Don’t Confuse the Cost of LIVING with the Cost of LABOR

Cost of Living/Cost of Labor

In working with clients in the development and management of base pay programs, we may hear about or receive questions about geographic cost of living being used to determine or justify pay rates. For example, “our Stanford, CT location has a much higher cost of living than the headquarters in Billerica, MA”. This may be based on employee experience and not actual cost of living information. This demonstrates confusion about what impact the cost of living has on pay levels. In addition, annual salary increases are sometimes referred to as cost of living increases.

What is Cost of Labor?

Cost of labor is what an employer pays to attract and retain an individual with the education, experience and skills needed to do a job. This is usually based on supply and demand in that location. Compensation professionals utilize ongoing employer-completed salary surveys (compensation market data) to establish and adjust pay ranges. Therefore, what employers pay in each geographic area reflect what other employers in that area are paying. Over time, pay for jobs increase when supply is low, and demand is high. When the demand drops, and the supply is high, the pay does not increase but can decrease.

What is Cost of Living?

“Cost of living is the amount of money needed to sustain a certain level of living, including basic expenses such as housing, food, taxes and health care” (Investopedia). Over time the cost of living has both increased and decreased. However, most don’t realize that it can decrease, and many employees still expect an annual increase to “maintain the same standard of living”.

Often, cost of living is higher in major metropolitan areas than the cost of labor. The Economic Research Institute Geographic Assessor provides differentials for both cost of living and cost of labor by salary levels compared to the US average.

As an example, the following table was created from our ERI subscription of Geographic Assessor. It compares the salary rate of $75,000 between the two cities of Newport News, Virginia and San Diego, California compared to the US Average and each other. It shows that the cost of labor is about 13% more in San Diego ($84,706) than Newport News. However, the cost of living in San Diego is significantly more than Newport News or 64%. If you want to live in a city where the cost of labor and cost of living is equal, Newport News is the place to be.

It is a prevailing practice or best practice for employers to use compensation market data to establish pay ranges, differentials between locations and establish salary increase budgets, not the cost of living. In these examples above, in developing a salary range for the two cities, we would recommend a 10-15% differential for these two cities for this pay level. We would not base it on the 64% differential in the cost of living.
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Compensation Philosophy – A Foundation for Decisions

What is a Compensation Philosophy? 

Does your company have a compensation philosophy? What does that even mean?! A compensation philosophy is a description of the objectives, guidelines and principles on which compensation policies, programs, systems and practices are based. It answers why a compensation program is designed or functions as it does or will in the future. It forms the foundation for making decisions and communicating them internally and externally.

It’s important to have a compensation philosophy to provide clarity and guidance to management in making decisions about: the ongoing effectiveness of programs and practices, new or unexpected situations within and outside of the organization, issues with talent acquisition and management, changes to the economic and market conditions and regulatory environment, and unusual employee situations and issues.

When consistently translated into actions through policies, programs, systems and practices and communicated to employees, it enhances employee pay satisfaction. If the philosophy statement doesn’t impact how pay programs are designed and managed, it is just rhetoric. Therefore, at its best, the compensation philosophy influences desired behaviors (and performance) of employees.

Read more about what a compensation philosophy includes…

What are some examples?

Check out these websites:

To learn more or discuss this further, contact the Wilson Group at

Top 10 Mistakes Made with Incentive Plans – by Susan Malanowski

  1. Too many measures

“Less is more” when determining the criteria or metrics to use in the plan. Plans with 3 to 5 measures can provide balance and focus. Too many measures dilute a participant’s attention and motivation.

  1. Metrics with a weight less than 10% of the total

One of the signs of too many measures is when a measure is weighted to be less than 10% in calculating the incentive. For most participants, a measure that is less than 10% adds very little to individual earnings and so they are easily ignored.

  1. Setting goals that are difficult to evaluate differences in multiple levels of performance

For each measure, goals are set. Goals are most effective when the manager and the employee knows when performance has been achieved, has been under achieved and over achieved and how the payouts align with those levels. Binary or yes/no goals present a significant issue for the incentive plan participant. What happens if there is over achievement or the results were actually close to the achievement or “yes” level but not quite? 
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New England Companies Paying More for Talent in 2017

According to a recent study by Wilson Group, Concord, MA, and Bose Corporation, New England companies are expecting modest growth in their business. Sixty-two percent (62%) of companies recently surveyed expected growth exceeding 4% in 2017; this compares to only 44% for 2016 actual growth. Plus 43% of companies surveyed are planning to increase their staffing levels and 41% are planning no change in staffing for 2015; this shows that employment is likely to remain strong in 2017 and the competition for talent will intensify.

