Author: Mr. Cheap

Part of most job interviews is where they ask you about your current salary or salary history.  This is obviously valuable information for the other side of the negotiation to know, as it tells them exactly what amount of money you were willing to work for.  At it’s core, while useful for them to know, I think it’s a highly inappropriate question.

I have a somewhat skewed view of employment compared to many people.  I have been an employee at a large number of venues (from McDonald’s to Nortel), a manager (with 4 people working for me), a sole-proprietor (from a paper boy through to running my own software company), a contract worker, and a dot-com startup employee.  I’ve worked in industries from server management software to hospitality / tourism to education.  All together this allows me to see employment as a fairly balanced process, employees need jobs and businesses need employees.  The market rate for the work is how badly each side needs the other.

The dot-com boom (and bust), which I caught the tail-end of in San Francisco, was the far side of the pendulum where employees were in the drivers seat.  Companies were desperate for tech workers, and some employees developed prima-donna attitudes.  While this certainly wasn’t right (as I used to tell the CEO of my company when he hand-delivered my morning coffee and I was chastising him for not putting enough milk in it), the standard attitude prima-donna attitude of the employer isn’t right either.

Asking for a salary history is an example of this.  How is it any business of a potential employer what you’re being paid at your current or previous jobs?  This is between the previous companies and yourself and has nothing to do with potential employers.  If you were to turn the question around and ask them to provide a copy of last weeks payroll to all the employees in the company (or even asked the salaries of everyone working comparable positions at the company or what they’ve budgeted for the position) there’s no way they would answer.

No one likes answering this question, but I think enough people feel intimidated by the interview process that they do (and it has become a standard question).

How Answering Hurts You

The company obviously has a range they want to pay for the position, you have a range in salary you’re hoping to earn.  If you’re lucky there’s an overlap and both side want to a) come to an agreement and b) have that agreement be the best possible deal for them (low salary for the company, high salary for the employee).

The problem is, if your current salary is very low, it may be below what they’d intended to pay, in which case they’ll happily match your current salary (or give you a small bump that’s still below what they originally intended as the low-end).  For someone who had to temporarily take a job at a lower salary, this can make it a very painful process to claw there way back up to what they should be getting paid.

Conversely, if you quote too high a salary, they might just decide that you’ll be unhappy working for what they can afford to pay you and not offer you the position.  You may have considered the salary they’re willing to offer, but by having quoted the high number you never get a chance to hear their offer.

I don’t advocate lying, even in answer to inappropriate questions, but there’s extra reason not to lie here:  a lie can STILL hurt you if it’s the wrong number.

Ways To Evade The Question

This is a tough one (much harder than the old “don’t be the first to mention a number” idea).  In truth, I’ve always been fairly confident that I’m getting paid market rate (and have been happy to negotiate with an offer letter in hand) and have provided this salary history information when asked.  I don’t think I will if I’m ever asked in the future however.  Off the cuff, some ways I’d consider answering would be:

1. “Unfortunately that’s priviliged information I’m not able to share.”
   • PRO:  Quickly ends the discussion, if pressed you can say that YOU make it privileged, not the previous employers (much like when someone tells you “sorry that’s against our policy” as a “reason” why they can’t do something).
   • CON:  You come across as somewhat aggressive, which for most jobs isn’t the image you want to convey.
2. “I’d like to focus on whether I’m a fit for this position, and I’m sure we can work something out with salary after we’ve determined that.”
   • PRO:  Taps into the “don’t talk numbers” game, and they might let it go without firming it up.
   • CON:  Probably they won’t accept the attempt to sidetrack things and will try to pin you down.
3. “Why would you like to know that information?”
   • PRO:  If you ask this sincerely and don’t come across as defensive, it may give you a chance to just talk philosophically about salary information (perhaps discuss some of the points in the section above) and you both may agree to just leave this question unanswered.  Depending on why they say they want to know, you may be able to answer the underlying question without providing the history.
   • CON:  They may not take it as sincere and you may come across as aggressive.  They might just say it’s part of their interview process and not provide a rationale (and demand an answer).
4. “I’d be happy to give you that information, but first could you please tell me what salaries people currently in this position at this company are earning”
   • PRO:  Clearly makes the point that this is a one-sided questions that is clearly inappropriate.
   • CON:  Most people don’t hire smart-asses, so you’ve probably just talked them out of hiring you.
5. “Well, I don’t think my recent salary history is relevant because of XYZ”
   • PRO:  If you have a solid reason (such as learning something new at your most recent position or being overpaid for some reason) they might accept that as a reason not to answer.
   • CON:  In all likelihood they’ll just say “we’ll take that into consideration” and still want to know.
6. “My last job paid $1,000,000 annually, and the job before that paid $1 / year”
   • PRO:  Perhaps as a second attempt to deflect after one of the early responses, humour may be able to put off the question.
   • CON:  Even when it’s an obvious lie, deceit as part of a job interview may not be the best idea.

