Salary Negotiations: Win by Losing

I’ve been reading a book called, “The Four Hour Work Week” lately, and the timing is pretty interesting. In the book, Ferris outlines a positively cold-blooded plan to seize control of your life and career using an approach that he calls “Lifestyle Design.” For me, the timing is interesting because “lifestyle design” is a good way to describe the way that I’ve been re-shaping my life over the last several years, thinking in terms of things that I want to be true about my life (e.g. “I should be able to go where I want when I feel like it and work from wherever”) rather than my career (e.g. “I wanna be a SENIOR Architect”). It also reinforces and then some my desire to focus increasingly on passive income. So, basically, reading this book for me is sort of like a gigantic pat on the back: “you’re on the right track, Erik, but you should double down!”

You should buy and read this book. Seriously. It’s, at times, audacious to the point of discomfort, and it can feel a little Amyway-this-is-too-good-to-be-true-ish (though it probably isn’t), but he makes some incisive observations that will rattle you and alter the way you think of the corporate world… like I’m about to do (I hope). Some of the inspiration for this post is derived from my experience (particularly the focus on programmers, which he doesn’t do), and some of it from the book. So, without further ado…

The Hard Truth

Salaried, exempt employment is an atrocious economic deal, especially for programmers. Weird as it sounds to say now, I’m not saying that your employer is screwing you nor that you shouldn’t be a salaried, exempt employee. I actually rewrote that first sentence several times, trying to be a little less blunt, but it is what it is. It’s not a value judgment and it’s not intended to be click bait or offensive — it’s just the stark truth. Let’s go through some numbers, to put an exclamation point on it.

For the sake of easy math, let’s say that you’re a representative Senior Software Engineer and you make 100K per year. If you’ve been a manager (or a contractor), you’re probably aware that there are 2080 “work-hours” in a year. Let’s drop those 80 hours off of the end and assume that they count as Christmas, Thanksgiving, etc. 10 holidays per year. So that means that you work 2000 hours and receive $100K. This means that you earn $50 per hour. That’s a pretty good wage.

But then, consider the fact that your labor on the freelance market can easily bill out at $150 per hour. I’ve seen this pay ratio play out in multiple locations, with multiple vendors. When I ran a department, I routinely solicited software contract/consulting services and saw a pretty standard set of rates come across. Bargain basement was $100 and top-o-the-line specialized rate was $200. But the blended rate would average a senior dev generating $150 per hour in revenue for his or her company.

So what gives? Why does this large gap exist? Well, because of all of the expenses that an employer incurs on your behalf, because of all of the perks of working for a company, and because of the stability, right? Okay, fair enough.

But, let’s do some more math, just for fun. Let’s assume that you get 4 weeks of PTO in some form or another. At $50/hr, this is a benefit that’s worth $8,000. Further, let’s assume that the employer pops for about $12,000 in insurance benefits. We’re now at a total compensation of $120,000. Let’s further add in $2,000 for the 401k plan, and another $3,000 in miscellaneous perks for a total of $125,000. Finally, let’s add taxes and unemployment insurance on for a generous extra $10,000 to bring the total to $135,000 in total comp. And then, let’s add another $15,000 because tuition reimbursement, 401K match, HSA kick and perhaps other exotic perks. We’re now at an even $150,000 for your total comp for the sake of easy math. And this is almost certainly a wildly generous figure.

So you take home $50/hr and you cost your employer $75/hr. Your employer charges $150/hr, which means that half is spent on you and half goes into the company coffers to pay for expenses, investment, overhead salary, etc. So of the employer’s cut for your time, 25% of it goes to the expenses and perks, and 75% goes to the company. You can think of this 75% or $75/hr as your “stability premium.” Every hour that you work, you’re forking over $75 for “stability,” which means not having to pursue your own leads, handle your own finances, worry about legal representation, etc.

And It Gets Worse

Is it (stability) worth $75/hr? That’s a question that I cannot possibly answer for you since worth is in the eye of the beholder. But what I will say is that with a full year of $75/hr ($150K) in your pocket, you could hire a commission-based salesperson and an administrative assistant and still have money left over for incidentals (assuming you had the up-front capital to pay until salesperson generated you some $150/hr consulting work). No doubt about it, though, there is real value and peace of mind in not having to worry about all that stuff. But still, compared to owning an enterprise and having a small staff, working for the man for the same pay is a vastly economically inferior situation.

And that’s not the worst of it. You see there’s another insidious characteristic of the corporate world, which is that 40 hour work weeks make about as much sense as laws that you can’t buy alcohol on Sundays after 4:30 PM if you’re wearing blue and Mercury is in retrograde. Don’t get me wrong; I’m not saying that there’s anything wrong with working 40 hours, but doesn’t it seem odd that everyone, everywhere works the same amount of hours (within reason)? There are strong societal incentives that start to kick in if you go too much over 40 (bad reputation for companies as sweatshops) and if you go too much under 40 (now you’re a part time employee and don’t get substantial medical and other benefits). We’re funneled toward the 40 hour mark like cattle being gently prodded into a single file line.

