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While many employees and employers have settled into the new normal, which likely involves some level of flex working, a hybrid schedule, and remote work, employers continue to ponder how this new reality impacts their compensation strategies. Early in 2020, questions arose regarding whether employees choosing to relocate to an area with a lower cost of living (CoLiv) should continue to be paid the same. Tech companies were the most vocal about plans to modify how they compensated employees, in many cases resulting in a decrease in the cost of labor (CoLab).
More recently, high inflation has continued to fuel the conversation around whether CoLiv plays a role in determining pay. As you see in the illustration below, with the consumer price index (a commonly used indicator of inflation) as high as it's been in 15 years, employers are trying to determine how to consider this gap.
GDP and consumer price index (CPI) figures from International Monetary Fund, World Economic Outlook Database, November 2021. Merit and salary increase numbers from Mercer’s Compensation Planning Surveys.
After all, if inflation becomes a driver of pay, then what happens when we return to the inflation rate levels of the past decade? It's not likely that you'd then reduce employee pay, is it?
On top of that, is it really the employer's responsibility to determine (or manage) their employees' standard of living?
Although the conversation between Rebecca Adractas, our content strategy leader, two of Mercer's experts, Tauseef Rahman and Vince Cordova, took place in 2020, much of their thoughts still resonate today. We need to reinforce best practices in setting total rewards strategies while finding ways to support the changing world of work.
RA - Vince and Tauseef, thanks for joining me today. Let’s start off by establishing the baseline. Tauseef, you’ve been a talent strategy consultant with expertise in rewards and analytics. Vince, you are an expert in global mobility. I’d like to hear from each of you how, pre-COVID, you see CoLiv and CoLab impacted pay practices and talent strategy.
TR Since the inception of employment, jobs have been thought of as having a fixed time and place. Remote work was never a consideration and we always established pay using cost of labor. Most everybody finds it difficult to separate cost of living and cost of labor, and understandably argues for using the one that would best suit their situation. The distinction has never been clear to people working outside of rewards.
VC I agree. Cost of living is not the starting point for setting pay. There are some cases where CoLiv is relevant — for example, collective bargaining agreements typically include cost of living adjustments with a schedule tied to the CPI. Another area where cost of living is a consideration is for relocation. If an organization has a national pay strategy, but is moving an employee to a higher cost of living area (due to a need to move an employee to that area) then the relocation package might include a lump sum or pay adjustment that would be temporary and disappear over time.
TR The difference between CoLiv and CoLab is much more apparent outside of the US where the two indicators move at very different rates, in emerging markets for example. The concept of employee mobility and relocating employees there is dramatically different due to the significant differences in cost of living and cost of labor.
VC Mobility has changed over the years too. An important shift has taken place — many employers segment how they handle their mobile population now. Those who willingly move because they see it as a career growth opportunity or for personal experience are less likely to receive a stipend/adjustment than those that move at the behest of the company.
RA For companies that are considering adjusting pay for those employees that have moved to lower CoLiv areas, what advice would you give them?
TR I have them think through a situation with two employees both doing the same job. One lives right in San Francisco, near the “office.” One lives in a suburb an hour outside of San Francisco. Both, pre-COVID, were commuting to the office. Would you pay them differently? No, you wouldn’t. Where that person chooses to live and how much of their life they spend commuting does not have an impact on their pay.
I also have them identify which jobs are really tied to a particular location versus not. Then ask, what’s the supply and demand like for those jobs?
RA Tauseef, what do you think of the Silicon Valley companies that are saying they are planning to reduce pay?
TR I think it’s a complex issue. There are competing demands. Employers may want employees to eventually return to work at campuses so that there is minimal distraction in terms of life activities by providing amenities such as food and access to an on-site gym. Employees may now question whether that co-location on campus is really a requirement of the role given they’ve been able to work from home. On the one hand, pay can be considered a deterrent to those considering moving. On the other hand, it’s a question of fairness of “keeping high cost of labor salaries” in a lower cost of labor market. Ultimately it goes back to the question — what is the labor market? If it’s a competitive national labor market for the job, I can see a move toward a national pay structure similar to what some companies have announced.
RA Vince, back to the question of CoLiv versus CoLab and how it will be used going forward, do you agree with Tauseef?
VC Companies look at CoLiv when trying to categorize office locations for different decision making (e.g., Tier I, Tier II categories for retail outlets) or when they are looking to open new locations. In some industries, that may not be such a prevalent practice any more. Presently, there is a lot of disruption in working from home for employees.
RA So, if companies do decide to adjust pay based on cost of living, they’re not just going to cut pay, are they? That seems very damaging.
TR No, they’d just slow down or eliminate an employee’s pay increases. And typically we’d suggest that the employer make it clear that the reason for the slowdown was the shift to comparing to a national pay system.
VC And, we have to keep in mind, some industries have been impacted very differently by this crisis. For those industries who have seen significant business revenue declines, it will become even more critical to determine how to allocate their spend on compensation, and they should consider how both the factors, CoLab and CoLiv, can inform strategies aligned with their current business reality. For industries who have prospered, demand for employees may be outstripping supply, and without a requirement to work in a physical office, recruiting and retaining employees will present new challenges, including understanding how this new environment is impacting the way CoLab is considered with respect to compensation philosophy and strategy.
TR Before making any changes, organizations will need to build their capabilities and methodology to determine which jobs should be paid locally versus nationally. Some are clearly local, some clearly national, but it’s the grey area in between where they need to make sure they have a way to make consistent decisions. They should be asking, “Where is the work best done?” If it’s a job that would require some in-person time, is the company better off just flying people to a central location once in a while, rather than insisting people are in an office?
RA Thanks to both of you, this is really helpful. In closing, if you had to tell companies one thing today, what would that be?
VC Don’t lock yourself into one model at this point.
TR We’re in a world where you can’t just consider one thing anymore. The idea that there is an office population versus a work from home population is outdated. There’s a continuum.
VC It’s likely that overall compensation will look a little different, but companies have to choose what they are going to spend money on to best enhance the employee experience and drive business performance.
TR And the boundaries of the employee experience has expanded exponentially.
RA Tauseef and Vince, thank you again for your time. I think you’ve given our readers some great ideas to consider. We’ll look forward to hearing more from you as we move into the future of work in 2021.
Need more information about revising your compensation strategy or looking for other ways to enhance your employee experience? Mercer is here to help. Contact us at 855-286-5302 or firstname.lastname@example.org.
Tauseef Rahman, Partner Tauseef is a partner at Mercer and is based in San Francisco. He consults organizations on a range of workforce strategy and analytics issues, and on the business impact of the changing nature of work.
Vince Cordova, Partner Vince is a Partner in Mercer's Career Practice based in New York City. He has over 20 years of experience in mobility, compensation, and HR.