How do you answer when you’re asked about your salary history for a job?  Do you feel this is a reasonable question?  Any ideas for better responses than I’ve come up with?

I’ve written about begging before.  As long term readers can probably guess, I’m fairly opposed to it (heck, I’ll even tell people off for begging in “World of Warcraft”).  Aggressive panhandlers are one thing, but at least their actions are usually motivated by a personal and immediate need.  Others have actually chosen begging as a career, and often make very good salaries doing so (or managing other people who do it on their behalf).

The brother of a family friend does fund raising for universities.  He basically hooks up with a school, and is given the mandate to boost donations from alumni.  He’s paid 10% of whatever he raises for the school (and is given a staff to help him with marketing, calling alumni, etc).  This can certainly rub people the wrong way (when they make a donation, they probably don’t realize that 10%+ is being taken off of the top to pay this guy), but from the university’s perspective, they’re way ahead (even after giving him his cut) if he can dramatically increase the donations.

At the beginning of the year Michael O’Mahoney left his job as the head of the “Sick Kids” fundraising arm, a position which paid $624,103 in salary and benefits.  Anyone who has spent time downtown in Toronto has seen the Sick Kid canvassers, who flank a sidewalk in pairs making it impossible to walk past without being solicited from one of them.  It’s pretty had to get angry at people fund raising for children who are ill, and to their credit they aren’t pushy at all, but it’s always bothered me that these young kids are being paid to shake down pedestrians.  Friends have insisted to me that they’re volunteers, not paid employees, but after I looked into it (I asked them on the street and looked on-line) it became quite clear that they are paid – currently starting at $12 / hour.

It has been so successful that recently the Red Cross has adopted a similar campaign here in KW (shaking down employees outside of RIM).  I suspect in the current economic climate, a number of students would be tempted to do this as a summer job – $12 / hour is a lot better than they’d be earning at fast food or doing yard work.

When I was a child my mother used to go door-to-door collecting for the CNIB (her grandmother was blind and glaucoma runs in the family).  This was begging as well, but I feel more comfortable with her doing this as a volunteer than someone being paid to do so. Even if someone supports being paid to fund raise, should people be getting rich doing so? (as in the case with 10% of school donations or an annual salary that’s more than 1/2 a million dollars).  I’m pretty sure this would bother many donors.

One of my math teachers in high school (a raging Scot) ranted one time about how he wouldn’t let his daughter participate in school fund raising activities because he didn’t want her “begging from the neighbours”.  The same guy compared an annual all-school hockey tournament to Nazi Germany, so at the time I thought he was a few cards short of a deck.  As I’ve gotten older, I’ve come to appreciate his perspective, and I think I’d be reluctant to allow my children to participate for the same reasons.

A friend of mine donated to Sick Kids the first time he encountered them on the street.  After he gave them $20, he was subjected to a continuous stream of requests for more money (phone calls, letters, etc).  He figures they quickly burned through the $20 trying to get more money out of him and he eventually insisted they take him off of all their lists as he was sick of being disturbed (and has said he’ll never donate to them again).

In late 2006 a scandal erupted with the Canadian arm of Mothers Against Drunk Driving that they were using almost all the funds raised to pay salaries and fuel additional fund raising activities with very little going to actually combat drunk driving.  My experience with non-profits has sadly been that this isn’t terribly unusual.  Good intentions are considered worth as much as actually accomplishing something.

“The Road to Hell: The Ravaging Effects of Foreign Aid and International Charity” by Michael Maren is an amazing book that details his desperate attempts to do good work in Africa, while being confronted with the reality that his work either was ineffective or actually harmful to the people he wanted to help (and was subverted for the benefit of those in power at the NPOs and in the African nations).

Do you donate money to charitable causes?  If you do, how do you ensure that your donation will be used effectively?  How do you pick where to donate?  Do you think it is reasonable for people to be paid for fund raising?

As a quick clarification, the “relationships” in this title refers to any people who have an ongoing association with each other, not exclusively romantic relationships.

Thicken My Wallet recently wrote a great post on negotiation which addresses negotiation where you have an ongoing relationship with the other party.  Most of my negotiation posts have dealt with “one off” transactions where you never expect to do business with the person again.  It’s definitely a different game when you keep interacting after the deal is done.

