When negotiating a pay increase, the focus is often productivity and deliverables. There are presentations and excel files to supplement claims of value add, which are then discussed and form basis for negotiation.
This is one aspect of it. Of how pay raises should be worked out. But there is one more consideration that I have been recently reminded about. A consideratjon that I have never used while negotiating pay raises at the end of year, nor had anyone use while they negotiated pay increases with me at year end evaluations.
There was an average of 3.1% increase in prices (aka inflation) in Germany in 2021 (whereas Pakistan had 8.9% the same year).
This means that our cost of living increased by 3.1% in one year alone. Has your earning adjusted to account for it?
In my decade long professional experience, here’s how year end evaluations and pay raises work:
You schedule a review with your reporting authority and prepare a report that highlights your deliverables and performance peaks. Essentially, all instances where you added value. You also match your performance against goals set at the beginning of the year, in order to establish your contribution.
A discussion ensues, feedbacks are exchanged, you are told that pandemic has really shook businesses (which is where a company’s performance report may come in handy to prepare you), and while you are fantastic, the company cannot offer a 20% increase at the moment. You eventually settle for 10%. Not the best, but well, you really like your team and have agreed to compromise.
Now that you have managed to negotiate a 10% pay raise, does it mean you are good to move to a bigger apartment that costs about 10% more? You are happy with your savings contribution, so no increase in savings/investment, just a bigger (aka more expensive), house.
Sadly, you can’t. Because while your salary is 10% higher, average prices of consumer goods has also risen by 3.1%. So in order to maintain same living standards, you will be spending 3% more than last year.
So, in effect, you income will increase by approximately 7%.
This is an important consideration when negotiating with your employer. And it also plays a crucial role in budgeting and personal finance planning. You may have a 10% increase in your salary but you cannot plan to increase expenses/savings by the same ratio. It would be, at best, 6.9%, although realistically, it would be more like 5.5%.
So, factor in inflation in your next year end evaluations (or whenever you are due to revisit pay raise), and do the same when planning expenses/savings/investments.