Geographic Differentials: It's About Competitive Pay, Not Cost of Living

Most organizations today have employees working at more than one location, raising the question of whether to pay differently in different places.  Invariably, and particularly when the conversation is driven by employees, the response focuses on differences in living expenses.

Wrong.

Your standard for decisions about implementing pay differences should be the degree to which there are verifiable differences in competitive salary levels, not differences in cost of living.  And that is because your compensation philosophy - presumably - states that you intend to pay people competitively, not reimburse them for their living expenses.

Just semantics?  Not at all.  There can be substantial differences between the cost of labor (average employee compensation level) and the cost of living (average cost of the bucket of goods utilized by a typical consumer, including things like housing, groceries, etc.) in a particular location.  Check out the following examples (using ERI's October 2010 Geographic Assessor, my tool of choice) and you'll see what I mean.  (Note that the statistics below apply to salaries at the $35,000 level.)

For San Francisco, California, salaries (cost of labor) are 124% of the U.S. average, while cost of living is 180% of the U.S. average.

For Manhattan, New York, salaries (cost of labor) are 119% of the U.S. average, while cost of living is 218% of the U.S. average.

So as you see, we can be talking about very different "differentials" depending on what we use as our point of reference.  Choose wisely ... and be crystal clear.

Image: Creative Commons Photo "Built Rite United States Map Puzzle" by Marxchivist

Comments

[Harvey]

That's hardly a representative sample of salaries. $35,000???? You can do better than that, I'm sure.

[Ann Bares]

Harvey:

Not quite sure if I understand your objection here, but let me clarify my choice and use of the $35,000 salary.

Geographic salary differences tend to vary by income level (and so, frankly, can cost of living estimates, but I'm not going to go there...); for example, the "differential" can be different at a $100,000 level than it is at $55,000 and than it is at $35,000. So if you want to look at and report specific statistics, you have to choose an income level at which to examine them.

I picked $35,000 only for the reason that it has been my experience that the question of geographic pay differences tends to come up mosst often for nonexempt, support staff level positions. This seemed like a reasonable salary level to select, with that fact in mind.

I could have chosen $40,000 or $50,000, and the statistics would have been a little different, but I'm not sure it really matters to the point I am trying to make here. Unless I'm missing something ... in which case, please fill me in.

[E James (Jim) Brennan]

To confirm Ann's point, the relative differentials at $100,000 show SF pay as 127% of national while renters' COL is close to 160%; Manhattan's pay at the $100K level is 125% and costs are 197% for those earning $100 grand who rent there. Differentials vary by income level (State minimum wage overrides alone have drastic effects on the percentages at the bottom) and family expense budgets vary at different income levels. The relative relationships between and among locations also change over time.

A major additional point everyone should remember is that very few people today live within walking distance of work, so where they EARN their pay is rarely where they SPEND most of their whole family's money. There was an article on this topic at the Compensation Cafe June 7, 2010: http://www.compensationcafe.com/2010/06/of-course-they-want-cost-of-living-pay-but-do-you-1.html, and I'll have more to say about it again soon.

[Fred]

"Wages ought not to be insufficient to support a frugal and well-behaved wage-earner."

Pope Leo XIII in "Rerum Novarum (Rights and Duties of Capital and Labor)"

[Mel]

Ann. Thanks for showing us how the cost of living impacts the cost of labor. Mel.