I know several power couples who make well over six figures a year. In some cases they make many multiples of six figures. Interestingly, they could still be considered to have a low salary, at least for this dialog. To set a level playing field, my goal is to discuss salary in relation to the average pay for the position. As an example, an MD who makes $125K a year in a world where the average for a medical doctor is almost twice that would fall into the category of ‘low salary’ even if Joe Sixpack still thinks of anyone who makes six figures as being ‘rich’. Going back to getting a lower salary, in all of my professional and interpersonal interactions I have never met anyone who was paid lower than the average for their job and appreciated their income position relative to the normal rates. Typically there is resentment and an intent to demand a more comparable pay. If the demands are not met then there is a desire to move to a different organization that offers more equitable compensation. Often I have reflected on the question of if this is a wise position to maintain? I wonder if there are benefits to being on the low end of the salary bell curve for one’s education, training, and experience? In reflecting I came across a few areas where it’s arguably much better to be on the lower end.
It’s about the Non-Licensure Credential
Before I get to the potential benefits of being on the lower end of the income distribution scale I want to make a couple of points. The first point is about the types of jobs this situation can apply to. I’ve used an MD to illustrate via an extreme example. In the real world you actually don’t see broad compensation variance with doctors, or to be honest, any medical or even non-medical credential that’s more of a license. That’s both the pro and con of jobs requiring a gatekeeper credential such as a license. The positive is that, for the most part, license holders have a pretty easy time getting a job as few others can legally do the work in question. The negative, aside from the economic reality that the legislated gatekeeper credential keeps prices artificially high for the consumer, is that salary ranges tend to be tight. A medical sonographer makes X, a special ed teacher makes Y. Licensed medical practitioners, teachers, CDL drivers, etc all fall within this description. Yes, it’s technically possible for one RN to make 50K/year and one to make 25K/year in the same hospital but in my experience that doesn’t happen all that often. So for this article, we are discussing non-licensure type jobs were there can be much greater variance in pay ranges.
The second point is about the frequency of job transitions and related transactions costs. This point underscores most of the facets of why, in some instances, getting a low salary can be beneficial. This goes back to the the fact that the world of work in the earlier generations of the industrial age was structured around unionized workforces that were maintained longer term by employers. Over time on the job benefits and compensation grew for individuals. This was designed as a retention mechanism for workers who were obtaining greater levels of skills and experience. Who in their right mind would leave the company after twenty years and give up their five weeks vacation and a pension? This was a win win for both the employer and employee. This model hasn’t completely disappeared but it’s definitely on life support. I’ve seen it in action, mostly with government institutions, and the model still works great at its original intent of retention.
Unfortunately the private sector isn’t using this model anymore. The accrued benefits are still there but flexibility in the workforce is highly desired by business managers and investors so there are less people accruing those increased benefits over time. It makes sense: Staff up when you need more capacity, lay off when you don’t. Economically, there is no reason to keep people around for the next positive business cycle. There are volumes written about how the average tenure at most jobs is now measured in a just a few short years. This practice moves the risk associated with business cycles squarely onto the shoulders of the worker. The corporation no longer needs reserves to meet payroll through longer down cycles. Nor does the corporation feel the need for providing high quality transition assistance when a layoff is unavoidable even if there are clear benefits to it. Jack Welch, the famed former CEO of General Electric, is a massive proponent of treating people well when you have to remove them from a job. I got a kick out of how he phrased it, saying “you gotta love people as much on the way out as you did on the way in”. Jack is no longer CEO of GE, and great severance and recruiting packages are no longer the norm in an age when people move a lot. Since there is no universally mandated legal infrastructure in place that says after X years in the workforce you get X benefits or X credits in time across companies, all employees start at zero at a new job.
The loss of benefits associated with seniority is just one of the transactional costs in job switching. The costs can be measured in many other ways. There is loss of income generation beyond severance, loss of benefits accrual, opportunity cost of wealth generation vis-à-vis investing into retirement accounts, etc.. Let’s be honest, even in the best severance package no company will continue to put money into a retirement account while the employee searches for a new job, and if one does, I have never heard about it. These costs can be thought of as standing still from a financial and career perspective.
If standing still from a career perspective and wealth generation is one problem during a job transition, another potential problem is moving backwards financially. We can’t forget that there are human beings involved in this. Human beings are not engines that just shut off and stand still economically during a transition. On top of the necessities for life like food, we live in a culture that encourages long term financial commitments to a lifestyle infrastructure inclusive of credit cards, car payments and 30 year mortgages. When the income stops, unfortunately, service on those debts doesn’t also stop, unless maybe it’s a student loan. If the worker doesn’t have a big enough buffer they start ‘going backwards’ financially and even then any buffer used has to be rebuilt when the employee moves forward. That means the buffer makes the landing soft but the plane is still going down.
