What Organizations Can Do About the High Cost of Living
If it seems like everything is more expensive lately, it’s not in your imagination. Housing shortages and inflation have priced many would-be homeowners out of the market, and rising rent costs have caused a steep rise in homelessness. Food costs have been impacted both by inflation and climate change (tried to buy chocolate chips lately?), and energy expenses are on the rise. This not only impacts individuals and families, it’s of concern for businesses as well. The cost of living is quickly outstripping wages in a labor market where many businesses struggle to hire and retain all the staff they need to operate effectively. The speed of the increase in cost of living has resulted in a mismatch between cost of living and cost of labor, which leaves many employees both mentally and financially stressed, especially in mission driven organizations where employees are already stretched thin. Organizations that want to remain competitive and hire or keep the talent that will move their mission forward have several options to address the challenges facing their employees without derailing their budget.
Understanding Cost of Living vs. Cost of Labor
What is the cost of living?
Cost of living is the amount of money a person needs to maintain an acceptable standard of living in a specific geographic area. Typically it is calculated using the Consumer Price Index and includes the combined costs of housing, food, healthcare and taxes. It may also include things such as transportation and entertainment.
What is the cost of labor?
Cost of labor refers to the amount of money it costs businesses to hire and retain employees with the education and skills to do a specific job in a specific geographic area. It takes into account the availability of talent and the market rate for that specific role in that location.
Let’s Look at the Geographic Differences
Given the vast size of the United States, and the variety in population (urban, suburban, rural), it should not be surprising that certain areas of the country have seen steeper increases in cost of living than others. The Pacific-Northwest region has been hit the hardest, and not just in its urban areas. While the Seattle and Portland metropolitan areas have definitely experienced a sharp increase in cost of living (23% and 22% respectively), many of the small and mid-size metro areas in Washington and Oregon have seen equally high increases. Also coming in the top five most affected places are the greater areas of Denver, Miami, and San Francisco. When evaluating possible solutions, organizations would be smart to look into the data of how their geographic area has been affected.
The Growing Gap
Ideally the cost of labor and the cost of living maintain a healthy balance: organizations are able to compensate employees fairly and sustainably and employees are able to live comfortably with what they are compensated. Currently, however, the U.S. economy does not find itself in that situation. Due to a variety of factors, (some new, some not) including inflation, the COVID-19 pandemic, a nation-wide housing shortage, climate change, and many more, there is a growing gap between salaries that could empower employees with greater financial stability and salaries that help them just get by. The desirability of better compensation can leave organizations with smaller budgets in danger of constantly replacing staff, which as SHRM states, can cost an organization three to four times the salary of the vacancy. The question remains, then: how can organizations address this gap in the short term to attract and retain staff without making business decisions that are unsustainable in the long run?
Before moving on, we want to acknowledge that there is certainly a case to be made for increasing the minimum wage federally and improving compensation practices overall. Though there is still a lot of work to be done at the national level, staying on top of the very real economic challenges employees face will help your organization ride the wave, stay competitive, and maintain a sustainable compensation program. Let’s dive in!
The Reality of Rising Costs
Rising costs and less buying power impact individuals and families in a variety of tangible and not-so-tangible ways. Because their money goes “less far,” people are required to cut back on expenses. While this can mean “fun” expenditures like streaming services, dining out, or clothing, for many families it means cutting back on spending that helps them keep a balance, such as groceries, health and wellness supplies, and even childcare. In both cases, however, these cutbacks mean a decreased quality of life, and often, increased stress. For people whose salaries used to just meet their necessary expenses, they’re now forced to cut back on necessities, or go into debt to pay for them. The increased stress and workload at home often lead to decreased employee morale and lower productivity. This makes the financial stress employees face an organizational concern as well as a human one.
Why Organizations Should Take Action
In a competitive labor market, like what we’re experiencing today, retaining top talent is of primary importance. Employees who feel financially secure are more likely to stay with their current organization, which helps to keep talented, highly skilled, and dedicated staff at the forefront of mission-critical work thereby reducing turnover. When compensation keeps up with the cost of living, employees are better able to manage their personal finances, leading to lower stress and higher workplace satisfaction.
Employees who are fairly compensated are also more likely to be motivated, productive, and engaged. When financial stress is alleviated, workers can focus better on their tasks, collaborate more effectively, and innovate. This ultimately results in greater mission-impact, team collaboration, and improved job performance.
Addressing the current discrepancy between cost of living and cost of labor makes your organization more nimble and shows employees that you’re willing to find flexible solutions to problems. This increases employee confidence in leadership and helps you retain your top talent. Showcasing adaptability and care for employee well-being also aids in finding and hiring the best matched talent for open positions. In both cases this increases your competitive advantage as an employer by making you a highly sought after place to work.
How Organizations Can Support Employees
Edgility’s experts recommend that organizations consider all factors when exploring ways to meet the market and stay fiscally competitive, and stable. Our team has a few options that will help organizations stay ahead of economic challenges while adhering to budgetary needs.
Budget for Annual Salary Increases
Annual salary increases might seem challenging if you are already managing a tight budget, but you don’t have to do it all at once. Start by scheduling smaller, incremental increases. Planning incremental increases spreads out the financial impact and allows for better budget forecasting. Another way to incorporate increases into your plan is to create a strong pathway for advancement by providing regular reviews that focus on clear goals and achievable competencies based on the level of the role (assistant, coordinator, manager, etc). This can help clarify what advancement could look like for employees, and create a clear-cut way to plan for the role long-term by forecasting (and “baking in”) potential salary increases ahead of time. Investing in your team will help improve retention and employee satisfaction, and in turn, support the continued growth of the organization by ensuring teams aren’t constantly replacing skilled workers.
