Author: Linda Cox

IRS Announces 2021 Optional Standard Mileage Rates

Posted on | by Linda Cox

Effective January 1, 2021, the optional IRS standard mileage rates for use of a car, van, pickup, or panel truck are as follows:

56¢ (a decrease of 1.5¢ from 2020)Per mile – for business use
16¢ (a decrease of 1¢ from 2020)Per mile – for medical or moving purposes
14¢ (no change from 2020)Per mile – in service of charitable organizations

The standard mileage rates for charitable organizations remained unchanged from 2020, with a 1 cent decrease per mile for medical or moving purposes and a 1.5 cent decrease per mile for business use.  The difference between the optional standard mileage rate for business use versus medical or moving purposes is that, while the medical and moving rate takes into account variable costs, the business rate is calculated from an annual study of fixed and variable costs. 

Please refer to the IRS News Release published on December 22, 2020, for additional details. See how the 2021 optional standard mileage differs from the 2020 Optional Standard Mileage Rate. 

Compensation Planning During the Global Pandemic

Posted on | by Linda Cox

The global pandemic and economic downturn, coupled with a recent new surge in cases, has created additional reasons for organizations to ensure that their compensation strategies and compensation plans reflect the needs of 2021.

Throughout 2020, we have seen extraordinary unemployment and changes to business operations to survive the pandemic.  A vast number of organizations and industries have experienced these changes:

  • Hiring freezes
  • Layoffs and furloughs
  • Executive pay cuts and freezes
  • Non-executive pay cuts and freezes
  • Work from home arrangements
  • Delayed and/or reduced salary increases
  • Incentive plan design and payout modifications providing greater management discretion
  • Time off without pay

We have also seen businesses and industries that have thrived as a result of the pandemic.  This includes essential workers and businesses that provided critical products and services during this unusual time.  When appropriate, many organizations have provided the following to their critical staff:

  • Temporary increases in pay
  • Hazard pay
  • Cash bonuses
  • Increased overtime

It is now timely to determine key changes to your 2021 compensation plan.   Obtaining top executive insight and aligning with finance is always a good place to start the compensation planning process.  This step is especially important since high unemployment and cash flow are such critical issues today for compensation planning purposes. 

The fall 2020 edition of ERI’s Coronavirus Compensation Survey of 262 organizations provides a summary of the latest compensation practices and trends as a result of the pandemic.  The survey is split into five sections: Compensation Changes, Workforce Changes, Remote Work, Benefits and Permanence, and Demographics.   ERI’s National Compensation Forecast, last published in October 2020, is also a valuable analysis of the market movement of salaries.  It includes a brief summary of the August 2020 results of ERI’s 2021 Salary Increase Survey.

DescriptionPercent
2021 Projected Salary Budget Increase3.00%
2021 Projected Salary Structure Increase2.20%
1-Year Actual Salary Movement*2.38%
October 2020 Actual Salary Movement0.45%

*October 2019 – October 2020

Base Pay

The market projects that median base salary increases will remain at 3% in 2020 and 2021.  Many companies have already deferred or will defer salary increase implementation dates or even freeze or cut salaries for cost containment purposes. 

The pandemic has affected industries and locations differently.  Consider reviewing the market movement of salaries nationally, with breakouts by industry and/or location when developing your salary increase budget recommendations.  It is also important to address whether essential versus non-essential workers will be recognized differently in your compensation plan.

Salary Structure

The projected 2021 salary structure increase is 2.20%.  Given the high unemployment rate, industries significantly impacted by the pandemic would most likely remain competitive without a salary structure adjustment for 2021.

Geographic Pay

With businesses operating remotely, there is a trend in adjusting pay based on geographic work locations for “permanently assigned” remote employee workplaces.  Companies such as VMWare, Facebook, and Twitter are just a few of the companies planning on these changes.  For example, if a place of business is in San Francisco, but an employee is permanently working remotely 150 miles away in a lower cost-of-labor location, then many companies are eliminating the pay premiums that have traditionally accompanied a high cost-of-labor location.  This can be accomplished through geographic differentials or geographic salary structures.

ERI’s Geographic Assessor is an excellent tool to fairly and accurately calculate the differences in cost of labor and cost of living between over 9,000 locations in the United States, Canada, Europe, and other countries worldwide. Utilize our Geographic Assessor to help find geographic salary differentials and help price jobs based on geographic location.

