Of Course, They Want Cost of Living Pay! (But Do You?)

Sometimes I wish I could get cost of living pay. 

If my boss were to be so stupid as to pay me more if I spent more, … boy, would I go on a spending binge!  But it would make me feel guilty, flying in the face of my philosophical commitment to classic open market supply and demand economic principles.

Most employers are too smart to tie compensation to personal expenses.  Hard enough, to keep track of ever-changing competitive salaries and internal pay equity relationships, without making a separate pay rate for each worker based on their personal expenses.  Can’t even argue that work location controls pay, either, because most people don’t live within walking distance to work.  Instead, we work where pay is highest and live where our income goes the farthest.

Companies pay what they do because that’s what the open market requires… a decently competitive rate.  The “market” for most workers tends be geographically defined as commuting distance.  Mind you, no two enterprises pay exactly the same, even peers of the same size in the same industry in the same town.  Every employer places a distinctly unique value on each job, as well.  Nevertheless, there is always a middle range for market-clearing salaries that will attract, retain and motivate competent people.

There aren’t that many rules about pay beyond the legally required minimum wage.  Think of any employer.  If they don’t pay enough, they lose good people and can’t hire new ones.  If they pay too much, they can’t get rid of their bad workers and their operating costs spiral out of control. 

Setting pay according to personal family expenses is truly a recipe for disaster, because employers can’t control the lifestyle choices of their workers.  As long as everyone holding a particular job lived at the same level, had the same expenses and got the same pay, “cost of living pay“ would work fine; because COL pay would equal the market-surveyed pay.  However, if some decided to live way beyond the average level, it would become a problem and the surveyed “cost of living” pay would vary… just as pay surveys now show.

To reconcile market pay surveys with cost of living surveys, I need to find a way to make the two identical.  Guess that’s what I should do, then, if I wanted more income to support a higher cost of living.  Persuade everyone who holds my job to demand… indeed, insist… on enough money to support a rich lifestyle.  If everyone demanded the same higher rate, every employer would have to pay it or lose their workers and be forced to replace them with new ones at the same rate they just refused to offer.  Then, the “open market competitive” level measured by salary surveys would climb up to the level I want to support my living costs. 

It might work!  Until the employers are driven out of business by competitors with lower labor costs, of course.

Or is there another solution?

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that  (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Comments

[Richard Domit]

Not a big issue with the current workforce since inflation is and has been under control for several years. It was a big issue in the 1970s when inflation was out of control. Thanks for the memories!

[Vita Taylor]

Jim, if you find a way to get us pay for COL, let me know. My husband and I can move back to California, buy that house by the beach, and go on evening strolls viewing the sunset. Until then, we will continue living in Dallas, Texas - no beach in sight - too hot for the evening strolls, but we can afford a house here, and by the way, business is pretty good here too. In Dallas' COL is pretty much in balance with the price of salaries, so if you choose you can live within your means. Jim, if you do find a way to get us a COL increase each year, based on where we live and what it costs to live there - we would be high-tailing it (Texas expression?) back to Cali for that wonderful climate and seascape!

[Paul Weatherhead]

Jim, congratulations on joining the Compensation Cafe team as a featured blogger!

While I agree that cost-of-living should have little application in corporate compensation policies, unfortunately it's a fact of life that working folks mentally compare the media headlines on CPI changes with their own annual salary adjustments to see if their "standard of living" is being maintained.

It's the continuing challenge of compensation professionals to keep abreast of the points that you have made in your post and in other articles like "Why CPI-Based Pay Policies Are Not the Answer" (http://www.worldatwork.org/waw/adimLink?id=29395&nonav=yes).

[Vita Taylor]

Great article, Paul, and so appropriate - thanks!

Congratulation, Jim, will stay tuned for more excellent, original thinking for which you are known.

[Richard]

You've made it sound horribly burdensome to pay COL differntials ("making a separate pay rate for each worker based on their personal expenses") which does not agree with my experience. Where I have worked the COL was accounted for and paid by using a factor (usually a percent of base pay) that applied to all employees. The factors are readily available from companies like Runzheimer and Mercer. Individual employees did not have their own factor. We operated for many years with such a plan and had no problems. I have never heard of any company operating as you describe.

[E. James (Jim) Brennan]

Paul & Vita: Thanks for adding your welcomes to those of the blue-ribbon contributors ... it's an honor to be in their number .. and a challenge to meet the exalted standards they set.

Richard: You are completely correct. I can't find anyone willing to pay me according to the standard of living I would like to achieve... like Donald Trump's. Seems terribly unfair to ascribe some arbitrary theoretical norm to me that has no relationship to my actual living costs!