It’s been nearly 2 years since I wrote my last actuarial exam. Faced with the prospect of a PhD program, I turned in my actuarial hat for an academic one. I was relieved, but my wife decided fireworks were more appropriate for the occasion.
Through a fortuitous turn of events, I landed a job and resumed the humdrum schedule of exam studying. My wife is understandably disappointed.
A large portion of my time in limbo was spent on asset valuation models. I bring this up because some of that theory transfers to career planning. Bear with me.
Asset valuation models largely fall into 1 of 2 categories. Either an intrinsic value is determined based on the asset’s behavior, or liquid market mechanics are used to select a fair value. The former, or intrinsic valuation, involves figuring out how much money the asset will generate in perpetuity. For example, renting out a home can bring in $500 of rent; if this $500 is collected every month forever, we can calculate the value of renting out a home.
The latter, or fair valuation, requires a fairly liquid market where similar, if not identical assets are traded at observable prices. If an investor buys a home for $5m and expects to rent it out for $500 each month, we might conclude that the value of renting out a home is $5m.
A similar concept is extrinsic value. Extrinsic value is defined as the difference between the fair value and the intrinsic value. If we calculate an asset’s intrinsic value as $100, but its fair value is $150, the asset has an extrinsic value of $50.
But how does all this relate to career planning?
To employers, we are assets too. And that means we have intrinsic and fair values. More often than not, employers decide not to hire candidates when they have large positive extrinsic values. Let me state that again in bold: large positive extrinsic values are detrimental to your career.
Put another way, employers tend to shy away from people who cost more than what they are worth. You might say, “okay Jon I already knew that, way to be pedantic”.
The problem with looking at this issue from a cost versus benefit approach, is that it implies we can only control how much we’re worth, not how much we cost. This is far from the truth.
We all have intrinsic and fair values. Our intrinsic values can be quantified as the increase in revenue that we contribute to the company as a result of employment, while our fair values can be calculated as what someone of similar seniority in a similar position is earning.
My intrinsic value is affected by what I’ve learned in life (school or otherwise), my software competencies, the soft skills I demonstrate on the job, any relevant experience I’ve gained so far, and anything else that will help my employer make more money.
On the other hand, my fair value depends on what industry I’m in, the nature of my position, and the type of company I’m in. As an example, working in a consulting firm increases my fair value compared to working in an insurance company.
Let’s revisit extrinsic value. Remember how large positive extrinsic values are detrimental to your career? Here’s what this means for you.
To prevent extrinsic values from building up, you must either increase your intrinsic value faster than your fair value, or decrease your fair value to pace your intrinsic value.
Let’s see that in an example. Emily, who spent her life in college as a closeted nerd, is proud that she graduated valedictorian. With perfect grades and an impressive display of business acumen, she is picked up by a large management consulting firm. At this point in her career, Emily has a small positive extrinsic value: she’s worth $100m to the firm, but the firm pays her $90m. Emily is happy.
5 years later, Emily is very likely to have built up a fair amount of intrinsic value from learning on the job and developing her soft skills. Perhaps her intrinsic value is now $200m. Good luck trying to convince someone to pay you $200m in this economy Emily.
So Emily has to lower her fair value, usually by stating up front that she can live with a lower salary. She contends that she can do without a weekly visit to Barbados.
Conversely, someone else who has been on the job for 20 years might have a fair value of $200m. Unfortunately, this person, let’s call him Bob, decided that he was done with learning the day he graduated. Bob doesn’t have a fantastic intrinsic value, he might actually be worth only $100m to the company.
I hope Bob gets to keep his job.
With this new found knowledge in mind, here’s what you can do:
- Increase your intrinsic value
- Learn more, ask more, be curious about everything
- Pick up new skills, whether hard or soft
- Find new ways to refine the way you impact your company’s income statement
- Pace your fair value
- Choose an industry and company that you feel comfortable growing your intrinsic value in
- When your existing environment can no longer support the growth of your intrinsic value, find a new one
- If you find your fair value lagging too far behind your intrinsic value, learn how to negotiate
I might explore some of these points in future posts, but I will conclude here. My wife wants me to keep a “time with wife” to “time with books” ratio of 2:1.