Learn how to negotiate your salary after receiving a new job offer. Follow these steps to get a higher salary increase and raise when moving companies. Read more for how to apply these steps when negotiating your salary over email or phone.
Congratulations on getting a new job! Now, imagine the following questions when negotiating your salary in a job offer:
“So what is your current salary?”
“What are you currently making?”
“What is your total compensation?”
How many of you guys have ever been on the receiving end of these questions from a recruiter and have just dreaded the next 30 seconds of exchange on this topic?
Honestly, as an interviewee — you’re almost always at a disadvantage in this situation. Depending on how you respond, if you’re straight forward about your pay — you could end up low-balling yourself during your salary negotiation.
On the other hand, if you exaggerate your compensation too much, you risk getting caught in a lie that might even get you dismissed or terminated later on.
There is almost no easy way to properly navigate through this question — except for this approach to salary negotiation that I’m about to share with you guys today. It’s the way I’ve personally handled this question on all 3 of my major company transitions — and it’s the way I’ve been able to negotiate at least a 36% pay increase each time I’ve moved companies.
So read on as I share with you my method & thought process on how to best answer this question & how to most effectively negotiate your salary when moving to a new company.
Welcome to Daniel’s Brew — where I cover personal finance, investing, and career development topics.
So as we dive into how to negotiate your salary, I want to separate the conversation into 2 parts:
1) First, before you even engage in salary negotiations with your prospective new company — there are 5 things you have to think about and prepare for when learning how to negotiate your salary.
2) Secondly, once you’ve done all of your research, I’ll walk you guys through one approach on how you can compare a new compensation offer to your current salary so that you can tactically maneuver through the negotiation process and end up with the best offer you can get.
How To Negotiate Your Salary – 5 Important Steps
STEP 1 OF 5: LEARN THE NEW COMPENSATION STRUCTURE
The first thing you have to do to prepare for your salary negotiation is level set your understanding of the new company’s compensation structure.
So when a recruiter asks you the salary question, your first response should always be “First, can you tell me what the compensation structure looks like at your company?” The reason you want to ask this, is because not all companies have the same compensation structure.
Some don’t do end-of-year bonuses or some companies only offer stock options instead of RSUs. And these stock awards all have different vesting cycles depending which company you go to. If you don’t know what the new company’s compensation structure looks like — you might end up negotiating for something that they don’t inherently have, which would clearly put you at a disadvantage from a bargaining perspective.
So let’s take a look at what a typical standard compensation breakdown looks like for large fortune 500 companies — so that you can be aware of all of the different components that might go into your total pay.
– The first component is obviously Base Salary — which is the standard yearly base pay you make as a foundation for doing your job. This is usually paid on either a biweekly or bimonthly cadence (which means you get 26 or 24 pay checks respectively, throughout the year).
– The next piece is the Yearly Cash Bonus — this is usually an additional lump sum awarded at the end of the year, based on performance (either yours, the company’s, or a combination of both). Typically, this is calculated as a percentage of your bonus eligible salary and that percentage amount varies by your level or title at the company. For example, a manager may have a bonus target of 10% at the end of the year, whereas a Sr. Manager might have a 15% bonus target, a director may have a 20% target and so on and so on.
– Yearly Stock awards are usually the 3rd component of compensation, especially in large tech companies — this is similar to the yearly cash bonus except for two key differences:
A) These awards typically come in either Restricted Stock Units or Stock Options. Restricted Stock Units or RSUs are individual company stocks that the company deposits, directly into your brokerage account. Stock options are contracts that give you the right to buy shares of your company stock at a certain price — within a specified period of time. Nowadays, most stock awards are given through RSUs, and you typically don’t see stock options as employee stock awards anymore.
B) Secondly, Regardless of whether you receive your stock awards in options or RSUs, it’s important to note that they almost always, come with a vesting schedule, which means that you’ll get to own these shares or contracts in pieces according to the schedule upon which your stock awards are released to you.
As an example, if you are awarded 1,000 units of RSU, and it vests 25% every year, that means every year, you would receive 250 units of stock into your brokerage account until the 1000 is done.
