Why Salary Calculators Don’t Compute
If you are an executive contemplating a job change with a physical move, the odds are you have consulted an on-line salary calculator tool, hoping it will give you guidance as to the cost-of -living differential in various parts of the country. In very plain terms, these calculators can be misleading, and could cause you to reject a great job you might want. Even in great offers, employers almost never offer the kinds of raises that these calculators imply you might need.
Example: You are a defense executive living and working in Huntsville, AL, making $200K per year. You have an offer to come to Los Angeles for a new position, with compensation of $240K per year, a 20% increase, and your relo costs will be covered. Not a bad offer in this economy. You go to CNN Money’s Salary calculator, which shows you should be making $284K. You double check at Salary.com, and it tells you that you need $299K to break even. Are these numbers legit? Should you take them seriously? Let’s take a closer look.
Start with taxes. Your combined Federal, State, FICA and Medicare take 40% off your taxable pay. Let’s say that you put away 6% in your 401K, and you have decent deductions, so your net effective total tax rate is closer to 30%. Minus the 401K and taxes, your current disposable income is $128K. But some of that goes to fairly fixed items that aren’t much affected by geography.
Food, clothing, vacations, savings, college tuition, doctors, car payments and golf all remain about the same from region to region. What elements really are affected by location? Housing, fuel, some taxes go up. You must take a look at the individual components of YOUR personal cost of living to see what goes up. In the example cited, an executive moving from Alabama to California might expect to double their housing costs, and will have about a 4-5% increase in state income taxes. The rest, fuel costs, sales taxes, etc. might be a bit higher, but not significantly (as a percentage of salary). Our estimate of the actual geographical increase in cost in this example is about $25-30K, not the $84-99K you might see in an on-line calculator. So the offer at $240K is a more than break even, and definitely not a loss in income.
The key point here is that salary differential calculators only apply to a portion of your income that goes to basic costs – not to your entire income. Be realistic in using tools like on-line calculators. Create a spreadsheet and look at the actual costs that will change for you, and use that scenario to make a decision. Know that salary calculators don’t apply as much to upper income people. Don’t be misled into making a decision that doesn’t reflect your personal situation.
Another thing to keep in mind: Future employers will look at your comp as a baseline for your next increase. 4-5 years from now, if you later move back to a lower cost area, your next employer will be looking at $250-260K+ in comp, not $210K (what you’d be getting if you stayed at current job). Although it is true that most employers don’t increase comp upwards to allow for geography in executive hires, it is even more true that employers almost never adjust executive comp down to reflect a move to lower cost areas, so your new comp will be based on the increase you took when you made the change. Generally speaking, taking a raise now increases your comp for the rest of your career.
We believe that the choice to make a change should be based on fit. If the new position represents a clearly superior situation – better company, better role, new challenges, better boss, brighter prospects for the future, these are the strongest determining factors. Be careful not to rule out good opportunities because an on-line calculator led you astray.