Short-Term Incentives 

Companies may adapt plan designs so that the compensation committee of the board of directors maintains discretionary authority.  This ensures the ability to adapt to changing business conditions as required in 2021.  Consider shorter performance periods as they are typically more predictable during these uncertain times.  In addition, strategic performance metrics may be used instead of financial performance metrics (or a combination of the two).  You may also consider deferring goal setting until the business outlook is clearer.  Finally, look into lowering the threshold and maximum payouts.  Modeling possible business scenarios is always worth the time and effort – this is important for both sales and non-sales plans.

When short-term incentive targets are too liberal as compared to the marketplace, base salary may then be set too low and affect employees’ ability to pay for fixed personal expenses (e.g., housing, food, etc.).  Consider targets that are truly pay at risk.

Pay Equity

Executives are embracing their responsibilities for pay equity and even adopting a pay equity culture.  It is important to discuss legal requirements and pay equity objectives with C-Suite executives while incorporating key goals and requirements into the compensation strategy.

Equity Compensation

Stock price volatility is projected to continue into 2021, affecting equity plans and equity compensation. This environment continues to make stock price forecasting a challenge.  Carefully assess the situation prior to making any changes.  Also, consider the high unemployment rate and if employee retention is at risk in this unique environment. 

During the 2008 financial crisis, there was a tendency for companies to shift from stock options to restricted shares.  Repricing and exchanges of options are more complex.  Companies may feel that restricted stock may lack retention value during stock price suppression.  If employee retention is an issue during these volatile times, supplemental grants may be an option to consider.

Performance Management

Performance management continues to be a high priority for 2021.  In today’s new performance management programs, the once-a-year program is being replaced with ongoing processes and discussions.  Consider the example below:

  • Q1 provides an opportunity for goal setting and planning. 
  • Q2 and Q3 allow for progress towards objectives and performance achievement feedback. 
  • Q4 allows for year-end attainment while having ongoing coaching, feedback, and development discussions.

Today’s programs are less rigid and instead focus on performance achievement, future potential, teamwork, and the big picture.  These programs also support more frequent communication than the traditional annual performance review.  Online and mobile technology are also utilized in best-in-class programs today.

Conclusion

The COVID-19 pandemic requires us to carefully review and update our compensation strategies in order to design annual compensation plans that meets the unique needs of 2021.  It is important to examine the following plans to ensure that your business requirements are attained:

  • Base pay
  • Salary structure
  • Geographic pay
  • Short-term incentives
  • Pay equity
  • Equity compensation
  • Performance management

ERI Economic Research Institute has a broad range of software solutions to meet your data requirements, including the Salary Assessor, Executive Compensation Assessor, and Geographic Assessor. 

The fall 2020 edition of ERI’s Coronavirus Compensation Survey, ERI’s National Compensation Forecast, and the ERI’s 2021 Salary Increase Survey are all important data resources to support you in meeting your 2021 compensation requirements.

photo of hand moving across money

IRS Announces 2021 Maximum Retirement Plan Contribution Limits

Posted on | by Linda Cox

It’s that time of year once again when the U.S. Internal Revenue Service has announced its 2021 limitations on retirement plans for the 2021 tax year.

The 401(k) retirement maximum contribution limit remains unchanged at $19,500 for elective deferrals in 2021, with a maximum contribution increasing to $58,000 for all sources (employee and employer). Human resources and payroll should update their systems and employee communications, as appropriate, reflecting changes effective January 1, 2021.

Limits Defined Contribution Plans
 401(k), 403(b), 457 & Most Federal Thrift Savings Plans 		2020 2021
Maximum elective deferral (employee) $19,000 $19,500
Maximum contribution–all sources (employee & employer) $57,000 $58,000
Age 50+* catch-up contribution (employee) $6,500 $6,500
Age 50+* maximum contribution—all sources plus catch up (employee & employer) $63,500 $64,500
Compensation ceiling for calculating contributions $285,000 $290,000
Nondiscrimination testing—compensation limitation for “key employees” $185,000 $185,000
Nondiscrimination testing—compensation limitation for “highly compensated employees” $130,000 $130,000
Limits Defined Benefit Plans 2020 2021
Annual benefit limitation $230,000 $230,000

*If age 50+ by year-end

The IRS has also announced the Individual Retirement Account (IRA) limits effective January 1, 2021. The IRA retirement annual contribution limit for 2021 is $6,000. If you are over 50, the annual catch up contribution not subject to an annual cost-of-living adjustment is $1,000.

