working for a salary – a bad deal?
Chances are you’ll never be rich as an employee. 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. In fact, in the most recent “boom” (2000-2007) the median wage in America actually declined (and before that it had been stagnant for 20 years). The real estate boom was a false one, not based on increased wealth or productivity, but on leverage; everyone borrowed money to make money. But unless you worked on Wall Street in a revenue-producing position (investment banker, etc.) it’s doubtful you saw an increase in your real wages.
I calculated my own raises year over year during the time I was still receiving a salary. 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. It was early in my career and my wages increased thanks more to changes in location than anything. I entered a field as it boomed. I moved to Russia as it boomed. I moved to New York it boomed. Then I switched to consulting
Over the last 5 years I worked as a salaried employee, my average annual raise was 5% – so my salary rose 27% during those five years. For those 5 years, the inflation rate was approximately 18% (inflationdata.com). Therefore, my real purchasing power increased approximately 9% over 5 years. This is not tremendous growth, despite the fact that I already had a six-figure salary – so the numbers looked good even if in reality they weren’t that impressive.
If you had an investment that had returned no more than 9% over five years you would probably dump it. Isn’t your career an investment of sorts? I am a consultant and I (usually) work for an hourly rate determined in a contract signed with the client at the beginning of a project. My rate fluctuates due to several factors: demand, the overall economy and even my own interests (for example, I hurt my rate by tending to refuse jobs with business travel involved). But I have a lot more control over that rate than I ever did over my salary.
I was a senior manager when I snuck out of the workforce and into consulting, so if I went back, I would probably go back in as a senior-level manager or a very junior executive. I know from talking to various that I make significantly more as a consultant than salaried people at a similar stage in their career. Granted, I have higher expenses (health care, insurance, etc.) but on a net basis I still come out ahead, and considering salaried people don’t get paid for overtime I get paid a lot more if you compared hourly salaries. The difference is when you hit the executive level, where there has been no wage stagnation in the last couple of decades. Between 1989 and 2007 (latest data I could find) executive salaries rose almost 107% while overall wages remained flat.
So while you might eventually hit the big time executive salaries, chances are good that you won’t, and your raises will likely not top 4%. Realistically, given the economy, raises in general seem unlikely – I’ve seen a lot of data indicating that pay cuts are becoming common. Another consideration is time: to make it as a junior executive requires pulling long hours trying to prove your worth to the organization and putting in face time. But if you work in a salaried job and love it and feel you have what it takes to make it to the executive level – go for it.
But if you are expecting to become rich as a salaried non-executive employee, sit down and calculate your raises over the last five years. Then honestly assess your chances of becoming an executive at what you do, because that’s the only way to become wealthy as a salaried person. I think you’ll find that while being employed can maintain your standard of living, it’s unlikely to make you wildly rich. That may be your comfort zone – not everyone wants to go into business for themselves. You may like your job, and if so, good for you. But unless you’re planning to put in the effort and hours and politicking to become an executive, chances are good your wages won’t ever make you wealthy.