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5 ways a big paycheck can backfire

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  • Author: Most people happier with five-figure salary than six-figures
  • Fat paycheck may make you most vulnerable for layoffs
  • Expert: Less money can give you more flexibility in job
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Rachel Zupek writer
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Amanda was unhappy with the amount of money she was making at her job, so she went after a position with a competitor and negotiated a higher salary.

5 ways a big paycheck can backfire

When she told her current employer about the higher salary offer, it countered with a considerable increase in her current salary to keep her on board.

Hoping this is what would happen all along, Amanda accepted the new salary and stayed with her employer.

One year later, the company made a round of layoffs because of changing market conditions and Amanda was one of the first to go. Not because she was a bad employee -- because she was overpaid compared to her contributions.

In today's society, workers associate earning a high salary as one of the most important aspects of their jobs. They assume making a lot of money equals happiness, satisfaction, less stress and job security. Unfortunately, this is not always the case; Amanda's story is just one of many examples of how having a higher paycheck can backfire

"Our sense of value and self-worth is often tied to how much money we make," says Michael Zwell, human capital expert and author of "Six-Figure Salary Negotiation." "There is an illusion that we live with and believe that a bigger paycheck makes us happier and more valuable."

In fact, research shows otherwise. Studies have shown most people feel happier in a five-figure job where they are earning more than the majority of other people in the company than they do in a six-figure job where they are making significantly less than others, says Stan Smith, founder and CEO of Smith Economics Group Ltd., in Zwell's book. Ultimately, he says, people can't rely on short-lived salaries, promotions and raises to keep them happy but rather the contributions they make in the long run.

Smaller paychecks reap large rewards

In some situations, having a smaller paycheck than you'd like can actually be a bonus. If you are in a job where there's a steep learning curve, for example, getting a smaller paycheck will buy you time to develop the skills and experience to earn more in long run, Zwell says.

Additionally, less money can buy you more flexibility on the job, Zwell says.

"Compensation is based on an exchange of value for value. Depending on your life circumstances, you may want to contribute less and put in more time on another key area of your life," he says.

If you've always thought a bigger salary was your dream, take a look at how making more money can actually work against you. You might start to appreciate what you currently earn.

Potential backfire No. 1: You're one of the first ones to be laid off

When the economy is weak and companies need to cut back on costs, one of the first places they look is the highest-salaried employees, as exemplified in Amanda's story. This is not to say that just because you earn more than others you're a target for layoffs. Nevertheless, if you're earning more than you should be for your market or contributions, chances are that your job could be under scrutiny.

Potential backfire No. 2: The more money you make, the more money you lose

Let's say you earn $85,000 annually and you received a raise that brought you up to $90,000. Sounds exciting at first -- until you the do the math and realize your new check is only a couple hundred dollars more than your old one.

One of the negatives to earning a high salary is that your marginal tax rate is higher than other people's. While you might be earning more than your co-worker, he or she might be taking home a similar -- or higher -- amount per check because they aren't taxed as much.

Potential backfire No. 3: You might be priced out of the market

Zwell uses the example of, Joseph, an accountant for one of today's biggest accounting firms. After three years, he got a huge promotion and was making $10,000 more than any of his peers. He was in a dead-end job however, doing accounting work that became routine.

When he looked for another job, he found that all the jobs he was qualified for paid much less than he was making. He didn't want to take a pay cut and even if he was willing to, companies would rather hire someone for whom the move was an increase in pay, not a decrease. In other words, nobody would hire him because he was currently making too much money for his experience -- thus, his high salary backfired.

Potential backfire No. 4: You could inadvertently trap yourself under a glass ceiling

Knowing where you are in a salary range reveals a lot about your career path, Zwell says. A young man is recently hired by a bank, for example, at the highest salary grade for a non-manager. He is already at the top of a salary range for his title, therefore less likely to earn any more money without changing positions or companies.

Potential backfire No. 5: Earning more money does not mean more happiness.

Sure, you might earn $200,000 annually -- but what does it matter if you're not doing something you enjoy? Many workers find themselves saying, "If only I earned $XX, then I would be happy." Then the day comes when you are earning that amount and -- surprise, surprise -- it's still not enough. Ultimately, the only time you'll really be happy is when you don't care about salary at all.

"The ultimate freedom is the executive who says, 'Pay me $1 a year because my salary doesn't matter. I have all the money I need. I'm here because I want to make a contribution,'" Smith says in Zwell's book. "Based on the intangibles, he's making more than everyone else."

Copyright 2009. All rights reserved. The information contained in this article may not be published, broadcast or otherwise distributed without the prior written authority

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