It’s also important to note that typically, vesting starts on the 1st year anniversary of when you receive your award — which means if you are awarded or given the 1000 units of stock this year, you have to wait until next year to actually see the first portion of that award to vest.
Also, in most cases, you have to remain a current employee within your company to keep receiving the vestings each year — so if you happen to leave your company before all of your awards is vested, you will end up forfeiting the remaining unvested amount.
– And the last factor in most compensation structures is the Core Employee Benefits — which includes your healthcare options, insurance benefits, 401k company match amount, HSA employer contributions and local partnership deals, etc. This is an area where there might be some hidden value so you’ll want to ask thoroughly about these benefits.
OK so we just covered standard compensation — On top of that when you are first coming into a new company/job, there are a few other New Hire Compensation elements that you can negotiate for, on top of your standard pay:
A) Sign on Cash Bonus — this is a lump sum cash amount that is usually paid with your first paycheck. Most companies use this (along with sign-on stock awards) as the biggest incentives to draw talent to their locations.
B) Sign on Stock Awards — This award is an additional grant of either Stock options or RSUs at the beginning of your employment to help make this transition more attractive. Again this typically follows a vesting cycle, starting from the first year anniversary of your employment — so don’t expect to see any of this until the start of your 2nd year at the company.
C) The 3rd negotiable element when starting a new job is Relocation benefits. This is applicable when you have to move from your current location to a new location to take this job — and these benefits and services typically include:
-Household packing/shipping/Storage service (usually from a professional moving company like Graebel or Chipman). This is where a professional moving company comes to your house and packs your household belongings and ships it to a storage location in the area of your new job, to hold in storage until you find a new permanent home to move into.
-Auto transportation, which is usually a freight service that’ll allow you to ship up to 2 vehicles via large cargo truck.
-Temporary Housing, which is typically a small house or apartment that you can stay for a few weeks to a few months so that you have a stable place to settle while you search for your permanent housing option in the new area.
Relocation benefits widely vary from company to company and the location you going to, so there might be some other benefits not mentioned here, that your new company may offer you.
Now, that’s a lot to think about — and keep in mind that not all companies will have all of these components … and that’s really the point of this first piece of advice when it comes to answering the salary question & kicking off your salary negotiation.
You have to know what your new prospective company is offering in their compensation structure so that you can accurately negotiate the right type of deal for your situation.
STEP 2 OF 5: YOU GOTTA KNOW YOUR NEW ENVIRONMENT
Now the 2nd thing you have to prepare for before you dive deep into salary negotiations is to do research on your new location/environment. Some things you’ll want to know are:
A) Does your new state have a state income tax?
B) How does the living cost in the new state compare with your current state?
C) What about housing costs? Are there any new transportation taxes that you’re not accustomed to getting in your current area?
These are all important things to know because they directly impact your expenses at the end of the day. It’s not just about the actual number of your total compensation that’s important. If you earn $75k a year, that might be decent in place with low living costs like Oklahoma or Texas, but if you make that in New York or Los Angeles — that might put you in a situation where you are barely scraping by.
At the end of the day, when you consider your new salary, and your new living expenses together, what you’ll want to know is if you end up with a higher net take-home pay, meaning, you have higher spending power than what you currently have now.
STEP 3 OF 5: YOU GOTTA KNOW YOUR WORTH
The 3rd step in salary negotiation is you gotta know is — your worth.
Now in order to determine this, you have to know what people in your field, in your new location are worth. There are a lot of great research sites out there like LinkedIn, Glassdoor that gives you estimates as to what compensation your prospective position will draw. In fact, have you seen this new beta feature from Linked? It pulls estimated salary info from a variety of sources online — it’s great that they started doing this.
So once you’ve got a good idea of what the average pay looks like for your position, it’s time to start looking at what key advantages your background and your resume bring to the table.
Is there a certain initiative or project that you’ve run in the past that is a perfect translation to the type of work this new role would be doing? Do you have any special certifications or degrees that other candidates might not have? Does your background include experience from strong brands or industry leaders, like Apple or Nike or Amazon? Are you applying for a people management position — and if so, do you have extensive experience leading large & complex organizations?
These are all things that give you an advantage over the competition and could give you leverage when negotiating your total compensation.
