It’s an empirical fact that it’s easier to get a payrise if you’re negotiating a new job than if you’re negotiating within your current job. When I look back over my own career, every time I’ve worked somewhere longer term (over a year), payrises have been a hard struggle. But eventually I’d leave for a new position, and my new pay made all payrises at the previous job irrelevant. These days I make job switching upfront and official: I run my own business and most of my money comes from short contracts. Getting rewarded for new skills or extra work is nowhere near as difficult as before.

I know I’m not the only one to notice this effect, but I’ve never heard anyone explain why things might be this way.

Before I give my explanation, let me make a couple of things clear from the start. I’m not going to argue that everyone should quit their jobs. I don’t know your situation, and maybe you’re getting a good deal already. Also, I apply game theory here, but, no, I don’t assume that humans are slaves to simplistic, mechanical laws of behaviour. However, just like music composition, even if humans are free, there are still patterns that matter. If you understand this stuff, you’ll have a career advantage.

But first, some background.

BATNA

Many geeks think negotiation is like a role-playing game: roll the die, add your charisma score, and if the result is high enough you’re convincing. Geeks who think that way usually have low confidence in their “charisma score”, and they blame that for their struggle with things like asking for payrises.

Charisma isn’t totally irrelevant, but the good news for geeks is that there’s a nerdy thing that’s much more important for negotiation: BATNA, or Best Alternative To Negotiated Agreement. Despite the jargony name, it’s a very simple idea: it’s about analysing the best outcome for both sides in a negotiation, assuming that at least one side says no to the other. Although most people don’t know it’s called “BATNA”, it’s the core of how any agreement works (or doesn’t work).

It’s easy to explain with an example. Imagine you buy a couch for $500, but when you take it home, you discover that it doesn’t fit the place you wanted to put it. A silly mistake, but thankfully the shop offers you a full refund if you return it. Just as you’re taking it back to the shop, you meet a stranger who says they want a couch like that, and they offer to buy it. What’s the price? If you ask for $1000,000, the deal won’t happen because their BATNA is that they go to the shop and buy one themselves for $500. If they offer $1 to buy, your BATNA is that you go to the shop and get the $500 refund. You’ll only come to an agreement if the price is something like $500. If transporting the couch to the shop costs significant time and money, you’ll accept less than $500 because your BATNA is worth $500 minus the cost of transport. On the other hand, if the stranger needs to cover up a stained carpet before the landlord does an inspection in half an hour, they’ll be willing to pay a heavy premium because their BATNA is so bad.

You can’t expect a negotiation to go well unless you’ve considered the BATNA of both sides.

Employment and Self-Employment

Most people of a certain socioeconomic class believe that the ideal, “proper” career is salaried, full-time employment at someone else’s business. Many people in this class never even imagine any other way to make a living, but there are alternatives. In Australia, like other countries, you’re free to register your own business number and then do whatever it is that people will pay for. That includes sitting at a desk and working on software and computer systems, or other work that’s more commonly done as an employee.

So why is salaried employment so popular? As someone who’s done both kinds of employment, one answer is obvious: stability. You can be (mostly) sure about exactly how much money you’ll make in the next six months when you have a salary. The next obvious answer is simplicity: as long as you meet the minimum bar of “work” done (whatever “work” means), the company promises to look after you. You don’t have to think about where your next dollar comes from, or about marketing, or insurances, or accounting, or even how to find people to socialise with.

That sums up the main reasons to like salaried employment (not that they’re bad reasons). I sometimes hear claims about other benefits of salaried employment, but they’re typically things that you can buy. If you’re self-employed and your work isn’t paying you enough to have the same lifestyle as you could under a salary (doing the same work) that means you’re not billing high enough. A lot of people make that mistake when they quit a salaried job for self-employment, but it’s still just a mistake.