Limits Individual Retirement Accounts 2020 2021
Annual contribution limit $6,000 $6,000
Age 50+* annual catch-up contribution not subject to annual cost-of-living adjustment $1,000 $1,000

*If age 50+ by year-end

Additional information and technical guidance may be found in the IRS source documents, as noted below:

The Internal Revenue Service announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2021.

Highlights of Changes for 2021

IRS Notice 2020-79

See how the 2021 maximum contribution limits compare to the 2020 contribution limits.

The Social Security Administration has announced 2021 payroll tax increases, as well. Learn more and find more information about new changes that the Social Security Administration is rolling out at ERI Economic Research Institute.

2020 Payroll Tax Increase

Social Security Administration Announces 2021 Payroll Tax Increase

Posted on | by Linda Cox

Effective January 1, 2021, the U.S. Social Security Administration will increase the maximum earnings subject to the Social Security payroll tax by $5,100 (from $137,700 in 2020 to $142,800 in 2021).

Tax 2021 Employer Tax % 2021 Employee Tax % 2021 Maximum Earnings Cap Increase over 2020
Social Security 6.20% 6.20% $142,800 $5,100 Maximum Earnings Cap
Medicare 1.45% 1.45% No Limit —
FICA Rate 7.65% 7.65%   —

Source:  U.S. Social Security Administration

SSA Fact Sheet

Note:  Excludes reference to 0.9% employee-paid Medicare tax under a provision of the Affordable Care Act. 

The Internal Revenue Service has announced 2021 IRA contribution limits as well. Learn more by taking a look at our recent blog post breaking down all of the major changes.

Get HR Certified with ERI’s Distance Learning Center

Posted on | by Linda Cox

The ERI Economic Research Institute Distance Learning Center (DLC) is a valuable resource for compensation and total rewards development.  Whether it is used for personal growth, part of a recertification program, or to develop a Human Resources team member, the online DLC program has many resources and programs to accomplish the task.  Here are some of the highlights of ERI’s Distance Learning Center with details provided below:

  • Complimentary Self-Study Online Courses
  • Online Professional Certification Program*
    • Compensation Analyst Credential (CAC)
    • Compensation Committee Certification (CCC)
  • Recertification and Continuing Education Professional Credits*
  • Professional Education Webinars*
    • Compensation Basics:  Job Analysis, Descriptions & Evaluations
    • Analyzing & Using Salary Survey Data
    • Designing Pay Structures
    • Basic Statistics for Compensation
  • ERI Assessor Series Training
  • Compensation Textbook
  • Business Glossary
  • For the Study of Compensation, Total Rewards, Work, Occupations, Industrial Psychology, and/or Management)**

* Nominal fee

** Also available for University/College Computer Laboratories and Career Centers

Complimentary Self-Study Online Courses

Thirty-six complimentary courses are an excellent resource for the development of Compensation and Human Resources staff members. 

Course titles include the following:

Total Rewards Foundation Salary Structures
09 Basic Quantitative Methods 82 Creating a Market Competitive Salary Structure
71 Environments of Compensation & Benefits Administration 83 Designing a Geographic Salary Structure
15 Federal Employment Laws That Impact Compensation & Benefits 19 Quantitative Methods Used in Salary Administration
03 New Economy Total Rewards 49 Regression Analysis Used in Salary Administration
02 Online Total Rewards Administration 81 Salary Structures and Pay Delivery
Job Analysis, Descriptions & Evaluations Salary Administration
03 Analyzing Salary Surveys 32 Eliminating the Gender Pay Gap
58 Comparing the DOT, O*NET and eDOT 04 Organization Salary Determinations
33 Job Analysis and Job Descriptions 77 Pay for Performance
34 Using Job Evaluation in Your Organization 78 Salary Increase Planning
Global Compensation Employee Benefits
92 Expatriate Compensation 53 Employee Benefit Strategies
93 Global Mobility & Relocation 50 Employee Life & Disability Insurance
84 Labor Market Trends:   U.S. vs. Europe 57 Relocating an Employee Within the United States
91 Multiple Country Compensation Programs 74 Trends in Retirement Plans
Variable PayExecutive Compensation
75 Creating a Variable Pay Plan42 Accumulated Earnings & Deferred Compensation
72 Nonprofit Variable Pay22 Black Scholes Valuations
76 Sales Compensation & Expense Allowances26 Compensation Committees: Framework for Executive Compensation Alignment
20 The Basics of Employee Stock Option Plans21 Compensation for Business Leaders
18 Intermediate Sanctions
12 IRS Reasonable Executive Compensation

An optional final examination is available at the end of each course for a nominal fee.  Upon successfully passing the final exam, the participant becomes eligible for recertification and continuing education professional credits.