STEP 4 OF 5: KNOW YOUR COMPENSATION MILESTONES
The fourth thing you have to know is what your compensation milestone points are.
What I mean is, there are 3 important compensation numbers that mark decision points when you are negotiating your offer.
1) Break-even point: This is what you are effectively making now — what your total comp looks like at this point in time.
Now, there are certain points in your career, where you might consider making a lateral move, in terms of compensation, to gain something that helps you align to the future direction of your career path.
Perhaps you’ve always aspired to be at that particular company and this is the only option available right now to get you there, or perhaps you are looking to move to a related but different field than what your current position is — it might require you to make a lateral move to enter into that area.
If this is the case, you’ll want to pay attention to what your break-even point is — which would be the level in which you would remain exactly the same in terms of your total pay. You might have to take a lateral move in pay to move into the role that you want, but you’ll want to make sure that you’re not going lower than your break-even point and taking a pay cut.
2) Settlement point: If you’re not looking to make a lateral move, then the settlement point is the minimum value that you would consider to make this move “worth it” for you as a transition from your current company to this new company. It may not be exactly everything you’ve wanted in your offer, but anything above this number is good enough for you to settle for and accept the offer.
3) Ideal point: This is the number you are shooting for. This is an attractive yet realistic number based on your research, which falls within the reasonable total compensation range for this position, within this company in this field, and in the location, you are looking to move to. Any offer that touches or exceeds this value would be reason enough for you to accept and throw a small party with your friends.
STEP 5 OF 5: BE OPTIMISTIC/FIRM, BUT PREPARE TO SETTLE IF NEEDED
First, let me just say that it is absolutely ok to settle on an offer — that is a compromise between what you are asking for and what the company is willing to give you.
You might be surprised to know, that most companies actually have a hiring policy that states that the recruiter or hiring manager cannot offer a candidate more than the mid-point salary value on their industry pay scale — without a series of executive approvals. To be very honest, unless you are VP level or an extremely specialized hire — the chances of them going above midpoint are probably not very likely.
But, it’s really not important that you get as close to their salary ceiling for that job — what is important is that you get to what you are comfortable with that makes it worth it for you to make the move. And again, that’s where knowing your 3 compensation milestones points come into play.
So, now that you’ve been armed with all of the information on how to negotiate your salary with a new offer, let’s say you had a great conversation with your recruiter and you’ve now received an initial offer from the new company. Let’s take a look at one approach on how you can compare a new compensation offer to your current salary so that you can tactically maneuver through the rest of the negotiation process and end up with the best offer you can get.
So — once I have the initial offer and an understanding of what the new compensation structure looks like, I create a forward-looking 5-year view of what my total comp would be, both in my current company and the new company so that I can understand how much the difference would be in my total pay.
(I get into some tactical calculations in this next section, so if you’d like to follow along in a video, instead of reading through the details, click here.)
Example: Current Company Compensation View — laid out in Excel.
The first step in doing this is to lay out all of the compensation components in an excel spreadsheet (as shown above). I typically use 5 years as the time horizon because most company stock awards vest at around 4 or 5 years.
Then beginning with my current company (let’s call this company Alpha for the sake of the example) — I start by projecting out 5 years worth of base salary, with a modest 3% base merit increase built in year over year, to account for inflation.
Let’s say Alpha Inc pays me $75k per year, for the sake of this example. So as you can see with a 3% base increase each year, my base salary would go from $75k to just over $84k by year 5.
Then comes the yearly projected bonus — let’s say in this case I currently receive a 15% end of year bonus. So I simply calculate 15% times my base salary for the year — and enter that in under each respective year of the 5-year chart.
Lastly, we have to factor in the stock awards that we currently have. Let’s say for the sake of this exercise, that Alpha offers me $10k worth of RSUs each year and it vests 25% each year — so for a period of 4 years. And let’s also say that I’ve been at the company for 5 years already and each year I’ve already received that same $10k worth of stock — with no interruption.
In that case, I would have 25% of 4 stock awards concurrently vesting each year, So let’s take a look at the previous 5 years, to see what that looks like.
So as you can see, I was awarded my first RSU award in year A and it started vesting the following year for the next 4 years. The same thing with the stock awards that I received in year B and year C — started vesting the following year for 4 years.
