How I Think About Salary

Nobody gets rich from a salary.

Aggressive statement; it warrants some definitions. A salary, broadly speaking, is compensation for your labor — for your input into the machination of a company. The same is true for a hourly wage, except the relationship is more obvious there.

People join companies to magnify their efforts — to get leverage in the output. If you improve something 1% in your life, you might not notice it. If you improve something 1% for millions of people, that can translate into thousands or millions of dollars. Often, that’s real value creation, and, if the company is any good, it captures some of that value and translates it into wealth.

Wealth is freedom — the freedom to apply it to do something, and the freedom from having to do something you don’t want to. In the world of business, wealth comes from ownership. You can design and ship a 1% improvement, create millions of dollars of value, and capture it within a few days. Owning, say, 0.1% of the company that enabled you to do so allows you to personally capture some of that value. This compounds in many ways.

In general, a bump in salary leads to a commensurate bump in spending. On average, a higher salary lets you buy a more expensive lifestyle (which isn’t inherently bad), but it doesn’t create more value or more freedom.

Instead, think of salary as a tool to cover your downside risk. Sufficient salary allows you to avoid going into debt, and allows you to buy the experiences, environments, and things that bring you joy, keep you healthy, and drive your productivity. Once that’s met, optimize for finding a great company.

(All of this takes a backseat if you’re carrying debt with an interest rate. In that case, you’ll probably want to optimize for salary and pay that down first).