Online Professional Certification Program

ERI DLC offers two credential programs:

Compensation Analyst Credential (CAC)

ERI Distance Learning Center’s Compensation Analyst Credential (CAC) designation is a convenient way to earn a professional credential while learning the fundamentals of this discipline. This online credential provides instruction on the basics of compensation planning, design, and administration. By earning a CAC, you will prove to employers that you have demonstrated expertise in the field of compensation.  Employers will know that you have received high-quality training in the most fundamental areas of compensation. The CAC is a reasonable fee-based program that can be obtained by successfully passing 12 self-paced, online courses with final exams, equal to approximately a 20-hour time commitment.

Compensation Committee Certification (CCC)

ERI Distance Learning Center’s Compensation Committee Certification (CCC) is a valuable series of courses to gain the knowledge required to serve on a Compensation Committee of the Board of Directors for an organization.  Individuals asked to serve on the boards of for-profit and non-profit organizations are responsible for overseeing these organizations’ executive pay packages. Board members who have earned a Compensation Committee Certification (CCC) will feel more comfortable in making executive compensation decisions because they have enhanced their knowledge of these important pay decisions.

Under intermediate sanctions, board members of tax-exempt organizations who make decisions about executive compensation are required to be knowledgeable about compensation in order to make informed decisions about reasonable compensation. Sarbanes-Oxley also requires board members of for-profit companies to be knowledgeable about compensation in making decisions about executive compensation.

The Compensation Committee Certification courses cover the following issues:

  • Compliance with compensation and benefits laws and regulations
  • Board member selection and service
  • Avoidance of intermediate sanctions on tax-exempt organizations’ executive compensation
  • Determination of reasonable executive compensation in for-profit companies

This certification can be completed at an individual board member’s own pace from the convenience of the workplace.  The CCC is a reasonable fee-based program that can be obtained by successfully passing 10 self-paced, online courses with final exams, equal to approximately a 20-hour time commitment.

Recertification and Continuing Education Professional Credits

Continuing education professional credits are available by successfully completing eligible fee-based DLC courses and final exams, as well as webinars.  We offer HRCI, SHRM, and WorldatWork recertification credits for self-paced courses and webinars, as well as NASBA continuing education credits for self-paced courses. Self-paced courses are available in bundles of up to 60 credits.

The ERI Distance Learning Center is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: https://www.nasbaregistry.org/

Professional Education Webinars

Professional education webinars (each 90 minutes in length) are conducted throughout the year to provide development in compensation planning, design, and development.  Here are a few of our most popular webinars:

Compensation Basics:  Job Analysis, Descriptions & Evaluation

This is a basic level course intended for those new to compensation. It examines methods and processes essential for compensation practitioners, such as job analysis, job documentation, and job evaluation. Several analysis techniques will be discussed that may be used to obtain important and relevant information about each distinct role performed within an organization for appropriate documentation. Guidelines for conducting a job analysis interview will be provided, and suggestions will be given for designing an effective job analysis questionnaire.

Analyzing & Using Salary Surveys

This is a basic level course intended for those new to compensation. This webinar will discuss practical guidelines that may be used for identifying, selecting, analyzing, and using market data to complete essential tasks in determining external competitiveness and establishing a competitive market-based pay program. The importance of communicating the compensation program effectively will also be discussed, and practical tips will be provided to support you in delivering a transparent message to your employees so that they may understand and, ultimately, buy into the program.

