Human Resources is not always considered a “numbers” department, but truly Human Resources deals in numbers all the time. Benefits costs, turnover, retention rates, and of course compensation planning all require calculations and math. That is why it is so important for Human Resources to be able to clearly explain the logic behind the numbers. Cost of living is one of those numbers. Human Resources Departments may field the following types of questions, and this article should provide the details needed to answer the questions accurately and clearly.
Some questions you will hear related to this topic are:
- “I saw on the news that cost-of-living went up 5% and our increases were only 2.5% – Why is that fair?
- “We need to add a remote customer service rep in Chicago – how does cost-of-living affect what we pay?
- “What is a cost-of-living adjustment? Should we start doing those as a company?”
Here are some key concepts to understand to address these types of questions:
- Cost of Living is what individuals pay to maintain their lifestyle. This includes rent, utilities, transportation, and groceries. This is a link to the data series on the Social Security Administration’s website. The consumer price index is another measure.
The Social Security Administration calculates a COLA (Cost of Living Adjustment) which may be as low as 0%. This number is used to ensure that benefit recipients are maintaining a consistent standard of living so they can pay for rent, etc.
- Cost of Labor is what an employer pays an incumbent for performing a job. This includes salaries and benefits.
- Cost of Living and Cost of Labor do not move at the same rates. As mentioned, cost of living may not increase at all in a given year; however, the cost of labor may still increase. In the majority of recent years, the cost of labor has been higher than or equivalent to the cost of living. However, that is not the case every year.
As an example: In the same year, the Economic Research Institute indicated the cost of living in Chicago was 150% the cost of living in Charlotte, while Bureau of Labor Statistics data, indicated a Customer Service Representative in Chicago’s pay/cost of labor is only 105% the cost of labor in Charlotte. If you were to adjust a wage based on the cost of living instead of the cost of labor, you would be paying more than other employers in the Chicago market.
How do these concepts apply to your company’s pay philosophy?
Most organizations (not all) calculate annual increases based on performance, not cost of living, and they often align their budget with projected increase numbers from other employers in their industry/geography. This generally ensures that their staff is paid reasonably and in alignment with market data.
Many organizations also reassess pay to market annually (using salary surveys) and make market-based adjustments accordingly. This ensures that if certain positions’ wages have increased significantly due to demand, the company can ensure that their staff are compensated at a comparable level, to ensure hiring and retention are not negatively impacted.
Some organizations (a fairly small number) do consider the cost of living as a part of their pay philosophy. For example, while they may provide significant merit increases for their few top performers, they may also want other employees to be able to continue to pay for rent, utilities, etc. without feeling under significant financial hardship since this can cause disengagement, stress and lack of productivity, particularly if those employees are low-wage earners.
Employers have varying approaches to geographic differences. Employers need to consider their compensation philosophy when making decisions on pay in different geographic locations. If employers wish to pay at the market rate, then they likely need to review the market rate for each geographical location for which they are located and clearly explain this to employees. They also need to consider what happens if an employee chooses to move to a geographic area that is at a lower market rate, and whether they will permit employees to move out of state if remote. Employers should think all scenarios through carefully, as in some cases a job’s market rate in one geographic region may exceed the pay of a manager situated in another location.
Contact Jackie Esposito, Catapult HR Compensation Advisor & Business Partner, for assistance evaluating your pay strategy or cost of labor for multiple locations.
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