Raise Your Salary; Improve your value to your employer

The only way you can command a higher salary is to make your employer more money than anyone else who could do your job.

You make money for your employer by producing profitable goods that will be bought by his customers (who are also his employers).

This is why your employer is not your employer, but your employer’s employers.

Who’s Your Employer?

As the saying goes in B2B (“business-to-business”) industries: “Your customer is not your customer but your customer’s customer.” To be successful in selling your products or services to your customer, you need to make your customer successful in selling his products or services to his customer.

As the manager of “ME, Incorporated,” you are in the B2B space. Your customer is your employer. If he doesn’t buy your services, you are out of a job. Your employer’s employers are his customers. If they don’t buy his products, he is out of business... And so are you.

Value Is In The Eye Of The Beholder

You buy a product if and only if you prefer it to any other use to which you could put your money. The seller sells her product if and only if she prefers the money to any other use to which she could put her product.

For example, if you buy a computer for $1,000, then you must believe that you will derive a higher benefit from the computer than from the $1,000. Similarly, if I sell you a computer for $1,000, I must believe that I will derive a higher benefit from the $1,000 than from the computer.

One of the greatest revolutions in economics was the discovery that “value” is not an attribute of things per se but, rather, an assessment made by the person for whom the thing appears to be valuable. Beginning with Aristotle, economists believed that “value” was an objective quality such as size, weight, or material composition. This thinking culminated with Karl Marx, who argued that “the labor incorporated in the good” was what made it valuable[CC1] .

They were all wrong.

A computer might be valuable to you because you don’t have one, but worthless to me because I have two. Neither of us is “wrong,” because the computer does not have an intrinsic value; it only has value for a particular person at a particular time under particular conditions. No matter how much effort the producer of the computer put into it, it’s still worthless to me.

The next time someone pleads with you, “But I worked so hard on this!” remember that the labor theory of value is hogwash. If his product doesn’t help you achieve your goals, all his effort has been for naught.

By the same logic, remember that your effort means nothing to your employer unless it helps him achieve his goals.

What Makes You Valuable?

You are selling your labor to your employer. (By “labor” I don’t just mean physical activity, but also everything else you do to contribute to your employer’s goals.)

Your employer buys your labor if and only if he prefers it to anything else he could do with his money—and that includes the labor of any other potential employee.

Your value to your employer depends solely on his ability to derive extra gains from your labor. (By “extra gains” I don’t just mean monetary profits but also everything else that matters to him and his organization.)

Of course, he combines your labor with other factors of production, such as the labor of others, capital equipment, and natural resources, so it is not a simple matter to calculate your contribution to the mix. But even if it is only an approximation, your employer will be willing to pay you only up to the monetary value that your contribution has for him.

A rational employer, one that wants to stay in business rather than overpay you and be undercut by more rational competitors who will bear lower costs, will never pay you more than this; and he will prefer to pay you less.

How much less? Well, how much would you like to pay for a computer? I wouldn’t mind getting it for free; would you? Well, neither would your employer mind getting your labor for free. The less cost, the more profit!

What Makes You Payable?

The upshot of all of this is that being “valuable” does not mean you are “payable.” As I said in my last post, your ability to negotiate your compensation is not limited only by the value of your labor in terms of extra gains for your employer. It is also limited by your employer’s best alternative to a negotiated agreement with you (his BATNA).

Your employer’s alternative is to hire the next most valuable person, where “value” is the difference between the extra gains he could make by hiring her minus her compensation.

So for your employer to hire you and keep you employed, your compensation must be in line with that of anyone else who could do as good a job for him as you can.

This is why the only way you can command a better salary is for you to be more valuable to your employer than anyone else who could do your job. And therefore, the only way to raise your salary is to make a higher contribution to your employer than you are making now.

This means helping him serve his customers more profitably than he currently does.

"In the market society the proprietors of [businesses, but also of labor] can enjoy their property only by employing it to the satisfaction of other people’s wants. They must serve the consumers in order to have any advantage […] Ownership is an asset only for those who know how to employ it in the best possible way for the benefit of the consumers.” —Ludwig Von Mises

Readers: What have you done at different stages of your career to improve your value to your employer, thereby raising your compensation? Leave a comment below and perhaps you will help thousands of professionals that would like to increase their value and command a higher salary.