Welcome to the New Normal: A Real World Example of Transaction Costs
I’ve recently been a close witness to a real world example of the modern flexible workforce reality and the resulting costs. It was with a local manufacturing company that shut their big facility down. The plant had been highly productive for decades. The production team had a tremendously deep knowledge base stemming from the fact that most of the workers had long tenures with commensurately great pay and benefits. This company is still very financially healthy but they had been feeling the pressure from international competition and management realized more automation wasn’t going to save them. The plant shut down and all the production workers lost their jobs. Most had to find comparable jobs offering to pay about 75% of the rate they were getting earlier and the benefits were similarly reduced. That’s classic manufacturing economics and most people can understand when production goes away. The company was going to keep the administrative and logistics functions as we live in the age of world wide connectivity so even if production wasn’t located locally the highly seasoned admin staff servicing the American customer base could keep chugging along. They were moved to a new office when the plant was shuttered. What blew my mind was that after a year the new admin office was shut down as well. I got to know this second group very well as they were a small team located in my hometown. The administration team was also long serving and highly effective. Each and every member of the team had virtually irreplaceable institutional and industry knowledge. Most had no formal credential and had worked their way up from production. Consequently, they got hit harder than the production team when it came to the transition. They have built their lives around their former income that was probably in the top 10% for their respective job titles. After the transition they were going to go from the highest tiers in their job categories to entry level or the bottom 25%. What does that mean in real terms? People who built lives and commitments with incomes in the 60K /year or more range now had to deal with a reality of incomes in the upper 20’s and lower 30’s for doing the exact same type of job. They were the team that actually inspired this article. It was hearing the team manager lament how her colleagues were all going to suffer but blamed herself and everyone else for living at their income level instead of living at a more modest level.
Is it possible to live that far below your means?
I reflected on what the manager said she should have done, i.e. live far below her means in preparation for the day the inevitable transition came. I wondered if it was possible. I came to the natural conclusion that technically yes, it’s absolutely possible. I also concluded it’s difficult, very difficult. This has to do with our culture. There are demands everywhere, social and family expectations, cost of living that gravitate towards incomes, etc. No mortgage broker will ever say “Hey, after reviewing your file I see you make in the top 10% of your job class, so you should absolutely not expect that to last the 30 years this mortgage service requires. Looking at that, I don’t advise you to buy this mortgage”. No, they say “You make in the top 10% in your job class so I can give you this much mortgage. That’s great as it so much more house than anyone else with your job can afford! Please sign here and let’s get started!” Unless the worker has committed themselves to playing financial defense as a life strategy it’s almost impossible to not fall into these types of fiscal scenarios where income is in equilibrium with expenses. It’s just easier to spend money based upon what is coming in.
So what does all this tell us? It says their are the negatives of a high salary relative to the average for a job. In the modern era, most people transition jobs often in their lifetime and that transition generally moves someone to the starting level of the income bracket or to the ‘average’ income for the job title. The transition to average more often than not means severely reduced quality of life if someone had been living at the higher, and arguably unsustainable level. So the lesson is to be very wary and continually evaluate your income relative to the industry. But what if your already at average or even lower than average? What are the benefits? The benefits of having lower than average income for a job are in some cases a mirror image of the negatives of having a higher than average income. I considered them for a while and there are four which I think stand out. They are: Risk Aversion, Job Security, Easier Transitions and Walk Away Power
The manager of the manufacturing admin team understood that her and her team were in a risky situation. They had good wages relative to their type of job and had inflated quality of life. They were in effect trading life experiences for financial security. If they were able to live well below their means, then the practical result is a bit like having quality of life insurance. The would move the risk of the transaction cost off of their own shoulders.
In another personal story, I have an experience that illustrates this odd scenario of being on the positive side of a lower quality of life. There was a period in my life where I put so much into my 401K at a well paying job that I only took home the exact same amount I would have gotten if on unemployment. When I did eventually lose that job it simply didn’t change my quality of life at all. The experience also had the added benefit of fixing much of my retirement planning stupidity from my 20’s. The only way I was able to pull this off was because I never saw the money in my check. It was like I was never getting it in the first place. Unfortunately that period of my life was short lived. These days, family needs coupled with a huge retraction in what unemployment pays in North Carolina have driven my bills far beyond the ability to stay in the safety defensive zone. It’s one of the reasons why I want to ‘beat the system’ by paying off my house. It’s to get back into the safety zone of not being at risk of losing all I have right now should my income shrink.
