working for a salary – a bad deal?

Office Politics: A Rise to the Top

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% ( 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.

AttributionPhoto credit: Some rights reserved by Alex E. Proimos

14 Replies to “working for a salary – a bad deal?”

  1. You bring up a good point Steve. Yes, you can live a comfortable, middle class life as a salaried employee, but usually the executives and self-employed people are the ones making the big bucks.

  2. I don’t know about this. I’m a middle manager at a Fortune 500 company in an area that I could make significantly more as a consultant (two of my other-company peers have done this so it is a known possibility). I choose to stay at the age of 44. Why? Salary is in mid-six figures, benefits okay, reasonable raises, great performance. By controlling expenses so we have about $5k a month in disposable income we can retire in our early 50’s. Will we? Not sure yet. Do we spend enough to have a good time now? Absolutely. Several annual domestic vacations and a paid-for vacation home in Colorado worth twice our primary home.

    So I think it is imminently possible to be top 5% rich (that’s rich enough, right?) while working in a regular desk job.

  3. Steve, you swiped my image. JK

    The way productivity gains are being squeezed out of employees, labor intensive industries are shrinking and international competition is increasing, I believe wages will be flat well into the future.

    Joining the executive ranks or making your own paycheck is the most logical path to prosperity.

  4. I don’t think it is impossible to retire wealthy on a salaried position, but I think the majority of those considered high net worth or ultra high net worth are business owners.

  5. Excellent article, Steve. Ironically, one of the first books that made me see this was Rich Dad Poor Dad. I like some of the ideas in the book, but overall, I don’t recommend it as a blueprint for wealth (just the concept of creating revenue streams and being a business owner, not a wage worker).

    Building different revenue streams is a huge part of my financial plan.

  6. You are confusing wealth and income.

    Similarly, comparing investment increases with salary is apples and oranges. The “return” on your career is the income; the 5% is an increase in that income, not the increase in principal.

    One might argue that the “principal” of a career is what you save out of the income. Of course you can’t simply sell your accumulated expertise to someone else and retire, the same way you might sell a business you’ve built. Even a business can only be sold if it’s capable of producing income without your personal involvement. You might be able to sell your “expertise” in the form of a book, though writing books is a lot of work and generally not that profitable.

    1. @Steve (that’s confusing!) – I’m not confusing wealth and income, really; it’s clear that someone on a low income can have significantly great wealth (net worth) than someone with a high income. I’m strictly looking at the income side of the equation for the purposes of arguing that far too many people expect to build wealth solely through very minor increases in their income and fail to recognize that other actions are needed to increase wealth, as well. If your spending remained constant and your income increased 4% per year, obviously your wealth might increase quite favorably if you invested the excess money wisely.

      I’d argue the principal of a career is the accumulation of skills, networks, and experience. I view myself, for example, as cashing in some of that principal to become a consultant. The book example is good, too. Or you could start a blog 🙂

      I know comparing investment income with salary income is not a truly meaningful comparison, but it means something to me in this sense: when you have salaried positions in a large company which caps annual increases at 4% (as one of my former employers did), your efforts to become a top performer are not aimed at increasing your raise, but instead hoping to be promoted. If I give you an imaginary investment that is guaranteed never to return more than 4% annually in dividend or interest income or even principal appreciation – whatever – you might like it (low risk, long haul, etc.) or you might hate it and move on to something riskier-but-more-likely-to-make-more-money.

    2. I have never heard of a place that explicitly caps raises at a certain amount. Well, other than 0%, as in a salary freeze. Of course the conventional wisdom (supported by my personal, but anecdotal experience) says that you probably won’t get huge raises without getting promoted or switching employers.

    3. @Steve: I wish I had never heard of a place that capped raises, either, but I did, and I worked there – a major consulting firm. It was basically a 0-4% raise, with the top consultants getting 4% with absolutely no latitude for more. Believe me, having brought in a lot of business that year for the firm I was exceptionally demotivated by getting 4%, even though I was assured it was a recognition of my great work.

      I couldn’t agree more that only promotions or switching employers results in a substantial raise. I’d even speculate that the great majority of promotions don’t even result in huge raises, unless you’re moving from staff to management or management to executive. Moving from Manager 1 to Manager 2 is probably going be a hearty slap on the back and a cost-of-living type raise.

  7. I thought a 9% return on an investment was considered AMAZING and at the top end of returns.

    Personally, who cares about being wealthy? I want to minimize risk and limit responsibility so that I can enjoy my spare time. Working 40 hours a week at a traditional desk job accomplishes this perfectly.

    1. @Honey: That’s a completely legitimate decision to make, similar to my decision to stop working as an employee and become a contract consultant, where I can count on one hand the number of weeks I’ve worked more than 40 hours in the past five years (seriously). Then again, unless I someday start hiring employees or something like that, my income alone is not going to make me wealthy.

      That 9% is from 5 years, not 1, but I guess if you were looking at the 2005-2010 5 year period it might not be bad at all…

  8. I’ve managed to more than double my income in the past 6 years, which is less impressive than it sounds since I graduated college 6 years ago. Still, I probably have another $20-30K per year in headroom in my current career without having to switch to management track. I won’t get rich, but I will be very comfortable.

  9. Quality of life is a big issue. If you have a sound financial plan, a good stable work environment, and you like what you do, sometimes more money won’t make you happier. Being out on your own you can make big bucks, but only if you virtually spend all your time at it. For some people that is the way to go. For the majority, however, I find they are better off being employed.

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