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Compensation  >>   Factoring Cost of Living into Geographic Differentials Search Discussion Posts
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Factoring Cost of Living into Geographic Differentials  
Posted: 03/26/2009 07:09am   170 Views

I am interested to learn how/if other companies factor in cost of living when determining geographic differentials.


Using the ERI Geographic Assessor, we have been determining our geographic differentials by taking an average of the cost of labor and cost of living for each of our locations as compared to the United States National Average. We then place the location on one of our three structures based upon the resulting average.


This has been the practice for several years, and we are now looking into whether averaging in the cost of living is necessary. Any advice or feedback is appreciated.


Factoring Cost of Living into Geographic Differentials  
Posted: 03/26/2009 07:28am  

Just on general principle, I would focus on cost-of-labor, not cost-of-living.  It is an accepted principle in business to build compensation on variations in different labor markets, but using cost-of-living data is a bit dicey. 

Fortunately for you, there has been a great deal of dialogue on this topic both on these bulletin boards and on the WorldatWork blogs.  Try typing COLA or some other key words in the Search box in the upper right hand corner, or on the Search box at the top of a W@W web page.  You'll get a ton of dialogue on the issue.

Here's a link to a recent article in workspan "Why CPI-Based Pay Policies Are Not the Answer."   The article will give you a historical perspective on the issue and some thoughts to consider.  http://www.worldatwork.org/waw/adimLink?id=29395 


Factoring Cost of Living into Geographic Differentials  
Posted: 03/27/2009 04:20pm   Revised: 09/13/2011 02:46pm  

Have to admit to being prejudiced, being the Senior Associate at ERI who publishes both labor cost data and cost of living data, so you can ignore me it you want.  Your Help menu contains myriad short explanations of the differences between what people earn (salary) and the cost of what what they buy (usually a "family" cost of living). 

There are additional articles and white papers on the subject, including one originally called Cost of Living 101.  To summarize, people usually don't work within walking distance of home.  They live one place and work in another.  They live on (and spend) a different sum than their single salary would suggest; and fund it by a combined budget (multi-earner families, credit card and home equity debt, spend savings, inheritances, etc.), and such.  The two concepts are apples and oranges. 

The politicizing of minimum wages has finally produced a tiny amount of positive statistical significance to living costs today at the bottom levels, but only as it affects the entry salaries in the majority of states with overrides to the Federal minimum rate.  Once you get up into the high 5-figure level, the relationship of local living costs to pay disappears.  Salary surveys, however, will always pick up whatever real impact there is from family living costs.  If costs spur people to demand higher pay, then the salary survey will show it.  Using both salary surveys and COL surveys would give the employee a double-snapshot, if there is a relationship.  And if there isn't, then forget it.

BTW, I do know that some consultants have advised clients to do what you described:  to pay both the competitive market premium pay rate AND add something extra for "cost of living", but I consider it a bogus cop-out.  It pleases the employees and it sure makes it easy to hire new people, though, when you pay that much more than anyone else in town.  So I understand why they may consider it smart consulting practice.  If the outfit that follows that bum advice can afford to stay in business while others get the same productivity from lower labor costs, of course.



Factoring Cost of Living into Geographic Differentials  
Posted: 03/27/2009 08:14pm  

P.S.  The only reason our Geographic Assessor includes a calculation of  Renters' Living Costs (the average amount spent in a year by a person making $####) as a point of information along with the more important local pay differentials at the same base-city salary level, is because our subscribers demand it.  I hate running the risk that someone will mistake the COL figure as related to the salary figure, because it isn't.  The two are completely independent of each other and are calculated from quite distinctly different databases and play different roles for different reasons.

Living costs for renters are shown primarily because of transfers and hires from other locations who (a) may properly require/demand a lump sum bridge payment to ease their entry to a more expensive community, (b) when they learn what the pay premium will be for this competitive labor market, need to know that management is also aware what it costs to live there and (c) to be prepared to manage expectations.  Per the last item, i.e., if someone hired from Long Island who worked in Manhattan is transferred to Big Springs TX, they may be horrified at the low pay levels among their new office peers but they will be even more stunned at how far their dollars go there.  That can be an important persuasive factor.

For those who really want to measure precise living costs, I recommend the Relocation Assessor.  Designed to identify exact family expenses at various budget levels between cities, it requires input for all the variables that affect family lifestyle costs and is rifle-shot accurate for either homeowners or renters.  The Geographic Assessor is primarily a labor cost comparison calculator with a separate tiny bit of renters' expense pattern data based on salary alone, for general information.


Factoring Cost of Living into Geographic Differentials  
Posted: 04/01/2009 08:00am  

Compensation consultants such as Mercer and Watson Wyatt publish geographic pay differential reports for their clients. Why don't you ask them how they calculate the differentials---cost-of-living or cost-of-labor? That will help you establish an industry standard or best practice to use to guide your company's approach.

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