- Expert Advice: If you’re still figuring out how you want your new compensation program to look, check out our free Compensation Philosophy Worksheet. This guide will help your team zero in on what is the most important, and translate that into your new policy.
How do employers calculate annual salary increases?
To calculate an annual salary increase, employers should refer to economic indicators like the Consumer Price Index (CPI), which tracks changes in the price of goods and services over time and/or they can use the Employment Cost Index (EPI). The CPI is often used to measure inflation, and employers can adjust salaries based on this percentage change. For example, if the CPI indicates a 3% rise in the cost of living over a year, an organization might apply a similar percentage increase to employee salaries. The EPI on the other hand provides information on how labor costs are changing and how the economy is faring. Learning how to leverage this information, and more specifically, the data around the cost of labor, can help employers build sustainable, competitive increases into their budgets.
Employers can also consider other factors like geographic location, housing costs, and industry-specific inflation to ensure that the increase they offer is both fair and competitive.
Implement a Living/Fair Wage Floor
Market rates and a living wage are not always the same thing. This is particularly true of roles that are traditionally undervalued such as elder care and housekeeping, but can occur in any role. Implementing a fair wage floor, also called a living wage floor, is one way to ensure people can afford to live in a specific geographic area.
While some organizations are in a financial position to set this outright, Edgility recognizes that’s not the case for all (we see you small businesses). When simply setting it outright is not an option, organizations should set one as high as they can and then create a plan to gradually grow the floor over time to get everyone up to livable wage. Here are a few ideas on how to do that.
- Take a phased approach (e.g. multi-year) but don’t move too slowly, as Living Wage is a moving target.
- Use annual salary planning as an opportunity to redistribute resources. Freezing salaries that are already over market value and having a lower percentage increase for wages already above the living wage floor are two ways to do that.
- Consider choosing a lower Living Wage threshold to start. For instance, use the wage floor for a single person with no dependents in your area, then move that up to a family-sustaining wage over time.
- Use natural attrition to increase or redistribute work and build up budget reserves.
See it in action: Learn how our clients, Para Los Niños and Planned Parenthood of Southwestern Ohio are leveraging our collaboration and their goals to improve the lives of their team members.
Flexible Benefits and Support
While adjusting for salary increases and implementing a wage floor are ideal ways to compensate for increased costs, organizations may not always be in a position to make those adjustments. Let’s take a look at some other strategies that can round out a competitive compensation package, and help bridge the gap for employees
Offer Stipends: Stipends are not the same as an increase in salary, but they can be offered as an added benefit that will give your organization more flexibility in how you address rising costs and contribute to an attractive compensation package. Stipends can be provided as regularly as you’d like – once a year, or monthly, weekly, daily, and at any set amount you decide. Making them a better choice for organizations seeking to level up their offerings, but in a way that can be easier on your budget and more sustainable. There are many types of stipends, but some of the most common stipends that are offered cover housing costs, work-related travel, health and wellness, technology/office supplies (great for remote workers!), and professional development. This additional benefit, no matter how small or the frequency, is a great way to show your team that you’re invested in their wellbeing and success.
Healthcare Benefits: In 2023, the national average cost of insurance was nearly $24,000 annually for a family of four. Many organizations now cover health insurance for the employee or offer a discounted package for the employee and their family. However, because premiums are only part of an employee’s healthcare cost (they might still have co-pays for care) one way to stay competitive and add value to your compensation package would be to fully subsidize healthcare benefits (medical, vision, and dental) for the employee. There are also other options you can consider to supplement your program, including different savings or reimbursement options such as a Flexible Spending Account (FSA), Health Savings Account (HSA), or Health Reimbursement Arrangement (HRA). Fortunately, there are many ways to support the health of your employees while also helping to alleviate some of the related costs. Tip: the next time you’re ready to revamp your healthcare options, ask your employees what they’d like to see. Maybe it’s something you can offer without breaking the bank.
Ultimately, flexible benefits like stipends and healthcare support can help address the real financial challenges employees face, even if direct salary adjustments aren’t possible. These measures show a commitment to their well-being and can make a meaningful difference in managing essential expenses. The key is understanding your team’s needs and finding practical ways to meet them.
- Expert Advice: Survey your employees regularly to understand which benefits they value the most. In-depth surveys like our Talent Equity Assessment can help leaders understand how their employees really feel about the organization, identify opportunity gaps, and pave the way for improvements through a deep understanding of the data.
Building an Effective Compensation Program for Tomorrow
The cost of living is often in flux, which makes it essential to revisit compensation packages regularly. Regular evaluations allow for thoughtful, incremental changes that align with budget realities and organizational values, which can help attract and retain dedicated staff, ensuring they can continue advancing the organization’s mission without unnecessary financial stress. A win-win for both parties.
Our team knows that every organization has unique goals and budgetary constraints. There is no one solution that works for every situation, so if you could use an experienced hand in determining the best ways to maintain competitiveness and adjust for the current discrepancy between cost of living and cost of labor, contact Edgility to work with one of our compensation experts.
