How to negotiate a raise

Asking for a raise can be a nerve-wracking experience. Since my professional career began in 2003, I have been successful in applying Moore’s law to my income. For the non-technies, that means that I my income has doubled roughly every 18 months for the past 10 years. A large majority of this time was spent working for someone else, so it follows that I’m pretty good at getting raises. As an employee of a number of firms that you can read about on my LinkedIn profile, I was regularly successful in negotiating raises of 50% or more.
As someone who has been both an employer and employee, I have negotiated both sides of the compensation coin. After explaining some of the techniques that I’ve used to negotiate raises, I’ll give you a sneak peek into the decision making process that I go through when determining whether to grant my employees’ requests for raises.

First you have to understand that asking for a raise comes with an implicit threat that “I will quit if you don’t give me what I want.” No seasoned employer is naive to this and they will do everything in their power to have their cake and eat it too by convincing you to take a sub-satisfactory raise and be happy about it. Further, as a self-respecting employee, you have an obligation to yourself to quit if you do not get what you want. Think that sounds like an impossible situation for both parties? It gets worse. A failed compensation discussion is the death of your career at that firm. If you don’t price yourself high enough, an employer won’t respect the work you do. You’ll find yourself succumbing to increasingly unreasonable demands from an employer after they know they’ve won. I don’t say this to dissuade you from asking for the raise in the first place, but rather to be very careful about the circumstances surrounding when you ask for the raise. Timing is everything.

That saying that “It’s easier to find a job when you already have one,” is the cornerstone of my raise strategy. Every employee places a valuation on themselves. Line employees, especially talented ones who have a track record of producing tend to feel undervalued while middle managers with underlings doing most of their work tend to feel overvalued and insecure in their positions. In either case, most employees valuations of themselves are completely irrelevant since they are only ever worth exactly what another employer is willing to pay them. I think you can see where I’m going here; STEP 1 IS TO GET ANOTHER JOB OFFER! Other guides will tell you to “research what others in your field make,” which will only give you a ballpark of what you might be making if you were someone else and working for another company. You can never be someone else, but you could be working for another company. When you get another offer, you’ve just secured your raise without having to make a single uncomfortable pitch to your boss. If your new job offer comes in at 15% more than what you’re currently making, then you can know with 100% confidence what number your current employer has to beat. What’s more, dusting off your interviewing skills will help to prepare you for the actual raise negotiation.

Step 2 is to build your case. People in Sales, Marketing, or any department that can be considered a profit-center will have an easier time doing this than those who are cost-centers. A profit center is anyone in a role that helps to bring new money into the firm. They’re judged by an employer purely in terms of return on investment. If you’re a profit center, your returns should be the main focus of your pitch. This gets trickier for employees who develop product, provide support, or even worse, and are on the operations side of things. I’ve molded my career by staying as close to the money, but it’s not impossible to ask for a raise as a cost center if the circumstances are right. People who work in financial risk management and compliance in this post Dodd-Frank world are in demand, for example. When recruiters start calling you, it’s time to build a case that you need to be “brought to a level consistent with the rest of the market.”

NEVER threaten to go find another job. That threat is already is implicit in the compensation discussion to start out with, but bringing it out into the open can make an employer turn openly hostile in a hurry. You also need to be careful to never compare yourself to what coworkers are making. Everyone likes to think that they run a meritocracy, so bringing that up might quickly expose you to the risk of being told that “you’d be paid like your coworkers if you performed like them.” Lastly, don’t pad your requests. Asking for a $15,000 raise hoping to get $10,000 will often make the employer balk at your request. I’ve said things in the past like “I’m not asking for $10k hoping to get $8K, I’m asking for $10k because $10k is what I need to be happy here.”
Now that we’ve covered what to do as an Employee, I’m going to give you a sneak peek of some of the things that go on in my head as an employer. First I would like to explain how things go in my company. I like to take a proactive approach and have compensation discussions with my employees at the end of every calendar year. I do this because losing a key employee (or even having him job hunting) because he doesn’t have the stones to approach me with a raise proposal is often more disruptive than having to pony up once a year. So with that said, I do my best to answer a few key questions whenever a compensation discussion with an employee takes place. Namely:
How much do I like this employee? For employees who are a lot to manage, upset corporate culture, or are otherwise difficult to deal with, I view this raise conversation as an opportunity to drive out someone that might have been problematic to begin with. This might be the opportunity to let them talk themselves into quitting and saving me the expense of firing them.
What is my total cost to replace this employee? I break this down by answering 3 more questions:
How long will it take me to find a replacement for them? Downtime is expensive.
After I find a replacement, how long will it take me to get the new hire up to the previous employee’s level of proficiency? Paying someone to learn is expensive.
How much will the replacement employee cost me? If the current employee is performing well and asking me to adjust their salary to something that is commensurate with the market, I will give them the raise they asked for and thank my lucky stars that I got away with paying them so little for as long as I did. I’ll usually hesitate heavily, and say something to the effect of “Well, that’s a lot more than what I really had in mind but you’ve been kicking ass lately and I want to see more of that.” This makes them feel like they won a huge victory and I’ll get at least 3-5 months of even higher performance out of them.
How big of a raise is this person asking for? I’m going to use whatever this number comes out to, compare it to my “cost-to-replace,” and then use every negotiation tactic in my playbook to talk their request down. And guess what, I’m better at it than 95% of unprepared employees unless they bring real leverage to the table.
I have a few tactics in my playbook that leave the employee coming out feeling like a winner but often agreeing to marginal raises. I’m good at mental math, so with line employees and non-engineers I’ll break down compensation package using unfair comparisons. People aren’t very good at understanding the effect of an annual compensation change on their lives but it’s very easy on a monthly basis. Rather than offering someone a $3,000 raise, I’ll offer them a raise of $250/month, for example.
Another favorite of mine is back loading compensation into bonuses. I’ll use arguments like “We want team players in this company, not just people looking to make a buck. If the team does well, you’ll do well, so how about I give you the exact dollar amount of raise that you’re looking for, but 80% of that raise is going into your bonus potential.” It’s great for me from a cashflow standpoint and I only really have to pay out if my firm does well. Win/Win. If the firm is doing well, any smart employer will spread the wealth around because inconsistent rewards will make an employee work WAY harder during bad times.