In game theory, they take a mathematical approach to strategic situations (where your best action depends on the actions of others).  The answer changes dramatically whether it’s a single iteration game, or a multiple iteration game.

Years ago I got working at a software consulting company (other companies would hire them to develop software).  During the negotiations the owner played all sorts of games with me.  One that he managed to pull off was he described the position as a “Java developer” role, and twice said “there are a couple projects in the works, so we don’t know EXACTLY which you’ll be working on when you first start”.  At the time, I didn’t pay much attention to this, but it turned out (once I’d signed the contract) that rather than doing development, they were going to have me doing application work for 6 months.  This is fine for what it is, but the consequence for me is that I would lose 6 months of skill development (I would be learning completely non-transferable skills for using that specific software application:  something I had no interest in, which he realized and why he downplayed it).  Before me they’d had a high school student working on it, so that gives an idea of how “challenging” the work was (but they needed it done, which is fair from a business perspective).

Tricking me into working on something other than what I’d expected turned out to be a very costly mistake for both of us.  I *MAY* have still accepted the job if they’d been upfront about what I’d be doing, told me that was what the business needed at that time, and given me a firm commitment WHEN I’d get back to doing the work I actually wanted to do.  As it played out, I couldn’t get over the fact that they’d pulled a bait-and-switch on me, and they remained unrepentant (with the owner repeatedly telling me he’s a sales guy so he naturally “puts the best spin on things”).  By the time we went our separate ways, they’d wasted a lot of money bringing me on board, and I’d wasted a lot of time finding and getting up to speed in a position which wasn’t a good fit for me.  Since then I won’t take a job if they can’t tell me EXACTLY what I’ll be working on day-one (and most companies have been able to tell me this – why would they be hiring someone if they don’t know what for?).

I’m constantly amazed how hard organizations haggle with employees over hirings and raises, and they don’t seem to factor in that they will have to work with this person for the period of their employement.  I’ve been treated rudely by people involved in the hiring at a number of organizations, and it blows my mind that they’d jeopardize me as a potential employee over something as silly as bad manners.  One interview I went to there were three men and two of them kept surfing on a notebook and whispering back and forth during the interview.  They asked me back for another round, and I declined, telling them if they couldn’t be bothered to give me their attention during an interview, I didn’t want to work with them.

People who are really strong hagglers / negotiators can get themselves in trouble if they keep getting good deals off of friends and family.  You might be able to convince the wife to do the dishes 4 nights in a row, but the fact that she agrees doesn’t mean she’s going to be happy about it.  It saddens me to see marriages degenerate into a state of war, where each disagreement becomes a battle, and winning the battle just causes more problems down the road.  Eventually both sides lose when the relationship can’t handle any more strain and is dissolved.

Recently I was talking to a friend-of-a-friend who is involved locally in real estate.  I’d asked him for a copy of the “offer to purchase” he’d last used when he bought a property without an agent.  He was willing to give me a copy, but wanted me to take him out to a fancy restaurant in exchange (with $35 entrees and $50 bottles of wine).  Rather than going out for a $150+ dinner, I just bought an offer to purchase at the book store for $15.  A month later, he told me he was going to be out of town and asked if I could show one of his properties for him.  Unsurprisingly, I wasn’t able to make the time to help him out.  He tried to get a killer good deal out of me for a copy of an offer to purchase, and burned the relationship with someone local who was familiar with real estate investing.

Some salespeople (real estate agents particularly like to do this) will try to sell themselves as focusing on the long term relationship (with the implicit commitment that they’ll give you a fair deal because they want to do business in the future and get referrals from you).  My experience has been that they realize they aren’t guaranteed future business or referrals and will (rationally) push to get the best deal for themselves in each transaction.  I don’t blame them for this, but it irks me when they pretend that they’re advisers (instead of salespeople) and are investing in the relationship (when they’re maximizing their short term benefit).

As Thicken My Wallet suggests in his posts, there are times when a negotiation is a one-off deal.  Other times you’re going to keep interacting with the person in the future.  When you’re going to have future interactions, it doesn’t mean you have to give them everything they want.  Instead, factor that value of these future interactions into the negotiations, and make sure that you aren’t pushing for a good short term benefit (that will cost you over the long term).

Have you had any experiences where people pushed hard for the best immediate deal and it hurt them long term?

Some time ago a reader, Ben, asked for feedback on a strategy he is considering which he describes as a variant on the Smith Maneuver.  My hat is off to Fraser Smith as he has successfully attached his name to something that is a fairly general strategy based on not much more than the Canadian tax code.

If you thinking about buying tax preparation software then consider software programs such as TurboTax or TurboTax Canada (formerly QuickTax).

