At Pequity, our goal is to build tools and systems that enable better pay decisions. From our research at numerous companies, a common comment we hear from companies and employees alike, is:

“How does cost of living impact compensation?”

The principles behind this question often come from a desire to ensure that an employee’s pay will not just meaningfully cover their expenses, but that it also will allow the employee to live a certain quality of life. While rooted in good intentions, incorporating cost of living can massively undercut the fairness of your compensation plan.

Take the following example: let’s assume we have Evan and Eustace (that’s a cool name). Both work at the same company, same location, in the same role & level, doing the same work.

Evan is a father of two, has 2 dogs, 2 cars, and wants to live right beside the company office in the middle of San Francisco.

Eustace on the other hand has no children, prefers to bike to work, and lives in a studio on the outskirts of town.

In this instance, Evan’s cost of living in San Francisco will be much higher than Eustace’s. However, if they are doing the same work, at the same performance level, is it fair to pay Evan more? Now imagine if it wasn’t Evan versus Eustace, but Evan versus Mariah. Mariah also lives in a 2 bedroom apartment that she shares with her boyfriend and a roommate, on the cheaper side of town — is Mariah’s cost of living less than Evans?

In cases like this, the best thing a company can do is pay for the local cost of labor. This number is derived from compensation survey data. The reason this is more reliable than cost of living, is because the local cost factors – such as the prices of food, rent, transportation, doggie day care, etc – are already baked into the pay. We also know that these surveys will be directly influenced by local minimum wage laws and minimum salary laws, which will influence the numbers as well.

Focusing on cost of labor instead of cost of living, also helps to discourage rewarding strong negotiators. Numerous studies show that women negotiate for raises just as often as men do (when given the chance to do so), but are less likely to have an opportunity to do so and are less likely to receive what they ask for. By creating a system that is based less on subjective inputs such as cost of living, and focusing your program on a more impartial factor (cost of labor), you enable your compensation decisions to become more robust, competitive and equitable for all genders and races regardless of negotiation skills.

Of course, all the above is just a recommendation based on experiences consulting with startups, mid-size, and large companies predominantly in the tech industry — but we recognize there are many ways to sniff out a pay program, and we’re always open to input.

Interested in learning more about making informed, purposeful pay decisions? We’d love to hear from you. Click here to send us an email – we read every letter that comes our way, and love to geek out on compensation.

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