Is your salary hike worth the extra hours you put in?

As engineers starting our careers, we are all motivated to work hard and make a mark for ourselves. We are driven by various factors: the type of work we do, competitiveness, our desire to get ahead in the company, get promotions and salary hikes.  Whatever it is, we tend to work overtime and dedicate ourselves to our work. Companies reward us for our hard work and dedication with salary hikes, bonuses and potentially stock options. These are some powerful incentives that would make any person prioritize work over personal issues and put in extra time.

Managers and directors will tell you that the best way to climb up the ladder is to dedicate yourself to the company and work hard to impress your boss. It sure is good to impress your boss with your good work. However, before we dedicate all our time to the company, I think we should take a harder look at what the outcome would be.  As engineers we should take a look at each problem in an analytical way.  What would be our salary at the end of all the extra hours that we put in? Let’s look at that.

A good way to do that is find an engineer senior to you who you know is a star and find out what his/her salary increase is over the past two years. Now of course salary details are supposed to kept secret. However most people have no issues mentioning the % hike they got, without giving the absolute numbers. You can be assured in a typical engineering company, which most are multi-national company, the number your gather from your senior is what you are mostly likely to get, no matter how hard you work.

Talking with friends and seniors I know with stellar performance records, I was surprised to see how their salaries increased. Typically it is in the range of 2-3%. Of course they were awarded bonuses, but their base salary only rose by maximum of 3% , unless there is a promotion involved. By the way 3% is unusual these days; it’s more likely to be 2% or upper 1%s.

Let’s see what this salary increase does to your take home salary at the end of year. Before we get into analysis, here are the assumptions in the following charts

•  Base salary:  $75000 (a typical fresher’s salary in an electrical engineering company
•  401k contributions: 10% (a number that I am a proponent of. Reasons to come in another post)
• Lives in CA and pays both state and federal taxes
• Tax Filing status: Single
•  The tax calculations assume only standard deductions (pretty typical for a fresh engineer
• The tax numbers are taken from www.irs.gov and www.ftb.ca.gov for the year 2012
•  Net income is the income you are left with in your bank account after paying state and federal taxes, medicare and social security taxes.
•  Net income doesn’t include your 401k contributions. You cannot use 401k contributions until a few years anyway.
• Disclaimer: I am not a tax expert. The tax calculations were based on my understanding and using simple 1040 form.

Salary increase	New salary	Net Income	Increase in Net Income
0%	$  75,000	$  49,061	0
1%	$  75,750	$  49,453	$      392
2%	$  77,265	$  50,245	$   1,183
3%	$  79,583	$  51,456	$   2,394
4%	$  82,766	$  53,119	$   4,057

So taking a typical increase of 2% salary, you can see that your net income increases only by $1183. Over a year you spend about 1960 hours ( I am assuming you get 3 weeks of vacation) at your job. As you can see your hourly increase in pay is just about $0.60. The question you need to ask yourself is: do I dedicate my time to my company for a trifling $0.60/hr increase or shall I do something else with my time that would get me better than $0.60/hr.

We will explore the options to make more than $0.60/hr in another post. But for now, I think we can all agree that those extra hours you put in to impress your boss didn’t really make sense.

 

If you were wondering where your salary goes to, here is a pie chart of the pre-tax salary.