwork and other aspects expected from you for delivery. The lesser you are on competencies required in your role; the lesser is the quantum of the jump. In case competencies are not as per required metrics, one could end up on the Trails/Equalizes charts. That in some association would be fruition of the


Summary

Be careful about the Multiplier you use. You may want to adjust that after 5 years of your work life
If you think the multiplier is good, then “signing the cheque” is a critical activity
Always look to significantly over haul the Benchmark so that you are good for the future.

How Much Salary Is enough? (IInd Part): Critical Mass Theory

In the last article, we had examined the salary – experience continuum. The broad idea was to establish an empirical method to benchmark salaries in careers. I would not claim that the hypothesis is a clearly established one. We are speaking of a geometric progression. The multiplicative index “x” may not be a constant value and it could vary from person to person, education background, industry and sectoral status, individual capabilities and attributes and the general attitude to learn. So this “x”, the benchmarking index is very subjective (though one may establish objective pointers).

Moving ahead, today we deal with the other two theories: The Blank Cheque theory and the Critical Mass theory.

Critical Mass Theory

There comes a time every man’s career where his income exponential starts to differentiate itself very highly from his expenses graph. Once a person has gone past this point in his life and career, he becomes economically liberated. He has gone past the absolute essential stage in Maslow’s hierarchy and may well look at self actualization as the next ambition in life. A flight ticket to a tennis event or a grand prix or a final event, or a 15 day exotic vacation is not going to bother your bank balances. Your inflow far exceeds your outflow at that point of time. You would speak about charity, social good, making a difference to the nation and the state. Bottomline: You talk Nirvana. Four snap shots to discuss this situation:

Snapshot 1: Apprenticeship phase: You would have joined a new company and you are 25. Your salary would have a tax component, a education loan component, cost of living component and then there would be money spent one oneself which could include clothes, electronics, going out, dinning etc etc. You could save a lot here but the savings are generally low in absolute terms.

Sanpshot 2: Mid Management Entry level (around 30): You would just have been married. This is the phase where you would be investing in comforts like a Television, a refridgerator, an AC, a Car. Depending upon what your savings from Apprenticeship period is, you would have part or all of these on EMIs. Here your salary is clearly not meeting upto your demands in life, which is why you are hedging the payments in the future term. Your net worth ( Your Asset Base – Your Liability) is probably close to zero if not negative.

Snapshot 3: Mid Life (around 35): You got kids, you have invested in a property. You spend very logically and sparingly. You are keen on investments and savings. There are other running expenses of a house, the domestic things, the kids and theor schools, your insurance premiums, your EMIs. Your net worth is deep deep negative and if you are fortunate, close to zero.

Snapshot 4: Nirvana: In here, the critical mass theory takes care of your monetary commitments. Your incomes exceeds your present expenditure, you may also be closing all the hedges that you had picked up during stage 2 and 3. You can talk about the nuances in golf, and your kids are well on their way to complete education . You and your wife spend time on Sundays teaching slum dwellers.


Coming back to our original line of thought, Once you have achieved the Critical mass in terms of Salary/ compensation / Benefits, your Nirvana starts. Thus hitting the Critical Mass reasonably early post your mid life would define many things including your personality, moneys and career in a different perspective. This is then what you call “ I have arrived..”

Having understood these stages through which one moves forward through in his career, the obvious question is “ How do you pre-pone Nirvana?”

The answer to that is that: You probably cannot pre pone Nirvana. That way you would defy the Experience Salary continuum, the basic premise of this discussion. Mark the use of “probably”. This is because there are cases and way to pre pone the Nirvana.

Out of a few that come to my mind is, a meaningful switchover in jobs, roles and companies can do the trick sometimes. This is one of the most difficult things to achieve and lot of perspicacity required. In a few instances an international exposure can pre pone Nirvana basis the Dollar/Euro salaries. The way I plan it for myself, I would take a sabbatical and pursue a higher and meaningful study sometime during my Mid Life. This would have to be through one of the Ivy League schools. It may support my specialization as of now or I may do it to acquire a completely different set of competencies.

One pitfall in this whole argument is that I haven’t looked at a career from a talent, competency, learning perspective. That’s very correct. But in these articles, lets just say that I have worked by a yardstick, that is very well summed up by this one liner by La Schiffer, the villain in Bond flick, Casino Royale : “ I believe in a reasonable rate of return”.

Key Words: Salary Experience Continuum, Critical Mass Theory.

Benchmarking Salaries: How much salary is enough?

(The following Post is basis few observations and a theory on Salary trends that i had made 5 years back when I had the opportunity of working with Accenture. Consequently, i find the theory to hold, at least empirically. A word of caution out here, this theory would be more applicable to technical people/blue collared workers. I will not extend this to non-technical professionals.)