Designing Pay Structures

This is an intermediate level course for those with a working knowledge of compensation. It is not intended for the advanced practitioner.  In this webinar, you will follow a detailed case study to learn how to design and deliver a competitive, market-priced pay structure with salary grades. Each participant also receives a Microsoft Excel Workbook including these formulas, tables, reports, charts and, graphs presented in the webinar:

External Market Summary Basic Math Approach Excel Formula Approach Straight-Line Formula Approach Curved-Line Formula Approach Compa-ratio Report and more

Basic Statistics for Compensation

This webinar is an introduction to basic research and statistical concepts used in compensation and will cover the steps of data analysis, types of variables, scales of measurement, measures of center and spread, correlation, and regression. There will be discussion and examples for performing calculations used in compensation, demonstrated using Microsoft Excel.

ERI Assessor Series Training

Customer training webinars (60-minutes in length) are conducted throughout the year, providing an orientation and product overview of ERI’s Assessor Series.  The Assessors are compiled from thousands of salary surveys, including surveys we conduct, surveys purchased from other organizations, and reports from publicly traded organizations.  The interactive software and databases are updated quarterly and include consensus results from the most reliable survey sources available.  The ERI Assessor Series includes the following products:

  • Salary Assessor
  • Executive Compensation Assessor
  • Geographic Assessor
  • Relocation Assessor
  • Nonprofit Comparables Assessor
  • Occupational Assessor

Compensation Textbook

ERI’s online compensation textbook is available free of charge to HR professionals and college students. This widely-used HR textbook is updated continuously so that, in combination with ERI Distance Learning Center online Human Resources courses, it provides the most timely compensation and benefits education available.

Business Glossary

Find business definitions for over 2,000 compensation and benefits terms in the Distance Learning Center online business glossary. This free online dictionary lets you quickly search for a business term within the extensive dictionary entries. In addition, each Distance Learning Center online business course provides an index that lists HR terms used throughout the course. This index will link you to the business glossary for definitions and show you where the HR term appears in other DLC e-learning material.

University/College Instructor Online Course Materials

ERI provides complimentary course materials and web access services to university and college instructors who teach in the field of work (occupations, compensation, total rewards, human resources, work, industrial psychology, and/or management).

Students can learn from these “real world” tools used daily by professionals:

  • All 36 ERI Distance Learning Center self-study courses are FREE.  This offer does not include our instructor-led webinars. Students work through an assigned online course, page by page, answering “advancing” questions. The last page contains an email template to transmit back to the instructor with notice of a student’s completion of the assignment. These courses make excellent lab and homework assignments!
  • For professors and instructors at nonprofit universities and colleges, ERI provides a FREE subscription to its Consultant Assessor Series (for the time period of the syllabus’ class). A reasonable payment is required if CAS is used outside the classroom in the instructor’s research or consulting; receipt of this payment will also extend the subscription period to the normal 12 months. ERI research data is used by thousands of consultants, the IRS, State AG Offices, etc.
  • Each student will be allowed to score (PDF & online) job analyses and receive created PAQ reports FREE. An instructor’s account site will show feedback: the number of jobs scored by each student and reports generated.
  • These same FREE offers are available for computer labs (used at Cornell University since 1989) and career centers. In the career center, students would be able to check salaries for different jobs in various parts of the country and check cost-of-living data.

ERI has supported the training of the next generation of HR professionals since 1974. We are one of the only firms in America (including state and federal agencies) that collects specific work characteristics of occupations, counts specific jobs, and assists the disabled or those new to the workplace with information about specific jobs (governments today report only on job families).

Check out ERI’s Distance Learning Center today.   It is an excellent resource for personal and staff development in compensation and total rewards development.  Whether it is used for personal growth, part of a recertification program, a college/university program, or to develop a Human Resources team member, the online DLC program has a breadth of resources and programs to accomplish your needs.

IRS Announces 2020 Optional Standard Mileage Rates

Posted on | by Linda Cox

Effective January 1, 2020, the optional IRS standard mileage rates for use of a car, van, pickup, or panel truck are as follows:

57.5¢ (a decrease of 0.5¢ from 2019) Per mile for business use
17¢ (a decrease of 3¢ from 2019) Per mile – medical or moving purposes
14¢ (no change from 2019) Per mile – in service of charitable organizations

The standard mileage rates for charitable organizations remained unchanged from 2019, with a 3 cent decrease for medical or moving purposes and a 0.5 cent decrease per mile for business use.  The difference between the optional standard mileage rate for business use versus medical or moving purposes is that, while the medical and moving rate takes into account variable costs, the business rate is calculated from an annual study of fixed and variable costs. 

