Let’s talk about the much-hated ‘last drawn salary’ policy

Here’s something that bothered me a lot when I first entered the working world.

When giving you a job offer, many companies would demand request for your last payslip. (You could always decline, but it would mean you wouldn’t get the job.)

Upon receiving your last payslip, they will then base your next salary based on a % increment of your current salary.

This % is often a number like 15 or 25%.

Here’s how it works:

Let’s suppose the x% increase in question is 20%.

If you are currently paid $3,000, the maximum they would offer you is $3,600.  ($3,000 x 1.2)

There are two scenarios where this can affect you negatively

Scenario 1: You DESERVE more than the company policy limit

Your skills and experience can command you a large pay jump over your current salary. Even the hiring manager has agreed on this. However, this ‘pay jump’ is more than the x% dictated by the company.

When this happens, it feels like you’re up against a brick wall. Company policy takes precedence; HR will insist that you can’t get more than x% than your current salary.

There’s no room for negotiation – take it, or leave it. This is a scenario I have personally experienced (I walked away).

Scenario 2: You started off underpaid

You started off your career with a low salary. This could be because of bad timing (i.e. finding a job during a recession), or because you didn’t negotiate.

Unless you break out of this cycle (more on this later), this low salary will potentially affect your lifetime earnings.

Example:

Graduate A graduates in 2023 during an impending recession. He starts off with a $3,000 starting salary. Assuming we follow a 20% increment each time he gets a new job, his progression looks like this:

$3,000 – > $3,600 -> $4,320 -> $5,184 -> $6,222

Graduate B graduates in 2024, but because the job market has improved, she starts off with $4,000,

$4,000 > $4,800 > $5,760 -> $6,912 -> $8,294

Why do companies do this? 

It feels sucky that companies do this, instead of taking the time to understand someone’s current worth. But, over time, I’ve come to understand why companies do this.

Four big reasons are:

They can do it, and the market accepts that this is the ‘meta’ 

Companies are often in a better position to negotiate than job-seekers. So they can adopt a ‘Take it or leave it’ attitude.  

If you speak to many people, you might also find that they’ll say ‘20-30% jump is the norm’.

People in the above scenarios could be exceptions, rather than the norm.

Risk management

Just as companies underpay people, sometimes people get overpaid, and this can hurt companies a lot.

That’s why companies use your current salary to gauge what you’re worth. Kinda like how landlords use current rental rates to determine how much they should increase their rent.

Example: 

If a previous employer felt you were worthy of a $4,000 job, then a 20% increase to $4,800 would reduce the risk of them overpaying you.

This 20% is like a margin of safety for their investment in you.

This would be opposed to say, bumping you straight up to $8,000 (a 100% increase)!

Simplicity and quickness: 

Taking time to figure out someone’s worth, and then having one-to-one negotiations is slow. Perhaps small companies that employ 3 people a year can afford to do so.

But if you’re hiring 1,000 people, it’s just too time-consuming.

And as the saying goes, time is money.

Standardisation and consistency:

In large companies, there’s a need to make salaries more consistent within bands.

After all, if everyone else has accepted an x% increase, why should you get paid anything more?

That said, I still think it’s not ideal for companies to do things this way.

Why?

You might STILL overpay people.

Just because someone was worth $x in their current role, doesn’t mean they’re worth $x now.

Everyone’s market value changes. Sometimes for the better. Sometimes for the worse.

You lose out on potentially good candidates.

Someone’s proven that they’re good for the job, but you’re not willing to pay for it. They don’t accept it. It is what it is.

You create resentment.  

Even if people grudgingly accept the offer, it creates an unpleasant feeling and doesn’t build loyalty.

So, when a better offer appears, they’re definitely going.

(Oh, did you say you have a staff retention problem?)

What now? 

We’re not sure whether this practice will ever change or whether it’s even possible.

But if it helps, here’s how I (Ruiming) dealt with this whole issue (though YMMV).

Doing all the following allowed me to jump from $4,000 to $7,500.

1.  Always know your worth. 

Be honest with what you can command. Keep in mind this also involves not overvaluing yourself and requires self-awareness. That said, if you’re underpaid, leave!

Some ways to do this:

• If you can directly measure the value you’re providing a business that would help a lot. This can be in terms of sales or savings.
• It doesn’t hurt to go for interviews often and get others to gauge what you’re worth. AKA, price discovery.

2.  Join a smaller company
   
   They often have less negotiating power compared to large ones. You can also attribute results/revenue/savings more directly to yourself –  and hence, justify increments.

   “I brought in $300,000 in sales”

   “I saved the company $300,000 through my digitisation efforts”

   (Note: Not all small companies will have the ability to pay, so manage your expectations.)

3. Pursue self-employment/commission-based roles 

   Same principle as above. You are better able to justify and measure your output and worth in these positions. Albeit, these are riskier positions.

4. Switch jobs more often

   If you can only increase your salary by jumping, then it makes sense to jump more! The trick is striking a nice balance between appearing too flaky and having your wage stagnate.

   Note: Having one or two exceptionally short tenures (less than a year) on your resume is fine. But too much will affect how employers perceive you.

5.  Never be desperate. Develop the ability to walk away from job offers that are not what you are worth. You can do this with strong finances and a great skill set.
   
6. Work hard on visibility. Become a person employers seek out, rather than vice versa.

Some ways to do this:

• Win industry awards
• Be credited for your work
• Put yourself in external-facing positions
• Write high-quality reflections and observations on LinkedIn
• Traditional networking

We know it’s hard to be underpaid 

It sucks to be paid less than what you’re worth.

But often, we’ve found that understanding the big picture can help you better tackle the problem.

By knowing why the companies do the things they do, you can adjust your actions accordingly – instead of being a hapless sitting duck in the cut-throat world of capitalism.

If it’s any consolation, it’s not personal.

Good luck, and all the best.

Stay woke, salaryman.