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I like this approach very much. Allows for differences without overpaying.. thanks.

Ann,

Would the picture be much different for an $80,000 salary?

Frank

Frank:

It does shift a bit, interestingly. A bit higher for salary costs, a bit lower for relative cost of living:

For Boston, salaries are 116% of U.S. average, cost of living is 143% of U.S. average.

For San Francisco, salaries are 124% of U.S. average, cost of living is 206% of U.S. average.

For Manhattan, salaries are 125% of U.S. average, cost of living is 213% of U.S. average.

I am guessing that the small relative drop in the cost of living percentages is some function of living costs in proportion to a higher salary.

The differences in cola, by salary, don't make sense, but I hesitate to call the Economic Research Institute for an explanation. Its website and communications are full of unintelligible techno-mumble-jumble and I fear having to translate its response. Why can't they use the Bureau of Labor Statistics cola data like the rest of the world? What qualifies it as an institute, or is that just a marketing gimmick?

Pete:

The differences in COLA by salary may not make sense to you, but that doesn't mean that they don't make sense. As I mentioned above, I am guessing that the difference has something to do with costs in proportion to a higher salary level. I am looking into getting a better and more detailed explanation.

I have found ERI to be a helpful resource in areas like geographic differentials - over the many years that I have been in a position to care about and pay attention to local compensation and cost information, their statistics have stood the test of time. I also know a large number of colleagues who do the same. They rely on a range of sources in compiling the data for their products - including BLS information.

Finally, Pete, some thoughts and a gentle suggestion for you. Like many other business bloggers out there, I work hard (on top of my "day job") to research topics and write posts in order to provide a forum for constructive dialogue on topics related to employee compensation and performance. Please join in, if you have questions or a thought to add to the discussion - but I would ask that you do it in a positive and professional manner. Take a close look at the manner in which my other commenters - on this post and others on the blog - share their thoughts, and then contrast that to yours. I think you'll see my point.

You're welcome back, but please know that I may not publish future remarks that are made in the same vein.

Shoulda called me. I'm Senior Associate at ERI Economic Research Institute (a private corporation founded in 1987) and still have a terribly obscure book entitled Geographic Salary and Cost of Living Differential Conversion Calculations stored in the Library of Congress.

Some of us old-timers here wrote the orginal certification tests for (then) ACA and ASPA, and ERI continues to be a default source of expert witness reliance for salary and living-cost facts. Our interactive cross-checked constantly updated datasets meet all the Daubert federal court standards) partly because we are so boringly detailed and precise.

For easier reading, I suggest some of our free Distance Learning Courses on the subject or even the courtesy white paper at
http://www.erieri.com/index.cfm?FuseAction=NewsRoom.Dsp_Release&PressReleaseID=111.

I recommend it to all ever confronted with a "why don't we just pay cost of living?" question. It's essentially an update of a similar article I wrote my compensation column in The Personnel Journal in the early 1980s. Another more technical white paper on new developments is at http://www.erieri.com/PDF/COLvsMerit.pdf.

Long story short: competitive wages are what you earn and cost of living is what you spend. The two are not the same.

E. James (Jim) Brennan

P.S. on COL

To simplify terminally, most people don't work within walking distance of home. Thus, wages and salaries in Manhattan are typically paid to people living in New Jersey, Long Island, Conn., etc., where their high center-city wages go farther towards supporting their desired lifestyle.

Secondly, living costs depend on family lifestyle and total family budget, so you may find two people combining incomes to support a Boston City lifestyle. But the same lifestyle may cost half as much in Texas, where salaries are not that much less than Boston's.

Jim:

Thanks for taking the time to add your thoughts and responses here - I appreciate it!

Let me see if I understand your response to our burning COLA question. I'm going to focus on your comment "living costs depend on lifestyle and total family budget". Are you saying then, considering the ERI data we examining, that the higher relative COLA number for a Bostoner who makes $80,000 versus a Bostoner who makes $30,000 is a reflection of the fact that the high earner also typically makes more costly lifestyle choices (e.g., transportation costs are higher because he/she is driving a better car, etc.)? Are these kinds of nuances reflected in those numbers?

Yes, that is correct. The higher earner tends to spend more on health care, buy better and finer consumables, take pricey vacations, fly rather than ride the hound, etc.

The detail about cost of living is more precise than a SWAG % or a “sorta” approximation you may get from a freebie website or BLS.

People spend differently at different income levels. “Carriage Trade” executives tend to get (fairly) equally gouged everywhere, and earners >$100K tend to show general movement towards the national norm, even while COL differences persist even at the $600K income levels… but lower-income spenders tend to be pretty closely tied to the localized neighborhood price structures for the products/services purchased by whatever family income is being measured. Our Relocation Assessor yields extremely precise COL figures according to each lifestyle category variable to best predicts either renters’ or homeowners’ annual expenses. The Geographic Assessor is fundamentally a cost of LABOR calculator but gives a teeny bit of renters’ living cost info showing average budget expenses for all renters earning X dollars. That’s because even tho you don’t pay for lifestyle costs (beyond the level reflected in local area pay surveys of job salary expectations) you DO need to look a transferee in the eye and say, “here’s our pay differential for SF and yes, I do indeed know what it costs to live there.”

Donald Trump spends differently than me, and I spend differently from you, and home ownership makes all comparisons extremely more complex because then you must control for every variable affecting home cost (see the Reloc Assessor for details, including ability to control number of dependents, number and value of autos and miles driven, term of loan, loan rate, insurance costs, maintenance costs, property taxes, etc.).

We’re data hounds at ERI, and republish all datasets every quarter to reflect the latest updated facts. Boring to most, but fun to people who are fact-oriented.

Thanks, Jim - once again - for the time and effort to fill us in. I've learned a lot from this exchange. Hope others have, too!

Ann,

Thanks to you and Jim for adding valuable information on this matter. Like you, I have heard nothing but good things about ERI's services and people. It seems to have a widely used and respected product on geographical pay differences.

Frank

Adding a comment and question from Dave-

Ann,

I would love to hear your strategy to relocating an employee to a higher cost area yet still performing the same role. How does this change your compensation approach? Pay may be similar in both areas but their lifestyle may be crimped if forced to move.

Dave:

I would advise you to separate the questions of 1) what is an appropriate compensation policy for someone in a particular area AND 2) how best to entice an employee to relocate to a similar job in an area where costs are higher and pay may or may not be.

I would isolate #1 and develop a compensation structure appropriate for the location - assuming this employe may not be the only one ever to work from there - in order to keep the integrity of your structure intact.

In dealing with #2, then, you may need to look at what types of overall incentives/relocation support are appropriate and necessary to get an employee to consider the opportunity. I can't point to any specific research, but I know that several of my clients have used a relo incentive/bonus approach (I'm going to roughly ballpark this as being 10% to 15% of base, normatively), which provides a cash award tied to the relocation. Typically this award is not all earned at the time of the relocation, but is subject to either time restrictions (e.g., half paid at the time of the move, half paid after 6 months or more on the job in the new location) or performance restrictions (achieving initial performance milestones in new role/location) - or both.

Also, in terms of getting a more general handle on relocation assistance and enticements, a number of my clients have found the Employee Relocation Council (www.erc.org) to be a helpful resource. Their services include several survey publications on relcation practices.

Good luck!

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About The Author

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    Compensation consultant Ann Bares is the Managing Partner of Altura Consulting Group. Ann has more than 20 years of experience consulting with organizations in the areas of compensation and performance management.

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