The Smith Maneuver

The Smith Maneuver has been very well described at Million Dollar Journey and The Canadian Capitalist.

The core of the idea is to convert your mortgage debt, which is NOT tax deductible in Canada, into an investment debt (which is) and by doing so “make your mortgage tax deductible”.  The Smith Maneuver itself actually builds beyond this idea and uses a readvanceable mortgage (many people want to avoid this part and just use a HELOC, which Fraser Smith discourages) and often invests in segregated funds.

Basically each month you’ll pay down your mortgage, and use the extra equity portion of the payment (principle repayment) to invest.  When you re-borrow this for investment purposes, it becomes tax deductible.  Your mortgage stays about the same, but as time goes on it keeps getting converted into a deductible loan instead of a non-deductible mortgage.  You can use the proceeds from the investment, or tax refunds to further pay down your mortgage and accelerate the process.

Canadian Tax Code

The key behind all of this is line 221 from your tax return.  Many people have an aversion to reading tax laws (or even tax instructions) assuming that it’s as obscure as ancient greek.  Much like Shakespeare, it LOOKS harder to understand than it actually is.  Read over the linked to page once without even trying to really understand what you’re reading.  Then go back, read it slowly, and be willing to re-read any sentences that don’t make sense.  Have faith in your understanding of terms that are familiar, and look up words and phrases that aren’t.  It gets easier the more you read.  If you really get stuck on a part of it, post what you don’t understand to the forums at Red Flag Deals (I horribly omitted them from my recent post of Canadian discussion forums), Canadian Money Forums or Canadian Business Online and someone should be able to help you understand.  Heck, you can even call the Canada Revenue Agency (CRA, our IRS).

The key parts we’re looking to take advantage of are, is the deductibility of:

• “Most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid.”

and

• “Fees to manage or take care of your investments“.

What this let’s us do is borrow to make an investment where we expect to earn more than we pay in interest.  This makes sense, as losing money on an investment to try to save taxes is pretty dopey in the first place.  One thing I looked into is that if you borrow money to pay the interest on a tax deductible loan, the new money borrowed IS deductible (so you can let the loan compound).

A Non-Smith Maneuver

Say I had a mortgage on my principle residence, and bought an investment property that was breaking even (lets say it cost me $1300 / month and I collected $1300 / month in rent). Let’s say I have a $100,000 4% interest-only mortgage and I’m paying $334 / month on it (the interest) and I can afford to pay this every month.

First I get a HELOC on my principle residence (I could get it on the investment property, but if the expense equals the income it probably doesn’t have the equity, plus it’s easier to get a HELOC on a principle residence). Say the HELOC is 6%.

Each month I pay my principle residence mortgage payment from my income and that’s taken care of. Then I also put down an extra payment of $1300 (from the rental income) of the mortgage on my principle residence. Doing so creates $1300 of extra room in the HELOC. I pay for the $1300 in rental expenses from the HELOC, and the interest on this $1300 debt is now tax deductible, since I borrowed it to pay for investment expenses (along with any amount on the HELOC which was used to make the down payment on the property and to pay for transactions fees, such as a lawyer, RELATED TO THE PURCHASE OF THAT PROPERTY).

I still have to pay tax on the $1300 in rent (it’s income). I’m also converting a 4% loan into a 6% loan. Even if it’s tax deductible, that doesn’t seem like the smartest idea in the world. Additionally, if my mortgage is fixed rate, I’m trading the certainty of my payments for the variable rate of a HELOC.  It *MAY* be possible to roll the HELOC into a lower interest second mortgage, or somehow have a segregated mortgage (that splits the deductible portion from the non-deductible portion), but I don’t know anything about either of these.

Ultimately, once my mortgage on my principle residence is paid off (after 76 months, or 6.5 years if we ignore the increasing interest on the HELOC and the decreasing interest on the principle residence mortgage) I can, of course, get a new, tax deductible mortgage to replace the HELOC. This process would be accelerated if there was more than one investment property (or if the income / expenses of the rental property was higher).

Other Alternatives

This is an example with investment real estate, but you could do the same thing with investing in blue chip dividend paying stocks, starting a business, buying  a franchise, or many other investments.  A while back I suggested Mike consider doing this with the blog (which wouldn’t be a FAST way to make his mortgage tax deductible, but would nibble away at it as time went on).  Basically any investment that earns income and has expenses can be structured this way to “convert” your mortgage into a deductible loan (by paying down the mortgage with the income, and borrowing to pay the investment expenses).

There is a great discussion on borrowing to invest on the Red Flag Deals site.