Income comparisons

Compensation in London and Houston: a focus on the finance and oil & gas industries.

Greta Skudra 2013

Created for Global Urban Lab Rice University: School of Social Sciences & Kinder Institute for Urban Research

Table of Contents Table of Contents .......................................................................................................................................... 1 Executive Summary....................................................................................................................................... 2 I. II. III. IV.

The Issue ........................................................................................................................................... 3 The Research .................................................................................................................................... 4 The Findings ...................................................................................................................................... 5 Conclusions/Implications ............................................................................................................... 11

Bibliography ................................................................................................................................................ 14

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Executive Summary Houston and London are rarely thought of in the same vein. However, it is worth comparing them due to the contrasting nature of their cost of living: London is one of the most expensive cities in which to live whereas Houston is one of the least expensive. In this paper, I compare the compensation of Londoners and Houstonians working in Finance (what London is most known for) and Oil & Gas (what Houston is most known for). Unsurprisingly Londoners do enjoy higher salaries in the finance industry. However, Houstonians enjoy higher salaries in the oil and gas industry. Additionally, when factoring in the cost of living, Houstonians enjoy an advantage in all job positions considered; quite simply, they enjoy a higher standard of living from their salaries. However, it is also important to look at nonmonetary benefits. For example, the British enjoy a feeling of greater financial security than do Americans, as well as a less stressful work culture. So in the end, professionals must decide whether they care more about making more money or about the work culture and other more subjective factors.

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I.

The Issue Exactly how does compensation differ in London and Houston in the finance and oil & gas

industries? It is rather novel and different to compare these two cities, whereas usually cities such as New York and London are coupled together for comparison. Of U.S. cities, Houston is often forgotten behind New York, LA, and Chicago, but indeed it deserves more recognition as the fourth largest city in the United States, complete with a booming business district, and a much faster growing population than New York, LA, and Chicago. I compare London and Houston because they provide a stark contrast in their cost of living; London has a reputation as one of the most expensive cities in the world, whereas Houston is thought to be one of the cheapest cities in the developed world. Indeed, according to expatistan.com, the cost of living is 84% higher in London than in Houston.1

London

Houston

1

See http://www.expatistan.com/cost-of-living/comparison/houston/london for the comparison. Last updated April 13, 2013.

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The salaries in the finance industry in particular will be investigated because London is currently recognized as the financial capital of the world, at least for the time being. The oil and gas industry will also be explored in particular because Houston is the oil and gas capital of the world. While Londoners enjoy higher salaries than Houstonians in the financial industry, is it enough to make up for London’s more expensive cost of living? Also, how do the salaries in the oil and gas industry compare in the two cities? This exploration is significant for urban research in seeing what motivates qualified candidates to take a job in one location versus another, despite possible monetary inequalities. Which city will prove to be the better deal money-wise?

If the financials do not provide an acceptable explanation, perhaps the other more subjective and soft factors affect one’s decision when choosing a job location.

II.

The Research In order to delve into these questions regarding compensation and location, background

research was completed on salary structures as well as salary levels in the various professions associated with the finance and oil and gas industries. The specific salaries were restricted to white-collar professions to provide for a more unified analysis so as to eliminate the need to compare the consequences of the differing minimum wages in the United States and the United Kingdom. The analysis was prepared mainly through the reading of industry reports as well as the use of online databases of SalaryExpert and Glassdoor. For the finance industry, the salaries in Houston of the top four US banks were compared with the salaries of the top four UK banks.

The salaries that had correlating and sufficient data in both locations were analyzed and sorted.

The UK salaries in British pounds were converted to US dollars at an exchange rate of 1.51. The collected data was then arranged into graphs and tables for easier comparison of the 4|Page

quantitative data. Qualitative information was also compared to provide a more thorough background on the subject.

III.

