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Would you stay in your current role if you received a 10% salary increase in your first year?
Would you stay in your current role if you received a 10% salary increase in your first year?
To understand the question, I’d suggest disaggregating two important features of any professional role: qualitative happiness/reward/fulfillment and quantitative benefits (salary, vacation time, fringe, insurance). We’ll answer this question looking at the latter, specifically salary, and presume that the former is positive.
Scenarios
Let’s first set the scenarios that we will use to understand the question. We have three (3) scenarios that unfold over a 1-year interval:
Scenario A: a 10% increase in salary
Scenario B: a 5% increase in salary (more on that to come)
Scenario C: a 0% increase in salary (notice I bolded the word “increase”). The following two sentences are NOT the same:
“a 0% increase in salary” ≠ “a 0% change in salary”
Scenario A is the scenario in question.
Scenario B is what you would receive if you invested all of your salary into a fixed instrument, such as a US Treasury note. As of this writing, the US Treasury rate os 5.03% —> 5% (US Treasury rates).
Scenario C is what most healthcare professionals face.
US Treasury rate, 1 year
Nominal value
The table shows you what you would have (nominal value) in each of the 3 scenarios (Line 5).
It’s clear that with a 10% salary increase (Scenario A), you would beat any comparable investment in a US Treasury (provided you had $150,000 to invest in a 1-year period).
Now let’s compare lines 5 and 7.
Nominal versus Real value
Line 5 is the nominal value at t = 1 year. Nominal values are the actual accounting value that you have.
Line 7 is the real value at t = 0 (when you started). It is calculated by using the nominal value at t = 1 and going back one year in time. Why did I do that?
Since most healthcare professionals don’t receive yearly salary increases, it’s safe to presume that we know this fact ex ante. In other words, we know at t = 0 that we won’t be receiving a salary increase.
If we know this unfortunate fact, then we know that our investment (i.e., our one-year’s worth of work, effort, dedication, commitment, passion, accomplishments, etc.) will not grow in value.
Our $150,000 earnings in t = 0 will have an identical accounting (nominal) value in t = 1 Scenario C, lines 3 and 5). Since everyone else’s $150,000 is growing (and ours isn’t), we pay a cost for the lack of growth. That cost is quantified by the annual interest rate, which I stipulated is 3.4% as of this writing (line 6).
With an opportunity cost (operative word is “cost”) of 3.4%, I am penalized this amount if I don’t invest the $150,000. Since I know I won’t be “investing” (i.e., growing my $150,000), I am actually earning less than $150,000 at t = 0. I actually earned $145,068 (line 7) when factoring the opportunity cost.
By not receiving a salary increase AND knowing one year in advance that I would NOT be receiving said increase, I lose $4932 in the one-year period.
The answer to the question is, from my perspective, a “yes”. If you are happy in your position, then a 10% increase is very valuable.
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