Of salary increments and percentage tricks



It is that time of the year when the annual salary increments are due. While one looked forward to the increments between 2002 and 2008, since the start of the financial crisis in September 2008, the annual salary increment has been slow and steady. And this of course has led to a lot of heartburn. Nevertheless, companies cannot increase salaries at a rate which is faster than the rate of increase in their profit. In fact, I have even worked for an organisation where the salary was cut during the course of the year.

Between 2008 and 2013, when the rate of inflation was higher than 10%, the annual increments were lower than that in many cases. Hence, in the strictest sense of the term, the ‘real’ salary was actually going down.

Let’s try and understand this point through an example. Let’s say the rate of inflation is at 10%. Hence, the increment in salary also needs to be 10% in order to ensure that the actually purchasing power of the salary continues to remain the same. Any increment of lower than 10%, actually means that the purchasing power of the salary is actually going down.

If the increment in salary is 8% and the rate of inflation is 10%, then the real salary has actually gone down. This despite the fact that you may have got the best increment within the group that you work in. This is something that most people don’t understand.

When it comes to annual salary increments, an interesting trick that some companies (or divisions of some companies at least) employ these days, is of giving out a sort of an equal increment to everyone. Honestly, I don’t have any research based evidence for this, and at best all my evidence is anecdotal, wherein I have heard about these things from friends as well as family.

While an equal increment to everyone might sound like a very equitable way of going about things, especially when times are tough, it is not. At a very basic level it shows the laziness of the bosses who are meant to decide on such things. How can increments be equal? And at the same time it shows that the bosses are rewarding themselves at the cost of their underlings.

How is that? As Charles Wheelan writes in Naked Statistics—Stripping the Dread from the Data: “Your kindhearted boss might point out that as a matter of fairness, every employee will be getting the same raise this year, 10 percent. What a magnanimous gesture—except that if your boss makes $1 million and you make $50,000, his raise will be $100,000 and yours will be $5,000.”

So what sounds very similar when we use percentages turns out to be very unequitable when we use absolutes. As Wheelan writes: “The statement “everyone will get the same 10 percent raise this year” just sounds so much better than “my raise will be twenty times bigger than yours.””

This is essentially a trick that higher-ups in the organisation employ to ensure that their actual increments in salary are much more, even though on the face of it, it doesn’t seem like that.

There is another point that needs to be made here. As an employee goes up the hierarchy, the absolute increment starts to matter more than the percentage increment. This is another point that people don’t seem to understand. A 10% increment at Rs 30 lakh will mean an absolute increase in salary of Rs 3 lakh. The same increment at Rs 10 lakh, would mean an absolute increase in salary of Rs 1 lakh.

I have met more than a few insecure souls who have been unhappy about someone earning a lower salary getting a higher percentage increment. This does not make any sense, but that is what comparison does to people.

To conclude, these are a few basic points that people need to keep in mind when they get around to analysing their increments in the months to come. And here is hoping that you get a good one.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the Bangalore Mirror on April 6, 2016