When I discussed risk aversion, it was more about the risk of losing one’s lifestyle. A variant of risk aversion is the risk of being the one who is let go. Although a lower income relative to what you do for a living, or to your coworkers with the same job, is no guarantee that you’ll be the one picked to stick around after a culling it’s definitely a huge check mark in your favor. Business reviews, economic cycles, and reorganizations among many other corporate machinations are reasons why good people get cut from profitable organizations. Costs are always a factor when considering who to let go. Typically they are not the only factor, but they are often a big one. Spreadsheet decision making happens. When considering staffing decisions by most managers financial justifications are an easy out for any manager who has to tell a team that several of their friends and colleagues are about to lose their job. “Business is soft and we had to make tough decisions”. Few will resent the manager who made the decision to let the most expensive people go.
Another benefit to having income lower compared to the average is easier transitions to new positions. I’ve seen examples of this in lower wage jobs where there is already massive transition due to the nature of the people who fill the positions. There are great numbers of people who have personality quirks that kept them from being effective at the higher skilled jobs so they stick to the lower ones where everyone who’s breathing gets $8-$10/hour. For them the problem transition isn’t from job to job, it’s job to no job. They may complain about .25 more or less an hour but they don’t really comprehend the benefits of their position being forced to live off the lower wages. They enjoy a working environment that includes very quick transitional mobility. They can leave one job on Friday and in most non-recession times, can start a new job on Monday or even Friday night if they are willing to work second or third shift. There are also plentiful jobs within the lower end of the wage scale.
The lowest tier of the workforce offers great illustrations of easy mobility but to a lesser extent the same rules apply for professionals. If you are an accountant who is happy with 30K when all the others make 45K, then there are probably several accounting firms in town who want to talk to you the second they know you are looking. Everybody loves a great deal so they move quick! It’s always beneficial when you are the one who is offering an employer a great deal.
Walk away power
You may want to keep things on your terms. Often I’ve heard some variant of ‘I can make this anywhere, and I don’t need to take this’. That’s another benefit of the lower salary relative to higher in demand skills. It is aligned to everyone including employers wanting a deal. If a company isn’t going to pay with dollars, they tend to have to pay in other ways, typically quality of life. If your quality of life and working environment isn’t what you want, then you can go find some place that does offer it.
What to do, no matter your income situation.
In the very early days of my marriage to my conservative wife, my mother told her ‘you should flaunt what you got more’. What she meant was that you only are young and beautiful once in your life and you should enjoy the benefits that brings in the short time you have it. I wonder if the same philosophy applies to incomes? Just because there are some benefits to having a lower than average salary I don’t think you should ever give up big dollars if someone is offering them or over time you have earned them. Ideally, my experience says one path to success is to live on the average for your income and do something like invest the rest before it even gets to your bank. If you can’t live like your only making average dollars, you can just subscribe to the YOLO mentality. Expect the crash, keep a basic plan of what you are going to do when it happens, but live and enjoy it while you got it. Worse case, you go bankrupt and start over. This is a philosophy followed by a friend of mine.
If you are targeting to make more than the average (financial offense), or if you find yourself in that situation, then there are some safety measures you can take beyond the chaos of bankruptcy cycles. They won’t completely mitigate the transaction cost if it happens, but it can help.
Always be reassessing where your income is relative to what you can get on the open market with your skills. Also, always have a plan ready for what your life is going to be like if you ‘transition’ out of your gig, even if you’ve been there twenty years and both you and the organization are planning to keep you there for another twenty. It’s what I alluded to earlier about having a plan in place. What is your budget at the lower salary? How long will your transition time be to get that average salary? What are the big changes that you need to implement, for example how long will it take you to sell the house? Simply stated, this is purposeful awareness of your economic reality.
Another option when making above average is to keep a massive buffer. At the very least it’ll allow you to be choosy throughout your transition. Since most won’t get back to the higher than average salary, then it gives time to lower your quality of life in a way that’s not so jaring. As I said, I think the ideal is two years, but that’s me.
If your lower than average, well don’t feel so bad or be resentful. Remember, you have the benefits of knowing that your transitions will be much easier. Your experience won’t be so jaring and your transition time shouldn’t be as long to get back to what you had coming in. That being said nothing is ever really set in stone.
In the end making way more than the average for any job is rare, but it does happen. After the pain of the transition, the worse case scenario when losing a high salary is that you can say “I had it good there for a while”. Making the average is, well, normal. It’s why so many people make the average. On the surface, nobody likes to make less money than other people who do the same job make, but if you step back and look at the situation with some practicality there really are some positive perspectives you can maintain. Your job is probably more secure, you get to manage your career more on your own terms, and when the almost guaranteed job transition happens, you’ll be better positioned to minimize its impact in your life.
Considering how volatile the job market is and how much downward pressure there is on quality of life as we move further into the information age, sometimes being one step behind financially may not be so bad. In this case taking one step back may not allow you to take two steps forward, but it may give you a bit more time to appreciate the silver linings on those clouds you can see from the path you are on.
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