Please refer to the IRS News Release and the IRS Notice 2020-05 published on December 31, 2019, for additional details. See how the 2020 optional standard mileage differs from the 2019 Optional Standard Mileage Rate. 

photo of hand moving across money

IRS Announces 2020 Maximum Retirement Plan Contribution Limits

Posted on | by Linda Cox

It’s that time of year once again when the U.S. Internal Revenue Service has announced its 2020 limitations on retirement plans for the 2020 tax year. 

The max 401(k) contribution limit has changed since last year.  The 401(k) retirement max contribution limit has increased to $19,500 for elective deferral in 2020, with a max contribution of $57,000 for all sources (employee and employer).  Human resources and payroll should update their systems and employee communications, as appropriate, reflecting changes effective January 1, 2020.

Limits Defined Contribution Plans
 401(k), 403(b), 457 & Most Federal Thrift Savings Plans 		2019 2020
Maximum elective deferral (employee) $19,000 $19,500
Maximum contribution–all sources (employee & employer) $56,000 $57,000
Age 50+* catch-up contribution (employee) $6,000 $6,500
Age 50+* maximum contribution—all sources plus catch up (employee & employer) $62,000 $63,500
Compensation ceiling for calculating contributions $280,000 $285,000
Nondiscrimination testing—compensation limitation for “key employees” $180,000 $185,000
Nondiscrimination testing—compensation limitation for “highly compensated employees” $125,000 $130,000
Limits Defined Benefit Plans 2019 2020
Annual benefit limitation $225,000 $230,000

The IRS has also announced the Individual Retirement Account (IRA) limits effective January 1, 2020.  The IRA retirement annual contribution limit for 2020 is $6,000.  If you are over 50, the annual catch up contribution not subject to annual cost-of-living adjustment is $1,000.

Limits Individual Retirement Accounts 2019 2020
Annual contribution limit $6,000 $6,000
Age 50+* annual catch-up contribution not subject to annual cost-of-living adjustment $1,000 $1,000

*If age 50+ by year-end

Additional information and technical guidance may be found in the IRS source documents as noted below:

IRS: 401(k) contribution limit increases to $19,500 for 2020

Notice 2019-59 (PDF)

See how the 2020 maximum contribution limits compare to the 2019 contribution limits.

The Social Security Administration has announced 2020 payroll tax increases as well. Learn more about them and find more information about new changes that the Social Security Administration is rolling out at ERI Economic Research Institute.

2020 Payroll Tax Increase

Social Security Administration Announces 2020 Payroll Tax Increase

Posted on | by Linda Cox

Effective January 1, 2020, the U.S. Social Security Administration will increase the maximum earnings subject to the Social Security payroll tax by $4,800 (from $132,900 in 2019 to $137,700 in 2020).

Tax 2020 Employer Tax % 2020 Employee Tax % 2020 Maximum Earnings Cap Increase over 2019
Social Security 6.20% 6.20% $137,700 $4,800 Maximum Earnings Cap
Medicare 1.45% 1.45% No Limit —
FICA Rate 7.65% 7.65%   —

Source:  U.S. Social Security Administration

SSA Fact Sheet

Note:  Excludes reference to 0.9% employee-paid Medicare tax under a provision of the Affordable Care Act. 

Find out how these new regulations compare to the 2019 Payroll Tax Increase and stay up to date on new policies from the U.S. Social Security Administration at the Economic Research Institute. Stay informed on new updates to what is included in payroll tax and other social security benefit changes.

The Internal Revenue Service has announced 2020 IRA contribution limits as well. Learn more about them by taking a look at our post breaking down all of the major changes.

cost of labor cost of living

Cost of Labor vs. Cost of Living

Posted on | by Linda Cox

Why it makes a difference in total rewards

The difference between the cost of labor and cost of living can mean many different things to many people.  In total rewards, it is important to address how cost of labor and cost of living are applied in our profession and business.

Cost of labor is determined by the supply and demand of labor across all industries and occupations by geographic location.  It represents the cost to hire and retain local nationals.  The cost of labor reflects the external labor market’s pay practices for total compensation based on all jobs combined for each geographic location.

Cost of living measures the required costs to maintain a certain standard of living within a geographic location (based on a market basket of goods and services including consumables, transportation, health services, housing, and taxes paid by an employee).  The cost of living can be referenced to compare the cost to live in one city as compared to another city.  It is commonly used to manage relocations as part of a global mobility program.