Now, it’s not the 40 hour work week that’s the bad part here. It’s the perverse incentives created by the 40 hour work week. Let’s say that Fred, a Senior Software Engineer vacates his position where he was making $100K and the company puts you in as his backfill for the same salary. Further, let’s say that you’re way more efficient than Fred was, and within a few months, you’re delivering twice the value to the business. So, assuming Fred was paid $50/hr and generating $150/hr for the company, you’re para-dropped in and are paid $50/hr to generate $300/hr for the company. That’s awesome, so you rub your hands together excitedly as you prepare to receive your reward!

And, do you know what that reward is? You’re assuming that it’s probably having your pay doubled or at least increased by a modest 50% or else you’re hoping to keep the same pay and work the 20 hours per week it takes you to do Fred’s job. I mean, that’s what’s rational, economically. I won’t hold you in suspense any longer. Drumroll please. And the reward is… a hearty pat on the back, an “atta boy, keep up the good work,” and a 5% COLA instead of a 3% one in 12 months at your annual review. At your $100K salary, that means that you get an extra 2K per year, which totals out to $1/hr. So you make your company an extra $150/hr by being awesome, and they toss you a buck. And the next year, they toss you another. And then, maybe in year 3, you’re ‘ready’ for a promotion, and they bump your pay $10K, bringing you up to a total of $7/hr. So over 4 years, you’ve earned them an extra $1.2 million, and they’ve responded by letting you keep $20K.

Okay, so you’re getting hosed, but where are the perverse incentives? Well, think about what this means. The difference between being an absolute efficiency machine for your employer and for being Fred is $20K spread over 4 years, which translates to $2.50/hr. Now, remember, at this point, that 40 hours per week is a fixed, non-negotiable, sacred figure. You have to be present, looking busy for 40 hours per week. So your choices as an efficiency machine boil down to “collect $50 per hour to look busy but coast and duck out early when no one is looking” or “collect $52.50/hr to put the pedal to the floor and give your all.” The perverse incentive is that looking busy is far more important to your career than adding value.

At this point, it bears mentioning that your employer isn’t screwing you, but rather playing by the standard corporate rules. I mean, think about it. What company is going to say, “you know what, let’s start paying all of our devs $250K per year?” If they were publicly traded, the shareholders would riot. These are the rules by which individuals and corporations play and pay, and that’s basically that. It’s just that the rules and standards are such that non-ownership employees create gobs and gobs of surplus value that they don’t get back.

Please Tell Me It Doesn’t Get Worse

I can tell you that it doesn’t get worse. You’re sufficiently depressed and we’ve hit rock bottom. It’s only up from here. But first, let’s have some comic relief as we consider salary negotiations in the grand scheme of things. When evaluating efficiency differences between senior software engineers, we’re talking here about someone making $50/hr and creating $150 to $300 per hour in market value for the company. And when you switch jobs, you’re going to haggle over 2 or 3 dollars per hour (and often far less at annual reviews).

Think of it this way. You’re making $95,000 at Initech and you decide to head for greener pastures at Initrode, where you’re offered $100,000. You demand $110K, they counter with $103K, and you settle on $105K. What you’ve said, in effect is, “Over the next 5 years, you were going to pay me $500K and, whereas the last guy earned you 1.5 million in revenue, I’m going to earn you 3 million in revenue, and I’m pretty pumped because I got you to agree to give me an extra $25K.” Let’s strip off 5 zeros and restate to drive home what you’re arguing about. “You were going to pay me $5 and, whereas the last guy earned you $15 in revenue, I’m going to earn you $30 in revenue, and I’m pretty pumped because I got you to agree to give me another quarter.”

It’s honestly like Mr Burns and Homer Simpson engaging in fisticuffs for a dollar. Even though Homer needs it proportionately far more than Burns, it’s not especially significant to either of them. For the rest of this post, I’m going to encourage you to let Burns have his precious dollar in exchange for something that will get you many, many more dollars later. There’s nothing quite as disconcerting as when your bargaining opponent readily agrees to what you had thought would be a tough sell, and that’s what you need to inspire in your manager when talking raises, COLAs and offers. “That seemed… too easy.”

Specifically, what I’m talking about here are things that you should demand in lieu of money. And, I mean, you can be explicit. At annual raise or hiring time, you can say something like, “you know what, how about you keep my pay at X and offer me Y instead?” It’s a bold play and one that will probably catch them off guard, but one they’ll also probably agree to since you’re completely conceding the thing they’re most geared up to push back on.