Post-Trade Analysis of Yesterday’s AP Hack!

And How Gatekeeper Fared…
One concern that I’ve noticed amongst options traders is their reluctance to auto-quote. Auto-quoting is the usage of an options model to send buy and sell orders in terms of volatility rather than outright market prices. Doing this is useful for traders who want to buy and sell at specified volatility points across an entire option chain, and they often times delta hedge directly into the underlying whenever their auto-quoting orders are filled.

The fear from auto-quoting comes from slow or latent systems getting hit on multiple strikes whenever a “book sweep,” or rapid repricing of the underlying, occurs. Auto-quoting computer systems need to do up to four Black-Scholes (or insert your favorite model) calculations for every single strike that they’re auto-quoting in, and then get change orders back out on the wire to the matching engine. If you’re quoting in 10 different underlyings, each with 40 live strikes under fast market conditions, you could be having to do up to 1600 partial differential equations per repricing. This in combination with messaging overhead, automated order logic, and user-interfaces can bring even the most powerful trading computers to their knees in fast market conditions! In other words, auto-quoting systems have historically tended to fail right when they’re needed the most!

Market conditions like yesterday’s False Tweet coming from Associated Press can be incredibly expensive in the first place, and a failure or freeze of an auto-quoting system could be catastrophic. The following is a recount of my experiences using SD Gatekeeper during the crash.

First a bit of background: I’ve been at a client site for the past week testing the next generation of tools we’re building. I sit in a small office right next to the traders that are using it and I spend most of my time babysitting algorithms and communicating with the developers about any bugs or performance issues with the software. In the meantime, the traders are using Gatekeeper to make 2 sided markets. Due to the proprietary nature of my customers’ trade and my duty to protect their trade secrets, I will not be disclosing what markets they were participating in however I can share the following pieces of data:

  • At the time of the crash, they were making 2 sided markets in 6 different markets, 5 of which were severely impacted by the crash.
  • All of the auto-quoting was taking place on a client machine several milliseconds away from the CME.

Around 10:00 AM PST, we observed a massive sell off in the E-Mini S&P. Though the exact events that took place from there are both a bit hazy to me due to the activity and strictly confidential, the important piece of information is that several minutes had passed between when the crash began to take place and when we finally pulled our orders. This sounds like all of the makings of disaster, but not so.

Blue Horseshoe Loves Gatekeeper

During the entire period of heightened market activity, Gatekeeper was successful in moving its orders out of the way and NOT ONE SINGLE ORDER was filled at a bad price. While there was a brief lockup of the User Interface, the auto-quoting functionality performed flawlessly even during the lockup.

For the tech geeks who want to understand how this is possible, I’m going to go into my analysis of the log files and subsequent stress testing and code profiling that my developers did. Casual readers my want to stop at this point, and I don’t blame you.

For the tech people:

Gatekeeper is an adapter-centric front end that uses a handful of assemblies. Namely, Gatekeeper, GKAPI, Strategies, and its adapters. All of the adapters inherit from our adapter base class to make it easy for us (and third-party developers) to add exchange connectivity and additional execution venues. All prices, orders, and business logic are then normalized into our concept of instruments, orders, prices and such in the GKAPI. Gatekeeper is simply a dumb UI implementation of the GKAPI. The strategies; Formula (autoquoting), Bookstackers, and Spread Bandit are all separate assemblies that use the GKAPI.

From a threading standpoint, we have a thread for each adapter, one for strategies, one for logging, and one for the UI. There other background workers doing various other tasks but for the purpose of this article, these are the relevant ones. The only one that became overwhelmed was the UI, and as we later found out, some of that wasn’t our fault.

In the form used yesterday, there were three supported adapters active; XTAPI, CTS, and Risk Server, however only the CTS Adapter was in use for auto-quoting purposes at the time of the crash.

For load-balancing purposes, CTS places limits on how often you can add or change orders to 50 orders per second but places no limitations on how many orders you can cancel. To prevent us from having our orders rejected, our adapter keeps track of how many changes and adds we’ve sent in a given second and cancels any order that “wants to change” after we’ve begun to approach our limit. We then add new orders at the requested change prices at a metered rate, as the adapter allows so that the user basically sees a changed order when in reality they were canceling, waiting, and replacing.

Under market conditions like yesterday, this essentially means that we were only slightly participating in the market (no more than 50 of our thousands of orders were active in the market at any given time).

Had we been using a DMA solution with co-location, we would have been fast enough to keep up anyways because our formula engine, FAST decoders and FIX engine have all been designed to accommodate for rapid repricing and mass-quoting. We take advantage of things like kernel bypass, scheduler optimizations, and iLink session spinning to bypass the limitations of 3rd party API’s.


Associated Press Hacked. Markets react to false tweet!

The S&P plunged within minutes early this afternoon, after somebody hacked an AP Twitter account and posted a bogus tweet saying the White House had been attacked and President Obama was injured. Bonds rallied a full handle and then bounced back just as quickly as it became obvious that the “news” was false and quickly recovered.

Update 4/23/2013 :12:50 CST:  Syrian Electronic Army have already claimed responsibility!

View an animated replay of the crash here:

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