How’d you like a $5,000 raise? My guess is that 100% of the people reading this would say sure, I’d love to get a nice pay increase.
Now let me ask you this. Does it matter to you HOW you get that raise? Let me present two options:
Option A: One day your boss comes in and says, "I’ve got some good news. You’ve been here about a year now, and management all agrees that you're doing great work. We view you as one of our top performing employees and we want to recognize that, so we're going to give you a $5,000 raise."
Option B: You’ve been at your company a year and it’s time for your annual performance review. In preparation, you do your research to find out the salary range for someone with your skills on the marketplace, collect data showing your accomplishments over the past year, and present your case of how you've helped the company increase revenues while cutting costs. You ask for a $5,000 raise and after considering it, your boss agrees and grants you the increase.
Would you prefer Option A or B, and why?
Many people might want to lean toward Option B. After all, isn’t something always better when you put in the work and really earn it? Who is more likely to take care of the first car that they own, the teenager that worked on a construction site for two hot summers, saved every dollar, and eventually was able to buy the best used vehicle they could afford?
Or the individual that gets handed the keys to a brand new Mini Cooper (in their favorite color) by their wealthy parents on their Sweet 16th birthday party? While it depends on how well the parents have taught their child about the value of hard work and money, it doesn’t always work out well. Need proof? To see what can happen when money is thrust upon someone without warning, go ahead and Google “lottery winner stories” and see how often things go wrong.
However, there is a key distinction between lottery winners and Option A. The former receives their winnings by random chance, while the latter is being recognized for their accomplishments as a top employee. That type of recognition can be a powerful motivator.
I recently spoke with a startup owner who uses Option A with his employees. While discussing negotiation, compensation, and the review process, he told me that he found it all very stressful and that constantly worrying about it was taking away time that he wanted to spend building his business.
His solution? He sat down with his co-founder and they made a list of their very best employees. Then they asked themselves, “If one of those employees walked in the door right now and said that they received an offer to go to a competitor, how much would we offer them to get them to stay?” Then they simply gave those employees a raise to that amount.
He told me, “It’s risky for us on the front end… we’re offering the incentive in the beginning, and betting that the employee is going to perform at a high level and not leave anyway. But it’s worked out very well for us. They’re excited about the increase, they feel incredibly valued, and there’s somewhat of an underlying agreement… if we’re now paying you above market value, neither of us need to worry about having another conversation about this for at least a year. We can all just focus on creating a great product.”
Take the case of “Tom,” who experienced both scenarios within a short time span. “I went in for my annual performance review, made my case, and it had gone well. I received a 5% raise. While that doesn’t seem like much and I can’t say I was thrilled, I realized that’s actually not too bad when you consider the average raise is only 2-3%, especially in this economy.”
But then something interesting happened just 3 months later. Tom had done a few projects for another group within their large company, and the new executive in charge of that division tried to lure him away. When a mentor in his current group found out, she went to upper management, told them the story of his possible transfer, and said, “We can’t afford to lose Tom.”
The next thing he knew, Tom was given a bump in title and a huge $15,000 raise. He said, “I have to admit that it worked. When they came out and gave me that title and massive bump in pay, it really made a difference. It signaled that they really had faith in me, and that I was an important part of the team. I worked extremely hard to live up to the new title that was given to me, felt incredibly appreciated to be paid top dollar, and didn’t even think about asking for another raise or looking for other opportunities for about 2 years. My job satisfaction was at an all-time high.”
In the real world, however, “free money” is the rare exception. Sure, in late 2010 Google surprised every one of their 25,000 employees worldwide by giving them a 10% raise and a $1,000 bonus. And yes, in 1996 the founders of Kingston Technology gave roughly $130,000 to each of their 550 employees.
For the rest of us, it's not that easy. You’re going to have to roll with Option B. That means doing all the things we consistently preach on Salary.com: Track your accomplishments, do your research, show how you contribute to the bottom line, and ask to be compensated based on your worth on the market.
In the end it might not feel like you won the lottery, but you might earn enough for that down payment on a Mini Cooper.