Work From Home

This is a benefit that’s somewhat common these days, but hardly universal. It’s also an invaluable benefit with tangible and intangible perks. The tangible ones are things like not spending money on gas, work clothes, tolls, car wear and tear, etc. Intangibles include extra time with family, avoidance of awkward coworker interactions, the ability to travel as you please with friends or family, provided you’re somewhere with an internet connection and, perhaps most importantly, the autonomy to manage your own time. Critically, if you’re replacing Fred and you’ve doubled him up on efficiency, there’s no one around to evaluate whether you look busy or not and there’s no one around to insist that you should do twice the work for no pay difference. This has the potential to be somewhat ethically murky, depending on your arrangement and understanding with your employer, so you’ll have to use your judgment. But, if nothing else, you recapture hours that you’d have spent commuting and can do laundry, dishes, and other chores while sitting in on pointless conference calls.

Best of all is the negotiating tack that you took. One of the biggest reasons that people don’t get to work from home is jealousy. Everyone else is trapped in 40-hour corporate prison, so why should you get to escape? Well, your boss can explain to them that you took a paycut for the privilege. Everyone else will think you’re a sucker too once they hear that. Let them.

Work on Public-Facing Stuff

Let’s say there are two projects that you could work on. The first one is a public-facing, open-source framework that your company maintains in support of other initiatives, and the other is Double-Super-Secret Project X. Take less money to work on the public-facing thing. It’s easy to get swept up in the internal company careerism and want to work on what the cool kids are working on, but if you kick butt on project X and it’s a wild success, what happens? A lot of C-level bonuses and you get a gift card to the Apple Store. Great. And, does it really matter if you ingratiate yourself in that organization’s politics? If you want rapid pay and title advancement, you should job hop.

But if you work on the open source stuff, you’re getting paid to get your name out there. Other developers and companies get familiar with you. They see and know your work. You start to earn a reputation and have a voice. This can result in job offers, but it can also result in a transition to self-employment, freelance work, partnership in ventures, investors, etc. Turn down the COLA and offer to do public-facing work, and the boost to your reputation will repay your investment in spades.

Negotiate for IP Rights

This may be a tougher sell, but consider offering up that COLA in exchange for claim to your work product. For instance, let’s say you’re working up a training manual for new developers to get up to speed with C#, ASP MVC, and Bootstrap. Tell the employer that you don’t care about a raise, but you’d love to own that training material and be able to sell it to a few people you know. If they say yes, you’re getting paid your salary to create a product that you can sell. Make it a book or a DVD screencast. See if you can make it into a Pluralsight course.

Speaking for myself, one of the biggest sources of financial success that I’ve had over the last several years if figuring out ways to multi-purpose things I’m working on. It’s now second nature to me to consider whether work I’m doing for a client could be generalized and made into a product. Look for opportunities like this with your employer.

How About Extra PTO?

This is an easy one that I’ve had success negotiating in the past, myself. Negotiating for extra PTO is pretty similar in concept to the work from home arrangement in that you’re attempting to reclaim hours of your life without pay reduction. It’s been my experience that companies are pretty willing to toss you an extra week if you back off of a salary negotiation. Leverage this as often as possible. If you spend an extra week of PTO doing a project for a client at the market rate that you could command, you’ll earn an extra $6,000, which is probably more than the COLA would have been anyway. And if you take the last piece of advice, you might have a way to turn that work product into something that earns you even more.

No Overtime

Here’s another creative solution, particularly if you’ve been working 50, 60, or 70 hour weeks. Simply tell them that you’ll forgo raises for a couple of years if they agree to respect 40 hours from their side. If you succeed in this tactic, it’s an enormous windfall for you. At 50, 60, or 70 hours, you’re giving them $500, $1,000, or $1,500 per week of free labor. Assuming they’re willing to let you cut that out in exchange for punting on a $3,000 per year pay raise, take it without blinking and then look up the statute of limitations for highway robbery.

Ask for “20% Time”

This is yet another variation on buying back your time. Google and some other organizations have historically offered employees unstructured time to work on things that interest them. If you’re able to negotiate an arrangement like this, it gives you an opportunity to work on key initiatives, strengthen your technical chops or contribute to open source. Take it if you can get it.

There Are Better Investments in Your Earning Power Than Cash Right Now

As I said at the beginning, salaried exempt employment is a rotten deal for software developers and probably for a lot of skilled labor or knowledge work positions. It’s one that’s pretty well codified into society, though, and salaried exempt employment is, in fact, stable and the best option for a lot of people. But that doesn’t mean that you can’t structure it in a more advantageous way, whether your intention is eventually to break off on your own or whether your intention is simply to have more time and a lifestyle that you prefer. Salaried employment is selling your labor at a steep discount for a pretty fixed number of hours (40). Trying to make that discount very slightly less steep is what most people do, but it’s an uphill battle against a prepared, entrenched employer and a whole lot of societal momentum. Cut bait on that strategy and figure out how to address the number of hours, whether it’s through more PTO, more efficiency from home, dual-purposing your work during those 40 hours, or really anything else you can think of. When you’re selling by the hour at a huge discount and you can’t meaningfully control the discount, you need to get creative economizing those hours so that you can use them to invest in yourself.