The typical career progression involves steadily increasing your earnings. Every year (or two) you expect to get some kind of pay increase even if it’s just a cost of living adjustment. You may switch employers several times along the way to further accelerate that upward trajectory. During that progression, would you ever willingly move backwards and take a pay cut?
Of course, there are plenty of good reasons you might choose to take a pay cut — career change, relocation, better work-life balance, more fulfilling work — but financial reasons are usually not one of them.
I can only think of 2 financial reasons to accept a pay cut (which sounds like a paradox in itself):
- To minimize financial damage after losing a job. 70% of income is better than no income, right?
- To increase long-term earning potential.
In the case of #2, it’s similar to any investment. Money (in the form of forfeited earnings) is risked in the short-term with the expectation of a future payoff that makes the risk more than worthwhile.
But what happens when the investment doesn’t pay off?
You take the losses without any of the rewards. You’re now sitting at a lower income level and growth isn’t materializing. Then you’re fighting just to get back to where you were before. But is that the ultimate goal?
If the opportunity presented itself, would you DOUBLE DOWN on yourself? And then if that didn’t work out, would you TRIPLE DOWN?
That’s exactly what I just did — took my third pay cut in a row chasing upside. This is super embarrassing to write but as a result the last pay raise I received was in 2014.
Whether or not it’s the best decision is still to be determined, but let’s examine the thought process behind each:
Pay Cut #1
Leave my cushy, secure government accounting job to join a small, fast-growing real estate investment fund that specializes in flipping residential property. After one year, I would get equity in the deals that I helped acquire. Since the deals are backed by private investors, I would also be able to invest my own money into the deals.
The Cut: $25,000 / year
That seems like an insane amount of money to give up as I think about it now. It started out as a $10,000 pay cut, but then I was offered an internal position / promotion to stay at the government, which I turned down. The fact I wouldn’t feel the full pay cut definitely made it easier to turn down.
There were also compensating factors such as the fact this new job was located in Florida which has no state income tax and lower cost of living. Also, I really wanted to escape the government to work somewhere that cared about concepts such as profit and efficiency.
What Went Wrong:
After completing my first year with a profitable track record, my managers kicked the can down the road in terms of receiving equity in the deals. I thought I would at least get a salary bump, but they wouldn’t budge there either. They told me I’m one of the higher paid people in the company and I should be happy. I said I gave up a lot to come there and they said they took pay cuts too to be there as the job market wasn’t the same as in major cities.
That’s all fine and dandy, but not what I signed up for when my wife and I moved our entire lives. Yes, West Palm Beach is a nice place, but we moved because of this job opportunity, not the beach.
The major factor in their resistance to pay me more was that market forces weren’t working in our favor. Our primary method of acquiring properties — foreclosure auctions — was dropping 40% year over year as backlog inventory from the Great Recession was started running out. With less supply and increased competition, our margins got cut in half on top of the lower volume. In order to combat this, we expanded into more counties, but that just led to higher overhead costs.
Additionally, I wasn’t able to invest our own money into deals simply because there wasn’t any — we used our savings for our wedding/honeymoon that year. It also wasn’t a sizable enough amount ($15k) when it comes to real estate.
Not only did I learn growth wasn’t present at this company, but also I realized the sustainability of the enterprise was in question. I had to evolve my responsibilities just to keep my job while searching for a new one.
Pay Cut #2
Join large mortgage company that promotes internally based on merit as a Senior Business Analyst with high visibility among company executives. Although salary was below market, I was told, “If you are who we think you are, you should be promoted twice in your first year.” Naturally, the plan was to make that happen.
The Cut: $1,000 / year
That doesn’t seem like much of cut, but in this case it was enhanced by moving from Florida back to the Washington DC area where there are state income taxes again (over 7%) and higher cost of living.
What Went Wrong:
I really have a knack for joining flourishing companies right when the good times are about to end. After joining in May 2017, interest rates started rising from their historical lows, signaling the end of the refinance boom and squeezing margins when selling mortgage backed securities in the secondary market.
The mortgage industry suffered a lot of mass layoffs in 2018. Fortunately, we avoided this because we increased volume. However, similar to my previous job, everything tightened up. Those promotions were again kicked down the road even though I won “Rookie of the Year”, saved the couple millions of dollars, and scored in the Top 10% on my CFA Level I Exam.
I could have fought my case better, but when you have to fight and claw for a raise that’ll only bump you from the bottom 1% of senior analyst salaries in the market area to the bottom 10%, that’s not the ultimate goal.
Pay Cut #3
Switch from an analyst role to a sales role within the same company where high-performers have the ability to earn double or triple my income as an analyst. Sometimes even more.
The Cut: $15,000 / year
That’s a pretty sizable cut, but the key thing here is that the cut is in base salary. Commissions and bonuses are where the good money is made. It just takes several months to build my business and get fully ramped up.
What’s Different This Time?
There are some major differences about this decision to take a pay cut versus the previous two decisions. I realized a major issue with staff positions is that you’re not in the driver’s seat of your financial future. Your manager is at the wheel.
With sales, you control your own destiny.
I never would have expected to transition to a sales role as I’m not a natural salesman. I’m a natural analyst. I would probably be terrible in most sales roles but I can handle selling a financial product. It’s probably the only thing I can sell.
The reason I felt comfortable doing so is that I was able to fully vet the decision beforehand.
As an analyst, I was heavily involved in commissions and had visibility into what every single salesperson earned. I also tracked all the sales production metrics for everyone, fully understanding the level of production needed to be a consistent high performer. In addition, I even shadowed the top sales producers in an assignment to see what behaviors made them better than their peers.
It led to the realization that time management, efficient processes, and simply outworking the competition are more than enough to be successful.
Because in the end it really comes down to math — sales is a numbers game.
There simply isn’t the opportunity to double or triple my income as an analyst with any single company. The primary way to accelerate earnings is to hop from company to company, getting more with each move. But the overall ceiling is still lower than I imagined when I started down this career track.
Taking a pay cut for growth is a gamble. Even more so when you don’t control your own destiny.
But what’s the biggest gamble in my opinion?
Staying in a position that you know doesn’t have the upside you’re looking for.
If best-case scenario is a 2% yearly raise, is that really worth your time? That’s just a cost of living adjustment.
A great metaphor for this is by MJ DeMarco in his book Unscripted where he talks about Life’s Gumball Machine. You want to increase your odds of getting a gold gumball, which is achieving huge success. The only ways to do that are by depositing more coins (taking more action) and choosing a machine with more gold gumballs.
So that’s what I’m doing with three pay cuts in a row for growth in the last 3-4 years.
Each of these pay cuts had the ability to reward me with a gold gumball. The first two didn’t work out, but here’s to hoping for a gold gumball in 2019.