Buzz
Salary increases can take different forms. You might receive a raise, a promotion, or even accept a new position with a higher salary. Regardless of the situation, it’s essential to know how to calculate the percentage increase based on your previous salary. Since inflation rates and living cost statistics are often expressed as percentages, calculating your salary increase percentage can help you compare the raise with other factors like inflation. Understanding how to calculate salary increase percentages also allows you to compare your salary with others in the same field.
Steps
Calculate the salary increase percentage
Subtract the old salary from the new salary. For example, if you earned $45,000 per year in your previous job and accept a new position paying $50,000 annually, subtract $45,000 from $50,000. This gives you $50,000 - $45,000 = $5,000.
- If you're paid hourly and don't know your annual income, simply subtract your new hourly wage from the old one. For instance, if your old wage was $14/hour and your new wage is $16/hour, the difference is $16 - $14 = $2.
Divide the difference by your old salary. To calculate the increase as a percentage, you first need to determine the decimal value. To do this, divide the difference calculated in Step 1 by your old salary.
- For example, in Step 1, divide $5,000 by $45,000, which gives $5,000 / $45,000 = 0.111.
- If calculating the hourly wage increase, use the same method. For the hourly wage increase above, divide $2 by $14, which gives $2 / $14 = 0.143.
Multiply the decimal by 100. To convert the decimal into a percentage, simply multiply it by 100. For the example above, multiply 0.111 by 100, resulting in 0.111 x 100 = 11.1%. This means your new salary of $50,000 is about 11.1% higher than your old salary of $45,000, or in other words, your salary has increased by 11.1%.
- For the hourly wage example, multiply the decimal by 100: 0.143 x 100 = 14.3%.
- To verify your calculation, multiply your old salary or hourly wage by the percentage increase. For example, $45,000 x 1.111 equals $49,995, rounded to $50,000. Similarly, $14 x 1.143 equals $16.002.
Consider additional benefits, if any. If you are comparing a new job to a salary increase or promotion at your current company, salary is only one part of the overall compensation package you should consider. You’ll need to evaluate several other factors that primarily impact your overall benefits. Here are a few important considerations:
- Insurance Benefits - If both jobs offer insurance coverage, you’ll need to compare the benefits of each insurance plan. You should also factor in the amount deducted for insurance (if any) when making your decision. For example, if the insurance contribution increases from $100/month to $200/month for the same coverage, it could reduce the net increase in your salary. Consider also the scope of coverage (e.g., does it include dental or vision?), the total annual insurance premiums you need to pay, etc.
- Bonuses or Commissions - While these may not be part of the base salary, be sure to include bonuses and/or commissions in your calculations. Your new salary might provide a higher base income, but if your current job offers quarterly bonuses, does the higher salary still hold significant value? Keep in mind that bonuses are often variable and depend on your performance and/or the company’s financial results.
- Retirement Plans - Most companies in the U.S. offer private retirement plans (such as the 401k) that allow employees to contribute a portion of their pre-tax salary into a retirement fund. Depending on the company’s policy, many also contribute a certain percentage to the employee’s 401k. If your current employer doesn’t contribute to this while the new company offers up to 6%, this is an important factor to consider in your decision.
- Severance Pay - Some companies offer severance packages to employees who have been with the company for a certain number of years. If your current job offers a generous severance pay after 25 years of service, but the new job doesn’t provide such a benefit, you should consider this. A higher annual salary may offer more immediate income, but it’s worth weighing the long-term financial benefits of each job. However, keep in mind that severance packages are becoming less common and may not always be as generous as expected. In some cases, retirement funds may be poorly managed and leave little or nothing for retirees.
Understand the relationship between salary increases and inflation.
Understand inflation. Inflation is the rise in prices for goods and services, which affects the cost of living. High inflation often leads to increased prices for food, utilities, and gas. People tend to buy less during periods of high inflation because prices are rising faster than their incomes can keep up.
Look up inflation rates. Several factors determine the inflation rate. In the U.S., the Bureau of Labor Statistics of the U.S. Department of Labor publishes a monthly report that tracks and calculates the inflation rate. You can read monthly analysis of the inflation rate in the U.S. over the past 15 years here.
Subtract the inflation rate from your salary increase percentage. To determine the effect of inflation on your salary increase, simply subtract the inflation rate from the salary increase percentage you calculated in Part 1. For example, the average inflation rate for 2014 was 1.6%. With a salary increase of 11.1% from Part 1, you can calculate the effect of inflation on your salary increase as follows: 11.1% - 1.6% = 9.5%. This means that after accounting for the rise in goods and services prices due to inflation, your effective salary increase is only 9.5% because the value of money is 1.6% lower than the previous year.
- In other words, you would need to spend 1.6% more of your money in 2014 to buy the same products as in 2013.
Understand the impact of inflation on purchasing power. Purchasing power refers to the comparative cost of goods and services over time. For example, let’s say you have a salary of $50,000 per year as in Part 1. If the inflation rate is 0% in the year of your salary increase, but the following year the inflation rate rises to 1.6% and you don't receive a raise, you will need to spend an additional 1.6% to buy the same basic goods and services. To calculate 1.6% of $50,000, you get 0.016 x 50,000 = $800. Your overall purchasing power, based on inflation, decreases by $800 compared to the previous year.
- The Bureau of Labor Statistics offers an easy way to compare purchasing power between years. You can access the tool here: http://www.bls.gov/data/inflation_calculator.htm
Tips
- You can use various online calculators to quickly compute your salary increase percentage.
- The examples above also apply accurately when using different currencies.
What You'll Need
- A calculator