The survey, “Compensation Planning for 2017” was conducted in November, 2016 and was sponsored by BOSE Corporation and Wilson Group. It includes survey responses from 58 leading New England companies such as TJX, iRobot, Hubspot, Mathworks, Dana-Farber Cancer Institute, New Balance, Harvard University, and DentaQuest. The survey report can be purchased here.

The jobs with the highest hiring challenges are professional level positions in Information Technology and Engineering. “This is not surprising given the knowledge based economy that characterizes the New England market” says Tom Wilson, President of Wilson Group.

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New FLSA Regulations Impact Variable Pay Design


Variable pay programs are becoming more common for non-exempt employees. The new FLSA regulations have clarified the impact on overtime pay and the standard threshold salary level for FLSA exemption. For non-exempt employees, any non-discretionary bonus needs to be included in their overtime pay. Plus, under the new regulation, 10% of any bonus can be included with the salary to determine whether pay exceeds the standard pay threshold of $47,476. Other factors may impact the cost and effectiveness of variable pay programs. Continue reading…

To learn more or discuss this further, contact the Wilson Group at

Primary Compensation Trends for 2016 – What’s Hot and What’s Not

Companies will be increasing base salaries 3% again this year. Companies are expecting greater competition for talent in 2016. So, most people will be getting a 3% raise and fewer people will receive no pay increase at all. This is just one of the findings from a recent survey report conducted by Wilson Group, Concord, MA, and sponsored by the BOSE Corporation.

The survey included data from over 50 leading companies in New England, and these companies reflect practices seen in other national and international studies. The survey was published in November, 2015, and looked back on 2015 and asked for projections for 2016.

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Long-term Incentives for Private Companies: Do you need them?

Long-term incentives (LTI), including stock options, restricted stock, have long been a key element of total compensation plans in public companies. The principle difference between LTI plans in public versus private companies is that the funding for these long term incentive plans comes directly from the private company’s bank account. While public companies have to expense options and restricted stock, the gain that is realized is paid for by outside investors. This is not true in a private company unless the objective is to sell the company to outside investors. If the private company issues stock, and the value grows, when it is time to redeem the shares, the company pays for this directly. Therefore, the design of these LTI plans need greater care and thought than in public companies. In fact, several surveys have indicated that while virtually all public companies use equity or LTI plans, only approximately 60% of private companies use them.

So why do private companies use LTI plans? Our perspective at the Wilson Group is that, if a company can achieve the desired level of revenue and profit growth without LTI plans, then do it. It is just that simple. LTI plans are used because the firm needs a leadership team that care about the growth, sustainable profitability and long-term value of the company; the same concern of most business owners. Do you want your executives to be “hired-guns” or “adopted” into the family business? How you answer this question will tell you what kind of compensation plan you need.

Which executives should be included in an LTI plan? Most private firms start with the CEO. If this person is from the outside, then equity will likely be needed, especially if you want the person to think more like an owner than a “hired gun.” After this is in place, or if the CEO is an owner, these plans are expanded to the senior management or the leadership team. LTI plans usually stop there, but there are a number of firms that use stock options or restricted stock as performance based recognition awards to all or many employees.

In public companies stock options and restricted stock are the most prevalent vehicles for long term incentives. In private companies, the vehicle depends on the purpose and structure of the plan. These may range from 3 to 5 year cash-incentive plans (i.e., if the company gets to $X level, you will receive $Y bonus after Z years) to performance-unit or simulated-stock plans. Of course, private companies can use options or stock, but simulated equity plans can have more flexibility when it comes to performance measures, goals, and payout mechanisms. While most LTI plans in public companies use Total Shareholder Returns as the prime measure, private companies use more operational metrics like revenue growth, profitability and return. Then, the number of units awarded and their value can be determined in relation to factors that drive growth and corporate value.

Finally, a key issue for LTI plans is to determine the share of ownership or value that will be awarded to LTI plan participants. In public companies, the equity value usually represents between 10% – 20% of the company’s total outstanding shares. This is a reasonable benchmark for a private company, but because of the reasons stated above, these plans are usually of less value. If they have significantly less “expected value”, then they will not be competitive enough to retain senior leadership especially if the company grows or becomes a leader in the market. Public companies are always looking for good talent.

We find that small private companies (under $10M in revenues) tend not to use equity plans, unless they are on a direct shot to an IPO, acquisition or are a venture financing backed firm. But, as they get larger, their need for leadership talent also grows and the firm may need someone who has “done this before.” This means they will seek to bring in talent that likely had equity as part of his or her total compensation package. Consequently, private companies growing past $50M start using LTI plans more frequently. When the firm reaches over $100M or $250M, then they most likely have some form of LTI plan as described above. These plans tend to follow the evolutionary growth and development of the company.

There are over 100 decisions needed in putting together an effective long-term incentive plan for a private company. The methodology for making these decisions is almost as important as the decisions themselves. These plans bond the individual and the company for the long-term, and are based on creating value for both. So long term incentive planning is fundamentally a win-win opportunity but needs to be carefully planned and executed to realize desired LTI benefits.