The Findings The data from Glassdoor revealed that London indeed has higher salaries for its white-collar

employees in the finance industry. However, they are not nearly high enough to make up for the higher cost of living. In the following graph, the London-based salaries of the top four banks of the United Kingdom (Barclay’s, Lloyd’s, Royal Bank of Scotland, and HSBC) were compared with the Houston-based salaries of the top four banks of the United States (Bank of America, Citi Group, Wells Fargo, and JPMorgan), in U.S. dollars.

Top 4 Bank Averages $140,000.00 $120,000.00 $100,000.00 $80,000.00 Houston Avg.

$60,000.00

London Avg.

$40,000.00 $20,000.00 $0.00 Financial Analyst

Business Analyst

IB Analyst

Associate

Vice President

In the entry-level positions available post baccalaureate studies, Londoners enjoy a base salary advantage of around 20%. However, once they reach the Associate and Vice President positions, the advantage shrinks to 5% and then 2%, respectively. This finding may explain how 5|Page

London attempts to attract top talent – through higher price-sticker starting salaries in the entry-level positions. Further, since U.S. top executives are paid significantly more on average than in other countries across the globe, the statistically insignificant differences between the top positions in the U.S. and the U.K. are easier to understand (Fernandes).

Additionally, it is also essential to look at the bonuses awarded on top of base salaries when looking at the finance industry; bonuses can account for a substantial increase to a banker’s yearly salary. The following graphs looks at the same positions and banks as the previous graph, but with bonuses included in total compensation.

Top 4 Bank Total Averages $200,000.00 $180,000.00 $160,000.00 $140,000.00 $120,000.00 $100,000.00

Houston Avg.

$80,000.00

London Avg.

$60,000.00 $40,000.00 $20,000.00 $0.00 Financial Analyst

Business Analyst

IB Analyst

Associate

Vice President

With this added information, some interesting discoveries come to light. The difference between Houston and London salaries in the analyst positions shrink to about 10%, down from the 20% seen with only the base salaries calculated. Even more interesting is that London’s higher positions of Associate and Vice President then swell to a 16% advantage, up from 5% and

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2%, over their Houston counterparts. Taking into account both base salary and total compensation together in these two cities, it is clear that Londoners enjoy advantages in salary, but in different structures than the Houstonians. In Houston it seems that the lower positions rely more on their bonuses to earn money, while in London the bonuses become more important once reaching a higher echelon. However, these salaries cannot be compared on their own. They need to be seen in the context of the cost of living in the respective cities.

Before looking at the cost of living, it is useful to also look at a second industry, the oil and gas industry. According to SalaryExpert, Houston has significantly higher salaries for petroleum engineers. A more reliable analysis was prepared using Glassdoor, looking at corresponding white-collar salaries at BP and Shell, two oil giants with large presences in both Houston and London. The following two graphs look at the salaries of Shell and BP employees in Houston and London, the first including only base salary and the second also including bonuses.

Oil Industry Salaries $160,000.00 $140,000.00 $120,000.00 $100,000.00 $80,000.00 $60,000.00 $40,000.00 $20,000.00

Houston London

$0.00

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Total Oil Industry Salaries $180,000.00 $160,000.00 $140,000.00 $120,000.00 $100,000.00 $80,000.00 $60,000.00

Houston

$40,000.00

London

$20,000.00 $0.00

It is evident that Houstonians enjoy a rather sizeable advantage in salary in the oil and gas industry when compared to Londoners. This result is surprising given that London is more expensive than is Houston. What is truly surprising is that the business and finance analysts are paid significantly much more – up to 50% when incorporating bonuses into the equation. This figure does not yet even take the cost of living into consideration.

The cost of living in Houston is infamous for being very low for a city of its size, while the cost of living in London is infamous for being one of the highest anywhere. In fact, the cost of living in London is around 84% higher when compared to Houston (Expatistan). Rent and transportation prove to be the biggest detriments to London’s cost of living (Numbeo). For example, monthly rent for a furnished 900 square foot apartment in the expensive part of the city is equivalent to $3,315 in London and $1,273 in Houston, a 160% difference (Expatistan).

