Higher pay or pay plus profit share?

Kartik Jhaveri

Suppose I were to offer you a job and I say that, “You have a choice on compensation. Either you take Rs 25,000 fixed salary or you take Rs 15,000 fixed and you can have a 10 per cent share in profits.” Now think for three minutes. Which one will you really take?

If you can’t decide here is some more information. I say that you can make probably four times as much with the second option i.e. you can potentially make Rs 60,000 and to reach this level you will take two-three months. Now, which one will you choose?

Just make your choice for now with the information provided. It will help you to appreciate the following contents of this article.

Whatever you have chosen is based on your understanding of the facts above and understanding is developed over time with experience of your life events.

If you chose the first option, you are of the conservative type – ‘A bird in hand is better than two in a bush’. If you chose the second option, you are of the enterprising type – "You feel that the maximum loss or risk is Rs 10,000 from fixed salary, but the potential gain is Rs 35,000 over the fixed salary, so let me see if I can pull this one."

The process working in an enterprising mind is also that of substitution of current or immediate benefit for a potentially larger reward. Most people, i.e. almost 95 per cent tend to choose the first option as there is comfort of something guaranteed. If I further told you that there is a 80 per cent chance of success in the second option then the percentage of people choosing second option would go up from 5 per cent to 15 per cent but 85 per cent people will still stick to option one.

Why?

We are not risk averse if that is what you are thinking. The fact is that it is easy to see and feel short term benefits while it is almost impossible to imagine long term benefits – given that we define long term as something beyond five, 10 or 20 years. This is precisely why people prefer to invest based on a stock tip which says ‘earn 20 per cent in one month’ v/s someone who would prefer invest for a 10 year period thereby obtaining a return of 15 per cent each year.

One can calculate quite easily what a 20 per cent gain might be but it is quite difficult to estimate a 15 per cent return each year for 10 years. One might make 20 per cent in one month and lose it or make the same in the next month – either ways there is no guarantee. If there was more knowledge, you would realise that there is a very high certainty of earning 15 per cent per annum and you would quite comfortably choose the second option.

People are not necessarily greedy but preference is towards the simpler/most obvious option in the absence of knowledge. The key to choosing the second option is knowledge. If the knowledge is fair and unbiased you will be able to choose the second option. The knowledge that you need is to know the difference between being rich and being wealthy. Having Rs 15,000 in your wallet or Rs 50,000 surplus in your bank account to spend, go shopping, buy expensive gadgets, go to clubs and bars and basically party makes you rich; and places you in temporary limelight as long as you have the money. Now imagine the pleasure of owning a private jet or let’s say a Mercedes or a BMW to make the fact more digestible. Being able to earn what you want when you want is being wealthy; knowing that you will be able to afford what you want at a point of time in future is being wealthy and surely being able to own super luxury items make you wealthy.

That’s the crux – you earn to spend – that’s ok. But splurge when you have so much that you know you have ample. In other words, it’s a substitution of irrelevant immediate pleasure for everlasting relevant pleasure. That I know will take time but can surely happen; just a matter of making the right choice with proper knowledge.

The author, Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at [email protected].