Sunday, May 27, 2012

How Does Your Salary Compare?

Most of us spend much of our time working for a salary. The average person will spend close to 40 years earning a salary of some sort. Do we spend enough time and effort making sure what we get paid is adequate? People who are in organized labour such as unions, are often made aware of the impact of inflation on their purchasing power, and the value of their benefits, over time. When you work in a profession or trade for a long period of time most people get a sense of what the market pays. This may be from listening to people complain about being under paid or boasting about the new job they just landed. We also get a sense of what the market pays from job adverts in newspapers or online. Increasingly, especially amongst the younger generation, people openly compare payslips while having lunch in the company canteen. These snippets of salary information lead us to feel either adequately paid or more likely under paid. Most of us tend to over estimate our value and as a result feel we do not earn enough. How much is enough? A little bit more?

It is much more difficult to get a sense of how our salary compares when we move to an unfamiliar environment. When you move to a new country, city or state it becomes much more difficult to compare your current salary to what you have been offered because the cost of living will also be different and that affects your purchasing power. If you are offered a salary that is 10% higher, it looks really attractive, but is it really? What if your cost of living was 20% higher? What if you have to pay for items you don't have to pay for now? What if you have to pay more tax? Of course the opposite could also be true. If you are offered a salary that is 10% lower, it looks really unattractive, but is it really? What if your cost of living was 20% lower? What if you have to pay for less items than you pay for now? What if you have also paid less tax? All these factors make comparing salaries when relocating challenging.

A useful tool to help people who need cost of living information to help them calculate cost of living differences and compare salary purchasing power is the salary purchasing power parity calculator (SPPP) report from

John Hunt, a Financial Manager in Houston, recently had a salary offer from a large multinational headquartered in Dubai. He was pretty happy with the salary offer of $120,000, tax free, as this was equal to his gross salary in Houston. His net (after tax) salary was $92,000 in Houston. In addition he was offered a housing allowance, which with the low rentals in Dubai would be more than adequate. That would mean he could rent out his home in Houston to cover his mortgage. He would also receive medical insurance and an annual return air ticket to Houston and 5 weeks annual leave each year.

Although he was excited about the offer of $120,000 tax free, he was not sure how far that would go in Dubai compared to his net salary of $92,000 in Houston and decided to use the SPPP calculator to see how his offer compared to his current purchasing power.

He had previously registered on so he logged in using his username and password. He clicked on the "Purchase Credits" menu and within 10 minutes had a credit loaded using PayPal and was ready to run his report. From the "Calculators" menu he choose the Salary Purchasing Power Parity Calculator (SPPP): The SPPP report calculates how much you need to earn in another location to compensate for a higher cost of living, hardship, and the exchange rate, in order to have the same relative spending power and as a result have a similar standard of living as you have in your current location.

John was prompted for a reference for his report to help him identify his reports for future reference. He then selected Houston as the location that he was being relocated from and Dubai as the location that he was relocating to.

Next John selected the basket costs that will he will pay for from his salary and selected Household and Healthcare as provided for by his employer. John read that basket costs that are provided such as in his case, household and healthcare costs, are not included in the cost of living calculation.

John then selected US Dollars as the currency and entered his net salary of 92,000 in Houston so that he could compare this to the net salary offer in Dubai for a more accurate comparison

Having checked all his selections in the calculator John clicked on "Run Report". Within a few minutes displayed his report. He saved a PDF version and had a look at what the report contained. This is what he learned:

*For the basket he selected (excluding Housing and Healthcare) Dubai is 8.78% more expensive than Houston
*The relative hardship (quality of living) between Houston and Dubai is 10%
*Applying the cost of living difference based on what will be paid from salary, together with the hardship difference, the Xpatulator calculation is as follows:
Home/Current location salary          $ 92,000.00
+ Cost of living difference (8.78%)  $   8,077.60
+ Hardship Difference (10%)           $   9,200.00
Total                                              $109,277.60

This means, based on all the above factors, that John would require a net salary of $109,277.60 in Dubai to have the same standard of living as currently enjoyed in Houston on a net salary of $92,000. This salary compensates for the overall cost of living difference of 8.78% and the hardship difference of 10%.

Given the offer of $120,000, John calculated that he would have an increased purchasing power of approximately 9.8% and accepted the job, confident that he would be better off financially, in addition to the better career prospects the new job was likely to bring.