Food is also more expensive. For example, one pound of chicken breast in London costs $6.86, 8|Page

whereas in Houston it is $3.51 (Expatistan). Similarly, a dozen eggs in London cost $4.20 whereas in Houston it is $2.24 (Expatistan).

Let us now consider the salary differences in light of the actual cost of living in the two cities. If a Vice President in Houston making $153,000 decided to relocate to London, he or she would need to make 84% more money, or $281,520, to maintain the same standard of living enjoyed in Houston. The actual average London salary as Vice President—$178,000—falls dramatically short. Similarly, a Shell Finance Analyst making $95,000 in Houston would need to make $174,800 to maintain his or her standard of living. However, the actual average London salary falls embarrassingly short at just $45,000. The following two graphs look at Houston salaries when taking into account London’s cost of living and comparing them to actual London salaries.

Finance Salaries Accounting for Cost of Living $300,000.00 $250,000.00 $200,000.00 $150,000.00

Houston Equiv.

London Avg.

$100,000.00 $50,000.00 $0.00 Financial Analyst

Business Analyst

IB Analyst

Associate

Vice President

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Oil & Gas Salaries Accounting for Cost of Living $350,000.00 $300,000.00 $250,000.00 $200,000.00 $150,000.00 $100,000.00 $50,000.00

Houston Equiv.

London

$0.00

From these numbers and their subsequent graphs, it is easy to see that Londoners have considerably less purchasing power, especially in the oil and gas industry.

Nevertheless, we cannot ignore the nonmonetary rewards and benefits. Issues such as work/life balance, job flexibility, training, and recognition are becoming increasingly important considerations for today’s workforce (The HR Specialist). These factors are especially important for candidates considering a job move (Hudson UK). The new workforce is heterogeneous, has varied needs, and thus it is difficult to fit under one “rewards umbrella� (Schroeder). UK employees generally enjoy a less stressful work life due to their culture; Americans are notorious for having a work ethic demanding more hours and that more be accomplished per hour. Citizens of the UK also have some special benefits such as free healthcare, Basic State Pension, plus tax incentives for personal retirement plans (MetLife). Moreover, Brits feel less

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concern from financial issues (44% versus 59% of Americans) due to broader choices and availability of healthcare, insurance, and investment products (MetLife). Nearly 55% of Brits feel prepared to make their retirement goals as opposed to only 22% of Americans (MetLife). Even though both countries are about to experience problems with an aging working population, 45% of UK companies offer benefits geared towards aging populations, including flexible working arrangments and offering time off for caregiving responsibilities whereas only 18% of U.S. companies do (MetLife). Yet, British employees are feeling a higher need for private health insurance, and U.S. companies have an advantage in this area because the lack of a U.S. healthcare system had forced them to adapt earlier (MetLife). In the end, both countries offer unique advantages to benefits packages and work culture.

IV.

Conclusions and Implications People are attracted to London careers for their high starting salaries in finance as well as

the nonmonetary rewards. However, taking into account cost of living, Houstonians have better value in all positions considered in the paper, specifically within the financial and the oil and gas industries. Choosing an appropriate compensation package for comparison is difficult; it is necessary to synthesize metro, industry, as well as job category data together in order to increase recruiting and retention efforts (Ritter). Thus, it can be said that the recent projection that London may lose its status as the financial capital of the world can be partly attributed to London companies needing to reevaluate their compensation packages (Bowers).

As someone who has lived in both London and Houston, allow me to consider a personal example. If upon my graduation from Rice University I decided to go into either the finance or the oil and gas industry, and I had the choice between London and Houston, which one would I 11 | P a g e

choose? If I were looking at compensation solely and had the choice of my job position, I would definitely want to work as a financial analyst at Shell in Houston – I would make significantly more. When taking into account living expenses, being Vice President at a top bank would be immensely more attractive in Houston.

