Why Do Companies Pay Cost of Living, Not What the Job is Worth? [Reader Question]

Another reader question today, this time on compensation. If you have questions you can always email ben@upstarthr.com and we’ll fit it into the queue if possible!

Why do companies pay employees by cost of living of the city/country that the employee is working from rather than the cost/value of the work? Can employees game this system to earn more money?

This is an interesting question, but the truth is it’s not either/or–it’s both. Employers must consider both internal equity and external/market equity when building a compensation structure.

Employers pay what the job is worth, or they will never be able to hire anyone. Try offering a software engineer $10,000 a year and see if they want to work for you. This is about internal value and equity–what value does this job have to the firm relative to other jobs? There’s a general hierarchy in terms of pay rates, which is why an administrative assistant earns less than the CEO. 

At the same time, employers have to look at cost of living as an additional factor in total compensation. When I recruited for roles in Kentucky or rural Alabama, pay rates were more flexible. When I recruited for people to go to Taiwan, they were less flexible. That’s because where you live/work affects the buying power of the dollars you earn.

In the end, it may turn out that an accountant in San Francisco makes twice as much as an accountant in Huntsville, Alabama (where I live). Why? Because the cost of living in SFO is much, much higher. It’s not because they are doing different work. It’s because the location demands a higher price point. And no, you can’t “game” this to earn more money. If you get paid $10k more a year and live in an area that requires $10k higher rent than a more rural or low-cost area, then you didn’t come out ahead at all.

By the way, if compensation is something you’re interested in, you can check out some of our other popular articles on the topic:

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