raises – are they for suckers?

If you work for an employer, chances are that you get paid a fixed amount and it is increased every year. Chances are also good that you are being paid in money, which is subject to inflation. The result is probably that your real wages are probably stagnant. As the New York Times pointed out recently:

Americans earned a smaller average income in 2005 than in 2000, the fifth consecutive year that they had to make ends meet with less money than at the peak of the last economic expansion, new government data shows.

Total income listed on tax returns grew every year after World War II, with a single one-year exception, until 2001, making the five-year period of lower average incomes and four years of lower total incomes a new experience for the majority of Americans born since 1945.

Go read the article before it goes in the (pay to view) Times archive.

I calculated my own raises, year over year. My best year was a 62% raise, and my worst was a three-year tie at 4%. The 62% raise was an exception to the rule. I left a stable job in a small Southern city, Memphis, and moved to the gargantuan metropolis of Moscow and received, in effect, hazard pay. The actual raise in real terms was even more, because I didn’t have to pay US taxes on it.

Over the last 5 years, my average annual raise was 5% – so my salary this year is 27% higher than my salary in 2002. For the last 5 years, the inflation rate was 14.29% (inflationdata.com). Therefore, my real purchasing power increased approximately 13% over 5 years.

This is not tremendous growth. If you had an investment that had returned no more than 13% over five years (more or less 3% annually) you would probably dump it. Isn’t your career an investment of sorts?

I am a consultant, so there is no real possibility of huge upward leaps in my salary unless I go back to a salaried job. I was a senior manager when I snuck out of the workforce and into consulting, so I would probably go back in as a senior-level manager or a very junior executive. I know from talking to various investment bank clients that I already make more in base salary than an experienced vice president, let alone a junior one. The bonuses are much larger, but are certainly not guaranteed. So while I might eventually hit the big time executive salaries, chances are good that the 4-7% kind of range would continue. Another consideration is my time, since as a junior executive I’d probably be pulling long hours trying to prove myself. I have grown accustomed to my consulting “8-‘n’-done.”

So if you work in a salaried job and love it or feel that you are gaining valuable experience, feel lucky. But if you are expecting to become rich as a salaried employee, sit down and calculate your raises over the last five years, and honestly assess your chances of becoming an executive at what you do. I think you’ll find that while being employed can maintain your standard of living, it’s unlikely to make you wildly rich.

How can you become rich – and should you want to? Coming soon…