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The Raise You Shouldn’t Take

You must consider the tradeoffs when contemplating a position with more responsibility and pay. Because the more you make the less you keep.

Is there a certain point at which it no longer makes sense to pursue a greater income? Maybe.

I think you must consider the tradeoffs when contemplating a position with more responsibility and pay. Because the more you make the less you keep.

Much of the developed world has a progressive tax structure, in which people who earn more pay a greater proportion (and dollar amount) of their income in taxes. Marginal tax rates for top-earners in Canada are displayed in the table below, and are as high as 54%!

The marginal tax rate is the portion of each additional dollar earned that goes to the government. The more you earn in total, the more each incremental dollar is taken away by the tax man.

Source: BDO

I’m not here to debate whether or not this progressive tax structure is morally right or wrong. My point is that this tax structure creates a rising disincentive for individuals to pursue ever-greater incomes.

Once a person attains a certain income level, I feel the added career risk, burden and responsibility is often not adequately compensated by the extra income from climbing the corporate ladder. For some other perks – extra vacation, corporate perks, ego boost, etc. – offset this imbalance. For many, beyond a certain point pursuing a higher income simply isn’t worth the sacrifice.

Put differently, those who do wish to climb the corporate ladder must require increasingly large dollar increases in pay to rationalize the tradeoff.

Here’s an example:

Let’s say you’re a typical employee of Big Corporation XYZ in Toronto and you’re looing at building your career. You start off at the bottom of the barrel working as a clerk in the back office making $45,000 (and probably living in your parents’ basement). You work hard and after a couple years find a better role within the company that comes with a $20,000 pay increase. To you this raise is everything – to Big Corporation XYZ it’s not a huge deal as they weren’t paying you much to begin with.

At that time, when you earned $45,000, a twenty grand pay increase was huge! Not only did you just increase your pay by 44%, you kept 71% of it because you were in a low marginal tax bracket. In other words, most of that earnings growth ended up directly in your pocket. So you were highly incentivized to increase your gross salary, as you got to keep most of it.

However, this incentive changes as salaries grow. The chart below shows how much of your gross salary (red) that you get to keep (blue) as your gross salary rises. When you earn $25,000 you keep almost everything. But as your gross salary rises the tax man benefits almost as much as you.

This next chart shows similar information, but focuses on the gap between gross and net income.

Finally, this third chart shows the effect of $25,000 pay increases on your total net income. A $25k pay increase is way more impactful to someone earning $50,000 than it is to someone earning $150,000.

Anyone making $150k has a high stress job. Taking on additional stress and responsibility isn’t financially worth it for another $25k. Of course, there’s more to the decision than just money. However, if money is a motivating factor the amount must be considered after tax, and the marginal pay raise worthy of action must rise with total income.

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