COVID-19

Employers rethink cost of living calculations

Kristin Schwab Oct 12, 2020
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People sit in socially distanced circles while picnicking at Mission Dolores Park in San Francisco. Some companies are reconsidering compensation based on a worker's location. Justin Sullivan/Getty Images
COVID-19

Employers rethink cost of living calculations

Kristin Schwab Oct 12, 2020
Heard on:
People sit in socially distanced circles while picnicking at Mission Dolores Park in San Francisco. Some companies are reconsidering compensation based on a worker's location. Justin Sullivan/Getty Images
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Microsoft is the latest big tech company to announce it will start letting more employees work from home part time or even permanently. Twitter, Facebook and a bunch of others are doing the same. And that’s got employers thinking about pay. When companies set pay rates, they consider two big factors: cost of labor and cost of living.

And that second piece — cost of living — could likely go way down if employees leave coastal cities, Silicon Valley or anyplace where it costs a lot to live.

There are tools online that calculate cost of living. You punch in where you live, where you want to live, your current salary, and out comes some magic number that tells you how much your money is worth in that prospective city. Behind that number are a lot of little ones.

“This is relatively straightforward if you think about prices of two items that are available in two locations,” said Ben Faber, an associate professor of economics at University of California, Berkeley.

Like how much is a gallon of gas? A pound of rice? A house?

“Where this becomes tricky is that a house is not just a physical structure with four walls and a roof on it. A house comes with a neighborhood, it comes with school quality, it comes with the types of neighbors that surround you,” Faber said.

Cost of living just assigns a dollar value to stuff. It doesn’t capture the unique value we place on how we live. And expectations about how we live are shifting, said Peter Cappelli, director of the Wharton School’s Center for Human Resources. He thinks slashing salaries for workers who move is tied to the increasingly outdated idea that compensation should be pegged to location. And yet?

“This is really kind of the dream of CFOs who think now here’s a way to cut pay by a lot,” he said.

Because to employees, taking a pay cut to live somewhere cheaper isn’t just about the value they place on a white picket fence. It could make them feel less valuable as workers.

“If you have the same person, they’re still providing the same value to the organization, they just happen to be living somewhere else, does that really change what you should pay them?” said Mary Ann Sardone, partner in Mercer’s talent consulting business.

Sardone thinks the pandemic may force employers to use national salary averages to create compensation packages. Because ultimately, if you want the best employee, you still have to give them the best offer, whether they’re living in the Big Apple or Boise.

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