Will cost of living, inflation impact how your firm sets employee pay?

An ongoing battle for your peers continues to be setting salary budgets and whether the cost of living or cost of labor should be considered in their compensation philosophy and strategy.

When COVID lockdowns made remote work mandatory, firms – especially those in the technology industry – started questioning whether employees that relocate to an area with a lower cost of living should continue to be paid at the same rate.

Flash forward to the current high rate of inflation, and once again one of the hottest topics of conversation is whether the cost of living should play a role in determining pay.

According to April 2022 data from the World Economic Outlook Database, Consumer Price Index statistics indicate an average inflation increase of more than 5% over the previous year – the highest in 15 years.

It’s a gap that’s hard to ignore. And slowing down or eliminating pay increases under these conditions may not seem like wise decisions. However, if inflation becomes a driver of pay, there should be a plan for what happens when inflation rate levels eventually go back down to where they were.

Cost of living v. cost of labor

Finance leaders are more likely to be paying attention to the cost of labor, or the total amount that a company spends on its employees, including benefits, compensation and payroll taxes. It’s important to ensure that the cost of labor doesn’t drastically affect company profits.

The experts at Indeed say the cost of living (e.g., housing, food, health care, clothing, transportation) and cost of labor can actually be used together to analyze what the most competitive wages/salaries are for your industry or region.

“Knowing the cost of living in your area allows you to offer competitive wages for those who may live there and work with your company,” said a post on Indeed’s website.

Meanwhile, the experts at Mercer believe that some industries will have to make pay decisions for certain jobs based on recruiting competition from a larger national labor market.

“Before making any changes, organizations will need to build their capabilities and methodology to determine which jobs should be paid” based on local cost of living/cost of labor versus a national pay structure, Mercer partner Tauseef Rahman said in an online post.

It may take calculating several sets of cost of living and cost of labor figures to make the best spending decisions to improve employee satisfaction and boost business performance.