Wednesday, March 9, 2011

Why your salary is what it is




Have you ever wondered why your salary is what it is? At first glance you would probably say it is based on what you signed up for when you joined your company and on the salary increases you received since then. Perhaps this was based on the state of the economy, your company’s profitability or hopefully your performance. But let us dig a little deeper.

Are other potential employers knocking at your door to offer you a better salary? Do you feel well paid for what you know and do? Do you feel you are unlucky and deserve to be paid a lot more, and hope someday you will! Chances are you fall somewhere in between feeling well paid and not. Most people would like to earn more, but accept that they are probably paid close to the salary market for their set of skills, and for the effort you put in. After all, at least you have a job. It could be worse.

In reality your salary is more a result of the supply and demand for your type of skills in your area, rather than a result of your actions. When demand exceeds supply for your skill type, you can demand a high salary, expect higher salary increases and consider better offers from other employers. On the other hand when supply exceeds demand, such as during a recession, or when an industry or skill set is in decline, it becomes tough to negotiate a better salary, in fact you would consider yourself lucky just to have a job.

Factors that pull salaries down through a decrease in demand / increase in supply for specific skills in a geographic area include:
  • New technologies that produce products more cheaply, more efficiently, and with less people.
  • Lower demand for products resulting in lower production volumes and, as a result, less jobs (i.e. economic recession).
  • Skills that have become redundant due to technology changes.

Factors that push salaries up through an increase in demand / decrease in supply of specific skills in a geographic area include:
  • Increased demand for products resulting in higher production volumes and, as a result, more jobs (i.e. economic boom).
  • Skills that have become required due to technology changes but are not available in sufficient numbers

There are of course other factors pulling and pushing salary levels, there are just too many to cover. The world is not a simple model of supply and demand.

The cost of living is often used to motivate salary increases. High inflation drives higher salaries which in turn drives higher inflation. Central Banks focus a great deal on this aspect. On the other hand, deflation and recession, may lead to pressure to decrease salaries, as we have seen in some countries in recent years.

Trade unions aim to look after their member’s interests by negotiating salary and benefits on their behalf. While trade unions have the best intentions in negotiating “rates” with large employers, this can be counter productive to it’s members at times by not only preventing employers from pushing salaries down but also by preventing (or perhaps more accurately “discouraging”) employers from pushing salaries up.

So what is the moral of the story? If you want to earn a high salary:
  • Work in a place where the economy is strong and growing
  • Get skills that will be in demand, now and in the future
  • Work in a place where inflation is low and stable
  • Work in a profession or industry that is free of trade unions and wage regulation
  • Choose an employer who practices performance based pay
  • Choose an employer who offers you developmental and promotion opportunities
 
Steven is Chief Instigator at http://www.xpatulator.com a website that provides cost of living index information and calculates what you need to earn in a different location to compensate for cost of living, hardship, and exchange rate differences.