Other related theories: The Blank Cheque Theory, The Critical Mass theory ( both would be discussed in forthcoming blogs)

Moore’s Law states that the number of semiconductors in a chip would double every 18 months. An interesting analogy is found in our Professional Lives as well. I will call it the "Experience Salary Continuum" which deals with what quantum of Salary you should benchmark against in your career progression. It is purely an empirical formula and one could use it as one out of several other benchmarking techniques. While I have found this theory to hold its turf in many occasions, estimation error gives gravely erroneous results. ( Refer to determining the “x” in the second last paragraph)

Put very simply, depending upon your education, your abilities and skill set, your salary should double every x years. The critical function is “x” years! The trick is to benchmark the “x”. Lets assume that you working at Rs.4 lakh per annum in the year 2000. Presently your salary is Rs.17 Lakh per annum. Is that Good or is that bad? The Experience salary continuum helps. Of the two professions that I know and have seen somewhat, the “x” has the following values:
Administrators/Managers: 2.5 years
Technical People/Engineers: 3-3.5 years (5 years back, when I formulated this theory , it was 3.5. Expecting it to be within the 3-3.5 years value)
Going back to our initial discussion, in 2000, when you joined your salary was Rs.4 lakh. I would run the calculations on both scenarios for now
Administrators/Managers: 8 years means 3 jumps (one jump every 2.5 years). The multiple would thus be 2*2*2=8. Thus your salary ought to be 4*8 = 32 Lakhs per annum. If you are at 17 Lpa, there is a scope for some improvement.
Technical People/Engineers: 8 years means 2+ jumps (the jumps are 3. – 3.5 years here). It is not three, though you are tending towards it. So let us assume the multiple to be between 2*2=4 and 2*2*2=8. A conservative number is 6 and an aggressive one is 7. Allowing for both multiples, on a 4 Lpa starting, the numbers would be 4*6=24 Lpa and 4*7=28 Lpa at current rates. Both scenario’s mean that you could bargain for more.
Unfortunately in our example, for the scenarios, manager as well as engineer, both are underpaid. However, if the starting salary was 3 lpa, then the Manager would measure 3*8= 24 lakhs. He would still b e underpaid. Our engineer, would be around 3*6=18 Lpa and thus he would just make the cut. (Just enough!)
That is the technique, which you can use as bechmarking purposes. More importantly, if the “x” is relatively precise and well based, you can also get to know your worth!
An example of how it helps: With a starting salary of 5 Lpa 5 years ago, I should be 20 Lpa now. I am at 14 Lpa, thereby underperforming by 30% but there are other factors that are holding me to this job. However, if I look for a job change next, I will pitch at 6.5 years benchmark salary. This means that for my next job change, I will try bargaining for 5*6= 30 Lpa. (The 6 is a value between the multiplicative factors, 4 and 8).

The Illustration given above shows the continuum compounding in 2.5 years (The Blue Line) and the red line is the actual salary hike over the 5 years. If one were to change his job at this time, the ideal benchmark is the blue line. We would cover that in a little more detail in the Blank Cheque theory (in one of the subsequent blogs).

What is the basis of the Experience Salary Continuum?
Experience is the one word answer. Demand and Supply is a two word answer. As you grow older with experience, the supply of people with experience decreases and the demand increases. Thus, the geometric progression in salaries.

Does this theory hold true in every situation?
No it doesnot.
As stated earlier this theory is more test proven with people who have technical education (Engineers and managers) . Rem. It may still hold true though for other professions! I am yet to affirm the extension of the theory to other professions.It may not hold true for speciality jobs, like those “Discovery TV’s extreme structures” project managers and engineers. They get paid well and they would falsify this theory.
There may be other multitude of reasons including job shifts and country jumping, which this theory doesnot take into account presently.

Determining the “x” is another critical aspect. This is a pure benchmarking exercise. You would have to use your networking skills on this one. You need to understand how your senior with the same profile, your colleague with the same profile, your boss, your subordinate, even the CEO have progressed through their careers. It may not mean knowing their start date, start salary and today’s salary (though that helps!). A 5-6 year snapshot of their career may be all you need to derive the doubling factor “x”.

I have found this technique extremely handy at benchmarking. My first job change saw me negotiate salary with the context set from this technique. More importantly, I have seen colleagues who earn more than the scale defined by this technique are happier at their jobs. The ones who earn less than the scale defined, are generally grumpy and keep comparing it with the ones mentioned earlier.

Then there are others… who are at the job for the love of it…..

Key words: Experience Salary Continuum