Thomas B. Wilson

President, Wilson Group


NE Companies Paying More for Performance in 2015 Compensation – by Tom Wilson

According to a recent study by the Wilson Group, Concord, MA, and the Bose Corporation, New England companies are expecting modest growth in their business.  Seventy-one percent (71%) of companies recently surveyed expected growth exceeding 4% in 2015; this compares to only 55% for 2014 actual growth.  Plus 50% of companies surveyed are planning to increase their staffing levels and 37% are planning no change in staffing for 2015; only one company in the survey indicated they were facing layoffs or staff reductions.

The survey, “Total Compensation Planning: Review of 2014 – Projections for 2015” was conducted in November, 2014 and was sponsored by the BOSE Corporation and the Wilson Group. It includes survey responses from 57 leading New England companies such as Constant Contact, Dana-Farber Cancer Institute, Eastern Bank, iRobot, and TJX. The survey is available at the Wilson Group website (

The jobs with the highest hiring challenges are professional level positions in Information Technology, Engineering, and Sales and Marketing.  “This is not surprising given the knowledge based economy that characterizes New England market” says Tom Wilson, President of the Wilson Group.

“Merit pay increases are likely to be the same in 2015 as in 2014” stated Wilson.  The projected pay increase averages 3.0% for both years.  “But, the number of people not receiving a pay increase will be slightly higher in 2015 than 2014,” says Wilson.  The report sited that 4.5% of employees didn’t receive a pay increase in 2014 and 5.0% are not likely to get one in 2015 in these companies.

Bonus plans will continue to be a major element of compensation and virtually all companies in the survey have these performance incentive plans.  Over 88% of these companies reported making bonus payouts in 2014.  The average payout will be a little less than the target payout, with the median payout at 90% of the planned amount.  The range of payouts for most companies fell between 47% of the target and 130% of the target for exceptional performance.

“Few companies are planning any major changes to their stock/equity plans,” says Wilson. “Seventy-seven percent (77%) are planning just normal updates, and some are developing new guidelines for awards given the migration from stock options to restricted stock.”  Companies are changing the performance measures with bonus plans to reflect more emphasis on revenue growth and customer satisfaction.  “As the market heats up for talent, New England companies are ready to link rewards more closely to performance and to use a variety of tools to accomplish this,” concludes Wilson.


Sales Compensation: When to Stop Paying Hunters and Start Paying Farmers

The role of new account sales representatives or Hunters is focused on getting the organization new business. Account Managers, or Farmers, are responsible for growing and maintaining the revenue stream. At a point in time there is a “handoff” of an account from the one who generated it to the one who is going to manage it over time. The timing is dependent on the nature and length of the sales cycle, on who is the buyer and “administrator” within the client, and should the “Hunter” have any future dealings with the customer. In strategic partners or large accounts, these tend to be handled by a team, where the Hunter is only involved when there is an upgrade to the products or similar issues. The Farmer or Account Manager   handles all the day to day activities, renews the contracts, and looks for new opportunities. When new opportunities arise, he/she works out with the Hunter who will take the lead on the opportunity. The reason is that the Account Manager has a relationship with one person in the organization (the internal administrator or program manager) and the Hunter has a relationship with the decision maker or senior executive. There is a longstanding “rule” that an individual can usually only span two levels in an organization. If the Hunter starts working with the client’s administrator, he/she will lose contact and credibility with the senior executive who bought the contract/service. This is an important principle in dealing with large accounts. So, one guideline regarding the timing of the handoff in the sales organization is when the management of the account or service is transferred to someone lower in the client organization for ongoing management. This may take 3 to 6 months after the contract has been signed. The pay of the Hunter is for this period (or the contract’s value) and the Account Manager picks this up and goes forward, and may not receive any income until the time of the contract’s renewal or there are additional sales (upsells) within the account.

If however, the business model relationship is that the decision maker is the administrator, then the timing is dependent on how quickly the Account Manager can establish a relationship with the decision maker. In this case, the Hunter and Account Manager are seen by the client/customer as being at the same level, and the Hunter was the one who found and opened the opportunity, but the real company-customer relationship is forged with the Account Manager. In this case the Hunter is paid based on the contract value once it is invoiced (depending on how the invoicing works in a subscription model), or for some period of time for the sales effort to be adequately compensated. Then, the revenues, renewals and upsells, belong to the Account Manager. The Account Manager does not need to go and get new business, but needs to retain, renew, service (i.e., address problems, provide education, support the products applications, etc.) and upsell new opportunities. The Account Manager takes advantage of the growth of the business of the client as well as the use and expansion of the product/service within the client. The Hunter is off looking for new opportunities.