Cost of labor and cost of living are frequently used to manage these important business decisions:

cost of labor cost of living

 

What are the differences between cost of labor and cost of living?

Where cost of living is very valuable in managing relocations and temporary global assignments, cost of labor is most valuable in managing ongoing, regular assignments for new hires and existing employees.  This includes developing the compensation strategy, creating salary structures, managing geographic pay, and assessing the cost of conducting business in a location.

A comparison of the cost of living and the cost of labor will always generate very different percentages. For example, the table below compares the percent difference in the cost of living and the cost of labor between the home base of Atlanta, Georgia, and three other locations in Manhattan, Chicago, and Los Angeles:

cost of living cost of labor

For example, Manhattan is 116.9% higher in cost of living and 23.0% higher in the cost of labor than Atlanta, Georgia.

U.S. merit increases are based on the cost of labor and commonly reflect the external labor market based on what other companies plan for their annual pay increases.  Occasionally, cost-of-living increases may be implemented, but they are typically contractual in nature.  Cost-of-living increases are typically based on increases in the consumer price index for a geographic location.

As inflation increases to double digits in a given country, consideration of cost-of-living increases typically become more prevalent.  For example, in the early 1980s, the United States had double-digit inflation with salary increase budgets of over 10%.   During this time, some companies elected to deliver both merit increases and cost-of-living increases, though they were frequently administered on two different dates.  Keep in mind, salary increases frequently trail changes in inflation—they don’t always change at the same time.

You will notice that cost of labor is commonly used for managing core compensation programs for local national employees, while cost of living is used to manage “temporary” relocation pay—especially under international mobility programs.  Occasionally, companies may pay a temporary relocation allowance, when appropriate, for domestic relocations.  Normally, these are phased out over time once an employee adjusts to the new cost of living in the new location.

 

How can cost of labor and cost of living be used together?

Key business decisions may occasionally require consideration of both cost of labor and cost of living in the analysis.  For example, when a business is considering offshoring, the cost and availability of labor, cost of living, cost of conducting business, business climate, and taxation should all be considered in the decision-making process.

Reliable reference sources, such as ERI’s Geographic Assessor (for geographic labor differentials) and Relocation Assessor (for cost-of-living analyses), are valuable in managing these important decisions as part of your total rewards program.

ERI Economic Research Institute compiles the most robust salary, cost-of-living, and executive compensation survey data available, with current market data for more than 1,000 industry sectors.

ERI’s Assessor Series – solutions for every compensation decision

Try a FREE Demo Request a Guided Tour

U.S. Department of Labor

U.S. Department of Labor Releases Overtime Proposal

Posted on | by Linda Cox

A Million More U.S. Employees Eligible for Overtime Pay

The long-awaited U.S. Department of Labor Notice of Proposed Rulemaking was released on March 7, 2019.

The new proposal, if passed, will increase the standard salary level threshold from $455 weekly (equivalent to $23,660 annually) to $679 weekly ($35,308 annually).  Employees paid below this level would be eligible for overtime pay when working more than 40 hours per week.  Employees who earn at least this pay level may be eligible for overtime pay based on job duties.  Stay informed about new changes to the FSLA overtime rules and how they affect overtime compensation.

Automatic adjustments are not included in this proposal although a commitment for periodic review would be included, subject to notice and comment rulemaking.

Other key provisions include the following:

  • There are no changes to the job duties test.
  • “Highly compensated employees” would increase from $100,000 to $147,414 per year (total annual compensation).
  • Nondiscretionary bonuses and incentive payments (including commissions) – paid at least annually – would satisfy up to 10% of the standard salary level.
  • There are no changes in overtime protections for these employees:
    • Police officers
    • Fire fighters
    • Paramedics
    • Nurses
    • Laborers, including non-management production-line employees
    • Non-management employees in maintenance, construction, and similar occupations, such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, and construction workers

Public comments on the Proposed Rulemaking may be made electronically at https://www.regulations.gov/.

Additional information about the U.S. Department of Labor Notice of Proposed Rulemaking is available at https://www.dol.gov/whd/overtime2019/

(Docket RIN 1235-AA20).

ERI Economic Research Institute compiles the most robust salary, cost-of-living, and executive compensation survey data available, with current market data for more than 1,000 industry sectors.

ERI’s Assessor Series® – Solutions for every compensation decision

Try a FREE Demo Request a Guided Tour