Geographic Pay Differentials
Updated: Aug 5
Some concerns that flow to HR:
Housing rent has gone up by 20% in City X. Will salaries or allowances be adjusted?
My team says they are living paycheck to paycheck, barely making it. The company is profitable, why are we not paying them enough to meet their basic needs?
Two of my team members, in the same role, work remotely from home in different locations. Why are we not paying them the same?
The answers may vary depending on an organization's rewards philosophy.
The (pre-pandemic) guiding principles compensation professionals typically used to address such queries are:
Companies typically pay cost of labour not cost of living. Cost of labour is a particular market's "going rate" for a job and ties to supply and demand. e.g. an electrical engineer in location A may be paid differently to an electrical engineer in location B. (Worth noting that remote work from home has shifted the global supply and demand equation...) Cost of living is essentially about consumer costs in a particular market and maintaining a standard of living. The cost of living index will factor elements such food, housing, transportation, taxes, etc in a location. Cost of labour can be greater than cost of living and vice versa. It is possible for changes in cost of living to follow labour costs - but there is no automatic correlation between the two.
Market-based competitive pay philosophy: Most companies pay based on the going rate for a job in the labour market. Example, if you pay a Lagos salary in Luanda, you risk over or underpaying for the job. Hence, cost of labour is normally the "go to" policy approach.
Aside from above, my additional thoughts:
(1) A business should strive to remain a going concern, so profitability and sustainability are important. The lower earning employees are the most vulnerable when CPI/cost of living spike up significantly while cost of labour remains fairly unchanged. Yes, this is a macro economic issue beyond an organization's full control. But if we know employees cannot live off the going rate for a job, I would argue that there is an opportunity to consider income protection Rewards solutions (financial and/or non-financial). I am not suggesting every lifestyle choice (cost of living standard) should be funded by the employer. I am referring to the very bottom of Maslow's hierarchy needs. Besides simply doing the right thing, isn't there also a business imperative (e.g. less turnover and improved productivity) to pay appropriately at all levels? Too much wishful thinking?
(2) Some countries/regions have very limited salary data; particularly foggy visibility when entering a new market or industry. CPI and cost of living are indicators that, combined with anecdotal data, can help build a workable baseline about pay practices in a market. How do you deal with severe data gaps?
The future of work is now; there is an opportunity to re-imagine pay. Now what to do about paying remote work from home jobs? ...
Originally published in August 2020: https://www.linkedin.com/pulse/geographic-pay-differentials-telma-le-guen/