What kind of pay raise should I ask for?

While most companies are cutting benefits in this economy, there are a few that are expanding. “Jim” is preparing for his annual review and wants to know how to negotiate his pay raise. Jim works in a medium size company that consults to law firms. He’s performed very well this year and he wants to know (1) how to make his case for a raise and (2) how much to ask for.

These are tough questions to answer. There are few hard and fast rules to salary negotiations. Raises depend not only on individual performance, but also on company performance and the subtle nuances of office politics. Some offices, for instance, make it a point to be fair and offer raises based mainly on years of experience to avoid ill-will and jealousy among peers.

That said, there are a couple guidelines you can use for reference. I came across two interesting points in the entertaining book Automatic Wealth for Grads by Michael Masterson.

The first point concerns what to emphasize when asking for a raise. Masterson suggests it’s very important not to focus on what you think is important, but on what your boss thinks. His specific tip is:

So list your boss’s top 10 priorities. Then identify the 2 that will have the greatest impact on his or her success…Those are the priorities you should focus on. (page 107)

This advice is great in a sneaky way. Not only does it highlight that businesses work on group bottom-line thinking (very different than college where grades are individual bottom-line thinking), but it also hints that employees need to connect with their bosses. How many times have you asked your boss what his or her priorities are? Communication can go a long way to building good will and a sizable raise.

So if you do perform well, how much should you ask for? The guideline here is that your raise will be dependent on how much you benefit the company’s bottom line. Typically, your raise will be a portion of the additional profits you can bring in for the company. Masterson offers a 10-for-1 guideline when asking for raises:

If you want to get a raise that’s $1,000 more than ordinary, make sure you’ve been a major contributor to an idea that will generate at least $10,000 in additional net profits for your company. So if you want to increase your current income by, say, $25,000, you are going to have to find a way to increase business profits by about a quarter of a million dollars. And that’s not just $250,000 once. It’s $250,000 this year and next year and every year thereafter that you expect to maintain that much-higher-than-average-salary. (page 118)

Masterson’s advice can sound daunting, especially for new grads, but I think it illustrates some good points. First, many companies are structured so that profits flow to the top. If you want to keep more of the profits of your labor, you have to get higher up (or start your own business). Second, raises are based not just on a single good year but rather an expectation that you will continue to perform at a high level. This is why companies look for employees with consistent track records.

What are your thoughts?

I told Jim I would post his situation to get your wonderful insights. How have you negotiated big raises? Do you agree with the 10-for-1 rule? Have you found useful websites or books on salary negotiation? What are mistakes to avoid during negotiation? Is your company offering raises in this economy?