For most of my career I operated under a common misconception about salary potential.

What employers will pay me is accurately reflected by my current salary.

Sure, I could expect a bump from a promotion or from a new employer trying to hire me away, but this bump is still measured from and anchored by, my current salary. Wrong. Just so wrong!

This is less about having confidence in my earning potential and more about a fundamental misunderstanding of how salaries are determined. 

"So what does my salary tell me about my salary potential?"

All your salary reveals is what your employer is paying you.

Notice I didn't say "how much your employer is willing to pay you." Your employer might be willing to pay you more. Significantly more. Your employer is certainly willing to pay you less. Your salary is the marriage between what you are willing to accept and what your employer has offered to pay you. Cue wedding music..."I do."

Throughout my career I've witnessed the wackiness that is the salary distortion field. I've known people doing the same exact job with comparable skills and experience make shockingly different salaries. What's going on here? Work or educational pedigree? Gender? Favoritism? Good luck or good looks? While I believe all of the above can have an impact on pay, it doesn't address the main driver.

"So what's going on here?!"

The main driver of your salary is what the market is paying for your services when the offer is made.

Let's unwrap this together. Allow me to share 3 principles that helped me navigate these baffling salary waters better. Did I mention I have a terrible sense of direction? Or that I'm not a great swimmer? But seriously...

Principle #1. New hires get market rates.

Okay, that's an oversimplification. There will be slight adjustments up and down for experience, industry, location, and budget, etc. It's probably more accurate to say that offers to new hires are anchored to current market rates. What does that mean? It means when a company needs a new resource, they know they are competing against other companies to hire the same resource. As a result, they can't veer too far off what other companies will be offering for your services = market rates. The further below market rates an offer is, the harder it will be to find someone qualified who will accept the offer.

Principle #2. pay raises are not anchored to market rates.

Like many things in life, there is good news and bad news. Let's pull the band-aid off first.

The Bad News

After you have accepted an offer, in the following years you may receive salary raises, however these increases are not meant to adjust you to the current market rate.

"Joe, can you give me an example of what you mean?"

Imagine you are hired in 2016 for the position of TPS Report Manager for $40,000. It's a hot market for TPS Report Managers so in 2017 new hires for the SAME EXACT position are offered $42,000. Since your salary is no longer anchored to market rates, you guessed it - your salary increase will not automatically be $2,000. Assuming a 3% pay raise, you would only be making $41,200 while the new you is making $42,000 for the same job - with one year less experience! This feels like an injustice and the office printer better step lightly or suffer your wrath.

The reality is the longer you stay in the same role at the same company, the more disconnected your salary will be to current market rates. So if year after year, demand for your position drives up market rates, your salary raises will not keep pace and you will be earning significantly less than new hires.

The Good News

Depending on your situation, the incremental salary increases you receive over the years can result in you earning a much higher salary than the market rate for your position. Translation - you will be earning a lot more than new hires for the same position. Ka-ching!

"Wait a second Joe! Isn't this contradicting what you just said and your previous example?"

The principle remains the same in that the longer you stay in the same role at the same company, the more disconnected your salary will be to current market rates for that same role. The difference here is when the market rate for your position stays relatively flat over the years or even goes down, your pay raises can outpace the market.

Let's go back to our earlier example. You are hired as a TPS Report Manager in 2016 for $40,000. In 2017 you are given a 3% pay raise and are now making $41,200.

A new TPS Manager hired in 2017 is making $42,000. Bummer. But hold on, let's play this out over several more years. Assuming 10 years of 3% raises, you end up making a little under $54,000. Imagine market rates had stayed relatively flat during that 10 year period and the market rate for a new TPS Manager is $44,000. You are now making about $10,000 more than a new hire in the same position. We're assuming your job has remained the same and you are essentially being paid to do the same job as every other TPS Manager.

If you are in this lucky boat, take a moment, go ahead with your Breaking Bad self and channel your inner Scrooge McDuck. I'll wait...

Principle #3. Salaries that don't reflect market rates bear risks.

Let's start with the most obvious risk. If you are in the same position over many years and the market rates for your position increase more than your salary raises, you are losing money. I'm not proposing any particular action, just shining a light on a scenario that could cause you to earn a lot less than your potential. The solutions to getting back to market rates are straightforward, but by no means easy or without their own risks: 1) change companies; 2) renegotiate your salary; 3) get promoted*.

* Getting promoted may not fully adjust you to market rates because you are still within the same employer's salary ecosystem, but you will be better off than if you stayed in the same role.

Next let's take a look at a less obvious risk. If years of salary raises at the same company put you well above the market rates for your role, time to break out the bubbly, right? If you are lucky and keep cruising like this until you retire, sail on! However, be aware that if that is not the case, stormy career waters may lie ahead. You are now a very expensive resource compared to others (Why don't we just say it? Younger, cheaper resources) who can provide the same service to your company. If budget cuts are an issue, who will have the bigger target on their back? Also, if you don't realize that what you earn is a lot more than the market rate, you may be in for a rude awakening when try to find a similar salary at a different company. And in some cases, you may have to take a significant haircut.

"But Joe, my company was paying me $X/year, surely other companies will do the same."

This can be true in limited instances, such as when a company is specifically trying to hire YOU away and not just fill a position. In that situation they may be willing to go above market rates and I say "bravo!" But keep in mind, your new role and salary carry the same risks in the future should things change. And in most cases, other companies won't care that your company was paying you way above market rates. They will have plenty of choices at a lower price point. Remember...

All your salary reveals is what your employer is paying you.

"So Joe, what do you propose I do?"

How you manage your career is a very subjective, complex, and personal affair. You have to decide what is best for your situation and salary is only one piece of the pie. However, what I can uniformly recommend is that you should take steps to periodically assess and learn your market value. From there, you will be able to make more informed decisions.

To know your value, you must periodically check what the market is paying for your position.

Below are 4 ways to find out your market value. Not all EZPZ, but all worthwhile. Good luck!

1. Research using salary tools or websites. For example, this one from Glassdoor.

2. Go on interviews. Talk to recruiters. Whether you get an interview, what offer is made, and feedback from the recruiter or hiring manager will all provide valuable information.

3. Network. Talk to others in your field both inside and outside your company and get a feel for the pay ranges and demand are for your position.

4. Call your HR rep and ask them for the pay ranges for your position. Not every company will provide this information, but I recommend you don't fold after the first "no." The person you talk to may be mistaken and this information may actually be available to you. Talk to a few others who know whether this information can be provided to you before giving up. 

Next post Saturday, 6:30 a.m.