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COST OF LIVING
The employer must always take into consideration differences in the cost of living that the employee will face when relocating.
The cost-of-living varies widely — even within the United States. An employee might refuse a promotion if the relocation entails moving to an area where the high cost-of-living would erode their salary increase.
There are 2 important questions to consider when designing an organization's relocation policy:
- Should salaries be adjusted for cost-of-living differences?
- OR
- Should employees be given assistance in housing costs?
To answer these questions, it’s essential to maintain accurate estimates of the cost-of-living differentials between areas.
Why does the cost of living vary?
Differences in local income taxes may significantly affect employees'
disposable income. Additionally, housing, transportation, utilities, and
consumables all have their own local demand and supply curves.
The costs of products and services are the result of specific combinations of factors and influences that determine their prices. This is particularly true for housing. Housing costs are the primary drivers of cost-of-living differentials, and because neighboring cities often have very different reputations and housing prices, it’s necessary to define the geographic location as narrowly as possible.
When the cost of living is substantially higher in the area to which the employee is relocating, companies have several options.
You might think that the easiest way to adjust for the cost-of-living differential is for the company to raise the employee’s salary. However, this route has its problems, the most significant being the increase in the base salary, which is a fixed cost.
Think about it…
What if a company relocates an employee to a city with a lower cost of living? Should the company lower the employee’s salary?
What about other employees working in the area? Will they be resentful if this employee’s salary is out of line with theirs?
You have 3 options for relocating employees:
-
separate salary structure
-
relocation bonus
-
cost-of-living allowance
Separate salary structure
Companies with employees in multiple locations where the cost of living is different often have separate salary structures for employees in each area.
To obtain information on how to develop such plans, see DLC Course 83: Designing a Geographic Salary Structure.
Relocation bonus
A company can provide the employee with a lump-sum bonus upon moving. This method has two sides.
| Advantage | Disadvantage |
|---|---|
| A relocation bonus provides employees with cash at a time when they are experiencing a lot of out-of-pocket expenses. | Although the bonus may appear large, it will end up being small compared to the higher cost of living. |
Cost-of-Living Allowance
| Cost-of-living allowance | A salary add-on that is clearly identified as separate from the base salary for the job. |
|---|
Cost-of-living allowances are usually established for a specified time period (up to 3 years) and are reduced over time. The idea is that the employee gets used to the cost differentials over time and no longer needs the allowance.
Exercise Question
A cost-of-living allowance is a: