Last year, when putting together my negotiation course and teaching workshops, I included a stat about how a small difference in salary could add up to over $1 million in lost earnings over the course of a career. Specifically, how a $7,000 salary difference could add up to over $1 million in lost earnings.
This wasn’t my own genius idea. Business school professors and negotiation researchers have been touting the fact that missing out on negotiating early in your career can cost you big. Carnegie Mellon economist Linda Babcock caught my attention when she shared that:
“I tell my graduate students that by not negotiating their job at the beginning of their career, they’re leaving anywhere between $1 million and $1.5 million on the table in lost earnings over their lifetime.”
Because I love a good spreadsheet, I wanted to do the math myself.
I was also really curious to do the math because when I graduated business school, I didn’t negotiate my base salary. I negotiated an additional bonus to go along with my cross-country move, but the money was spent pretty quickly (if you’ve ever moved across the country, you know it’s not cheap).
So did I make a $1 million mistake? I really wanted to know.
Why pick $7,000 as the starting salary difference?
In additional research done by Babcock, she found that there was a 7% difference in salaries being earned by male and female MBA graduates. Men earned, on average, 7% more than women. A $100,000 salary is pretty standard for an MBA graduate, so I used that as an easy number for the math.
I’ll try to make this as painless as possible, but skip a few paragraphs if you really hate math.
Taking Babcock’s 7% difference and applying it to my $100,000 starting salary, I assumed that Jack and Jane, two MBA grads are both offered jobs for $100,000 upon graduation. Jack negotiates his offer up to $107,000. Jane doesn’t. Poor Jane.
So there’s a $7,000 difference on day one.
What if they both get a 5% raise the next year? Jack’s salary goes up to $112,350 and Jane’s salary is $105,000. Over those two years, he’s now made $14,350 more than Jane ($7,000 + $7,350).
Now extend that for 35 years. We’ll say that they each received 5% raises each year and every 5 years they each received promotions, which earned them 15% raises in that year. They receive the same % for raises and promotions each year for 35 years.
Jack comes out earning $935,000 more than Jane at the end of his career.
That’s based on just salary alone. But there’s more.
What if Jack invests only the salary difference that he makes each year. So the first year he invests $7,000. The second year he invests another $7,350, and so on for 35 years. If he makes 5% on his investments he’ll be able to grow that $935,000 difference to $1.8 million.
All from negotiating $7,000 one time.
So yes, when I graduated from business school I set myself up to make less than I could’ve. A lot less. Like a beautiful home on the beach in Hawaii + 30 years of plane tickets less.
If like me, you didn’t negotiate your salary, all hope isn’t lost. You’re not going to be stuck on the same path making the same salary forever like Jane. Just think of this as a good reminder to negotiate even small amounts, because over time they really will add up.
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