So by the current year, Year E, you can see that I have 4 vestings that happen from each of the 4 stock awards I’ve received previously. And as long as I continue to be awarded $10k worth of RSUs each year, I will continue to have 4 vestings of stock each year — and that’s how I got to $10k worth of actualized/vested stock each year for the next five year.
This important to understand because when you have a new offer from another company and you have to start a stock vesting cycle all over again — it’ll take you another 4 years before you get to a point where all of your stock awards are vesting concurrently.
So considering all of that, when I go back to the forward-looking view of the next 5 years, you can see that my total yearly compensation goes from $96k to $107k — if I stay at my current company of Alpha Inc. That means, in aggregate, I would make just over $507k in total comp over those 5 years.
Now, let’s try this same exercise for the new prospective company I want to go to.
Now let’s say that this new company is called Delta Corp & they are offering me the following: $80k base pay, 18% end of year bonus and an end-of-year RSU award worth $15k each year — that also vests 25% per year just like Alpha Inc.
So again, with the 3% base pay increase each year, my base salary at Delta Corp goes from $80k in year 1 to just over $90k in year 5. And the end of year bonus is again just an 18% calculation of my base pay for each year.
Now, let’s take a look at the stock awards. So — just as in the example with Alpha Inc, let’s say I get the $15k worth of RSUs each year for the next 5 years. So the year 1 stock award would be given to me in year 1 and would start vesting in year 2. Same principle for the next 4 stock awards.
So considering all of this, when I look at the forward-looking view of the next 5 years, in this new company, my total yearly compensation goes from $94k to just over $121k — and in aggregate, I would make just over $538k in total comp over those next 5 years.
Now let’s compare.
Honestly, the new offer is pretty good but if you look at it over the course of 5 years — it’s only $31k more than what you would have made if you stayed at Alpha Inc. And $31k over 5 years averages out to $6k per year.
Not bad, but if you had to move across the country and leave behind all of your friends and family to make this transition, would $6k per year be worth it? (That’s an additional $500 more per month than what Alpha Inc is currently paying.)
So, is it worth it? Maybe, but to make the offer even sweeter, this is where you would negotiation your sign-on benefits to getting an even better deal. So, let’s say you go back and negotiate with Delta Corp, and they decide to come back and offer you 2 sign-on bonuses:
A) One in the form of $30k cash — to be paid out at your first paycheck.
B) The other in the form of an additional $20k RSUs stock award in year 1 to vest in 4 years (25% per year).
So let’s see what happens when you add this to your compensation calculation at Delta Corp — an additional $30k to your year 1 base salary and an additional $20k worth of RSUs to your first stock award.
Wow — in this case, your combined total compensation over the course of the next 5 years, would be $588k — which is a difference of over $80k. That’s roughly $16k more per year than if you had stayed with Alpha Inc. (Which is $1,333 more per month than the current compensation.)
It definitely seems like a better deal to go to Delta than stay at Alpha right?
And this is how you build and compare total compensations between 2 companies and effectively figure out what to negotiate to get the best offer from your new prospective employer.
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So, I hope you’ve found my guidelines for how to negotiate your salary helpful — taking on a new job, especially if you have to relocate, is a big milestone in your life. And with any major life move, make sure you do all of your research and seek out a wide variety of advice, especially from those that are close to you, before you make a final decision.
All of this, your job, your career, your salary — it should drive towards a higher purpose for you.
Whether it’s safety or comfort or whatever that purpose is for you, I’m a firm believer that your family’s happiness is one of the most important things in life, so make sure you’re also keeping them in mind as you consider any big career decisions in your future.
And beyond that — the most important thing that I can tell you when negotiating your salary is: make sure you know you worth & believe in it.
You know your background, your history and what you bring to the table. Never second-guess that no matter what — and make sure your new company recognizes that as well!
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**** Disclaimer *****
The content here is strictly the opinion of Daniel’s Brew and is for entertainment purposes only. It should not be considered professional financial investment or career advice. Investing and career decisions are personal choices that each individual must make for themselves in accordance with their situation and long term plans. Daniel’s Brew will not be held liable for any outcome as a result of anyone following the opinions provided in this content.