Asking for that Payrise

Let’s say you’ve been working as a salaried employee at a company for a while. As a curious, self-motivated person who regularly reads essays by nerds on the internet, you’ve learned a lot in that time. You’ve applied your new skills to your work, and proven yourself to be a much more valuable employee than when you were first hired. Is it time to ask for a payrise? You practise your most charismatic phrasing, and approach your manager with your d20 in hand. The response is that you’re doing great, and they’d love to give you a payrise, but the rules say

  1. You can’t get a payrise unless you’ve been working for more than N years
  2. You can’t get more than one payrise in N years
  3. That inflation adjustment on your salary counted as a payrise, so you can’t ask for a payrise now
  4. You can’t be paid more than Peter
  5. We need more time to see if you’re ready, so keep up the great work for another year or so and we’ll consider it then

The thing to realise is that all these rules are completely arbitrary. If the company had a genuine motivation to give you a payrise, the rules would vanish. To see that, try replacing “payrise” with “workload increase”. Software projects are extremely expensive, require skill, and have a high failure rate. Software work therefore carries a non-trivial amount of responsibility, so you might argue that employers should be very conservative about increasing how much involvement someone has in a project. But I’ve never heard an employer say anything like, “Great job on getting that last task completed ahead of schedule, but we need more time to see if you’re ready to increase your workload. Just take a break until the next scheduled task, and if you do well at that one, too, maybe we can start giving you more work to do.”

If you’re hearing feedback that you’re doing well, but there are various arbitrary reasons you can’t get rewarded for it, that’s a strong sign you’re being paid below market rates. Now, the term “market rates” gets used pretty loosely, so let me be super clear: that means someone else would agree to pay you more if you asked.

Note that I’m not claiming that your manager is evil. At most larger companies, your manager really can’t do much against the company rules. I’m not writing this to call companies evil, either, because that won’t help you or me to get any payrises. What will help is understanding why companies can afford to make payrises difficult.

Getting that Payrise

You’ve probably seen this coming: it’s all about BATNA, and how you can’t expect your employer to agree to something that’s worse than their BATNA. So, what’s their BATNA? What happens if you ask for a payrise, and they say no?

Sometimes you see a story online about someone who was burning themselves out working super hard as an obviously vital member of a team. This person asks for a small payrise and gets rejected for some silly reason. Shortly after that, they tell their employer that they have a much bigger offer from another company. Suddenly the reason for rejecting the payrise evaporates, and the employer comes up with a counteroffer, but it’s too late: the worker leaves for a better job. The original employer is left wailing and gnashing their teeth. If only companies appreciated their employees more!

These stories are like hero stories in the movies. They tickle our sense of justice, but aren’t exactly representative of normal life. The reality is that most employees would just go back to their desks if they’re told, “No.” Sure, they’ll grumble, and they’ll upvote the next “Tech workers are underappreciated!” post on Reddit, but to many companies this is a completely acceptable BATNA.

In short, the main bargaining chip a salaried employee has is quitting, but that negates the reasons to be a salaried employee in the first place.

When you’re negotiating a contract with a new potential employer, however, the situation is totally different. Whatever conditions you ask for will be compared against the BATNA of searching for someone else who has your skills. Any reasonable request has a much higher chance of being accepted.

The Job Security Tax

Now, something might be bothering you: despite what I’ve said, people do get payrises. But all I’ve argued is that companies can make payrises difficult, not impossible. Sure, salaried employees might not quit when they’re a little underpaid. (They might not even realise they’re underpaid.) But if the underpayment gets big and obvious enough, maybe they will, so employers have to give out payrises eventually. Occasional payrises also make a good carrot for encouraging employees to keep working harder.

At the scale of a large company, it’s just a matter of tuning. Payrises can be delayed a little here, and made a bit smaller there, and the company saves money. Go too far, and the employee attrition rate goes up, which is a sign to back off and start paying more again.

Sure, the employee’s salary will tend to grow as their skills grow, but that growth will be slowed down. How much it is slowed down will depend (long term) on how strongly the employee values job security. It’s a job security tax.

What Should You Do?

As I said before, I’m not going to tell you to quit (or not quit) without knowing what your situation is.

Perhaps you read this thinking that it sounds nothing like your workplace. If so, you’re lucky to be in one of the better places. You now have solid reasons to appreciate your employer as much as they appreciate you.

For the rest of you, I guess there are two broad options. Obviously, there’s the one I’m taking: not being a salaried employee. The other option is to understand the job security tax and try to optimise it. If you’re young and single, maybe you don’t need job security so much (at least for now). Even if you have good reasons to want job security (and there are plenty), maybe you can reduce your dependence on it by saving money in an emergency fund, and making sure your friendship group includes people who aren’t your current colleagues. That’s a good idea even if you aren’t planning to quit today — you never know what the future will be like.