Companies don't look at buying power when determining compensation. If you live in some hypothetical location where milk costs $1000/galloon, a company isn't going to pay you $100,000,000/year; that would make no sense at all. Dublin, Ireland is more expensive a place to live than is Omaha, NE, but tech workers in Dublin get paid maybe $60K/year.
Actually, they do consider local cost of living. I worked for a global IT company that had different pay scales for the same jobs depending on the market.
Comapnies do have different pay scales for different locations but it has nothing to do with COL, although that might be their pretext.
It has everything to do with local labor market supply and demand dynamics. When there is a lot of competition for the same potential employees companies will pay more, out of necessity. If company A offers a candidate $300K and Company B offers $400K, then Company A will probably lose out.
Companies set their salaries based on what their competition in the labor market is willing to pay for the same candidates, not how much it costs for a gallon of gas.
Actually, they do consider local cost of living. I worked for a global IT company that had different pay scales for the same jobs depending on the market.
Comapnies do have different pay scales for different locations but it has nothing to do with COL, although that might be their pretext.
It has everything to do with local labor market supply and demand dynamics. When there is a lot of competition for the same potential employees companies will pay more, out of necessity. If company A offers a candidate $300K and Company B offers $400K, then Company A will probably lose out.
Companies set their salaries based on what their competition in the labor market is willing to pay for the same candidates, not how much it costs for a gallon of gas.
Exactly!
Big tech companies will pay someone in Prague, CZ around $60K/yr while the "same" position in Austin, Texas would pay $350K/yr, but Prague is actually more expensive than Austin!
I think that some of the confusion regarding this discussion is due to terminology. I've seen the term "Location Adjusted Rates" used to describe the differential pay rates for the same job across differing areas.
It's really common for those areas with higher labor rates to also be higher cost of living as well, but it appears that the more pertinent factor is in fact the pay rate for labor in that area.
I'm more familiar with public employee pay scales in certain areas, and their explanation almost always was based on surveys of the pay scale for comparable emloyees in the specific area, and what they were getting paid - hence, their labor rate.