Negotiation techniques: how a $5,000 a year pay rise could lead to $1M

In previous blogs I have spoken about how spending habits are much more important than income when it comes to building wealth.  However, let’s say you have good spending habits, and are looking to save and invest more, to achieve financial freedom. What’s the easiest and quickest way to get there? Probably negotiation, and specifically, negotiating your salary. 

Even for high earners, negotiating a $5,000 a year rise could lead to you having more than $1M extra in 30-40 years, if you invest the $5,000 wisely.  That is based on pretty normal market returns.  An average return of 10%-10.5% doesn’t sound like much, but over 30 years it is huge.  It can lead to more than $1M over a lifetime as the figures below show.  Assuming a quite normal return of 10% before inflation and 7% after inflation, we get these figures:

If we assume, you already have $100,000 invested, the figures are even more impressive due to the compounding effect:

If you already have a $200,000 portfolio, and invest the $5,000 yearly into the markets, you will have more than $2M after 30 years.  A $500,000 portfolio will result in $4.3M after 30 years if you invest the $5,000 a year!  These are all inflation-adjusted figures as well.

Many people feel, perhaps due to culture, that it is rude to even negotiate on their salary. I am from the UK, and that is defiantly a cultural norm for some British people.  But asking is the first step and you need to be prepared to do that.   Of course, coming to the meeting armed with facts about whether you are being underpaid will help, and there are numerous websites that allow you to compare how much you are getting paid compared to others.

However, in addition to that, it has to be reminded that people can be emotional even in business, so having facts alone isn’t always enough. In the classic book `Getting to Yes` Fisher and Ury develop some common strategies to getting a pay rise including:

 – Focusing on mutual benefit, not just your own 

 – Really listening to the other person 

 – Having a best alternative to a negotiated agreement, if negotiations break down.

There work has been criticized by some, and others claim it is idealistic in part as people find it hard to trust others, which is one reason negotiations are difficult. Certainly the former CIY staffer Chris Voss, who wrote Never Split the Difference, believes so.  Win-win only exists when both sides are reasonable.

Added to the problem is human irrationality.  The Noble Prize winning psychologist Daniel Kahneman showed that most human decision maker is guided by our emotions, and not rationality.  We don’t negotiate as hard with people we like, for example.  Knowing this bias before going into a room with somebody you like (your manager, boss or whoever) can help you get a better deal, if you pledge to yourself that you will still negotiate hard despite the good feelings involved.  

The Dale Carnegie Institute also lists 6 good techniques for any negotiation:

1. Know what you want  – Sounds obvious but many people don’t know what they want 

2. Know what your counterpart wants – what will your employer want?

3. Anticipate objections – what will be the likely objections of your boss or manager?

4. Identify concessions. – Some things should be up for negotiation and some things need red lines 

5. Determine your “walk-away”  – when will you walk away and when will you agree?

6. Practice with a partner before the negotiation  – practice makes perfect

Salary may be the easiest and most beneficial way to increase your income and long-term wealth, but negotiating on credit card fees if you have debt, gym membership and other things can also make a small difference.

Finally, as a motivator, remember that the extra $5000 a year rise might be the difference between being financial free at 55 as opposed to 65, or living off fine wines or dog food in retirement.  So it can really matters to get negotiations right. 

Adam Fayed – International AMG – adamfayed@iamgltd.com