Saturday, June 27, 2015

How Salary is Really Determined

Most people come to the wrong conclusion that going back to grad school will increase their earning power.  

I'm not talking about advanced degrees like medicine, dentistry, or law where you have to have the degree to practice that sort of profession, or degrees where you really want to be a university professor, but degrees such as MBAs, MAs, and any other degree that is not really demanded by the market.  

Now I sound like I'm speaking heresy because I do not have an advanced degree myself, but I did seriously consider getting an advanced degree at one point.  When I was close to finishing college, I came to that wrong conclusion myself.  

Before graduating, the program director for the scholarship program I was in said to all of the scholarship recipients: 

"Stick with the last 2 semesters*, 
it will make a difference in your pay."  
*referring to MIS, MS in Finance, and MAcc

However, other things came in the way so I didn't apply straight out of undergrad.  Thank goodness other things did come my way because with more life experiences, I was able to do more objective research of considering whether it would be worth my time and money going back to school.  

I am more convinced than ever that going back to grad school is not an investment, it is a waste of money and lots of money.  Now, in all fairness, people who have graduate degrees earn more...BUT THE DEGREE ITSELF IS NOT THE CAUSE OF IT. 

Everyone must learn before going back to grad school is how salary is determined in the real world, not what you study in economics class, and especially not from college admissions people (what they won't tell you is that they need your money).  You may just discover a more cost-effective way to make yourself more marketable without going back to school!  

Salary Determination Primer
The first thing to keep in mind, is that all employers have a budget of what they can pay someone for a specific job.  This is usually known as a pay range.  Simply put, the employer pays someone what they can afford and at a rate the employee would be happy with.  

If the employee wants more (within reason), and the employer really needs to fill the position, they will review their budget and come back with a counteroffer.  Most big employers hire people known as "talent acquisition" who are expert at handling negotiation with potential hires and will do everything in the book not to budge with their initial offer.  After all, they are paid to get an employee in the door for the least possible amount of money for the employer.  If the offer is too low for the employee's needs, the employer will not take it personal and just keep looking for someone who will be happy to work for that pay range.  

The second thing to consider is what other companies of comparable size and industry are paying others for that type of job.  Companies focused on making a profit will shell out higher wages than non-profit.  Bigger companies also shell out more than smaller companies.  

Employers do a better job than job candidates knowing what a reasonable amount of pay would be for comparable job descriptions in various areas.  For example, they will not pay accountants in Texas, a New York or San Francisco salary.  So if you are working in San Francisco or New York, and hoping your previous base pay will influence your future base pay if you relocate to Texas, you are wrong. Your pay will first be reduced about 20%-30% to adjust for cost of living and then from there, the employer will determine an offer from that adjusted previous base salary and the job they're hiring for.     

Third is special skills.  This is HUGE.  The truth is, if you have the scarce skills demanded by the market, if you have the most complete portfolio of job related experience available, you will get the job with competitive pay, even over a candidate with a top MBA.  So think long and hard about whether you want to go back for two or or even more years of college only to have stiff competition with the non-grad school candidates with the 5-7 years of relevant work experience. If you are new to the job, you will be on the lower end of the range.  If you can already do the job, you are in the middle of the range.  And if you have more relevant job experience, you will be put on the higher end of the range quoted by the employer.  

"Sweet Companies only want Guys with Skills"

Fourth is previous salary history.  Many job applications ask what you made in your last job because this is determined in making a competitive job offer.  Switching to another company for comparable job skills warrant your biggest increases in pay.  That being said, DO NOT LIE ABOUT WHAT YOU MADE AT YOUR LAST JOB.  Employers do call your previous employer to legally find out and confirm your job titles, how many years you worked, and the amount of money you made.    

Fifth is your boss.  The higher up the chain you are, you are able to influence pay and needing to go through less approvals for salary adjustments.  If you do not have sponsorship from your boss or other senior leaders at your company, it is impossible to transfer internally or be considered for promotions, ever.  

In conclusion, the name of the school or ranking or the degree does not influence salary, it is really about what you're doing that is in demand right now by the market but more important, acquiring years of experience on the job to do it.  And once you're in a job, your pay will be judged much more by what you do on the job, how you get along with others, and even how you dress rather than where you went to school and what degree you got.  

I'll conclude with a quote from a talent acquisition director at Humana, a national health insurance company, along with the link to the article.