Job choices, as we know, are made on more than just salaries alone. I personally love Houston’s weather and I am not so fond of London’s. Yet, London offers much in culture and activities, whereas in comparison, Houston lacks in this area. So I can see the decision to choose between Houston and London when entering the finance industry to be difficult. However, I think that between the real salaries and the weather, I personally would choose Houston. I would not worry about healthcare specifically because the large companies that I considered all have sufficient health insurance. My choice of location could also depend on where I am from; since I grew up mostly in the United States, it might make me feel more comfortable to choose a U.S. location. A last consideration that I would find to be very useful would be to know if there are any differences in the likelihood of ascending the career ladder in the two cities, especially as a female in a traditionally male-dominated career.

It must be noted that the calculations and analysis performed for this white paper are only a starting point; I was limited to sources readily available to the public. A more complete analysis would gather exact salaries and bonuses from companies. However, this report does provide solid estimates of the differences between compensation in London and Houston in specific industries, as well as some nonmonetary aspects worthy of consideration.

London is an international cultural center, which undoubtedly attracts many people. Since it is known as the financial capital of the world, it also specifically attracts those interested in the 12 | P a g e

finance field. However, it would be interesting to see whether more bankers would come to Houston if they knew they would enjoy higher real salaries. For those interested in the oil and gas industry, a position in Houston seems to be the easy choice since the salaries are substantially higher, even when not taking the cost of living into consideration. Even though Houstonians enjoy monetary benefits, the more subjective factors such as work/life balance and stress levels cannot be so easily measured. If professionals had the actual choice between the higher paying Houston position and the less paying London position, they would also consider factors such as the reputations of cities, proximity to family and friends, and other quality of life issues. In the final analysis then the chief marker of worth in a capitalist system— financial compensation—is only but one consideration among many.

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Bibliography Bowers, Simon. London to lose title of world's finance capital, study warns. 11 November 2012. 19 March 2013 <http://www.guardian.co.uk/business/2012/nov/11/london-lose-title-finance-capital>.

Expatistan. Cost of living comparison between London (United Kingdom) and Houston (United States).

2013. 15 March 2013 <http://www.expatistan.com/cost-of-living/comparison/houston/london>.

Fernandes, Nuno et al. The Pay Divide: (Why) Are U.S. Top Executives Paid More? 2006. 25 April 2013 <http://finance.bwl.unimannheim.de/fileadmin/files/areafinance/files/Paper_Finance_Seminar/Ferreira.pdf>.

Glassdoor. Salaries Index. 2013. 15 March 2013 <http://www.glassdoor.com/Salaries/index.htm>.

Hudson UK. Banking & Financial Services: 2012 Salary Guide. 2012. Hudson. 15 March 2013 <http://uk.hudson.com/Portals/UK/documents/SalarySurveys/banking-finance-salary-survey-2012.pdf>.

MetLife. Study of International Employee Benefits Trends. 2002. 18 March 2013 <http://www.whymetlife.com/international/downloads/iEBTS-UK.pdf>.

Numbeo. Cost of Living Comparison Between Houston, TX and London. 2013. 15 March 2013 <http://www.numbeo.com/cost-ofliving/compare_cities.jsp?country1=United+States&city1=Houston%2C+TX&country2=United+Kingdom &city2=London>.

Ritter, Tripp. 2012 Trends in Pay - U.S. Salary Growth. 30 July 2012. 15 March 2013 <http://blogs.payscale.com/compensation/2012/07/us-pay-increase-trends-in-2012.html>.

SalaryExpert. Salary Data. 2013. 15 March 2013 <http://www.salaryexpert.com/>.

Schroeder, Laura. 5 Trends That Are Changing How We Thinks About Compensation. August 2011. 15 March 2013 <http://www.compensationcafe.com/2011/08/5-trends-that-are-changing-how-we-thinkabout-compensation.html>.

The HR Specialist. Employee compensation: 12 trends for 2012. 9 March 2012. 15 March 2013 <http://www.businessmanagementdaily.com/29870/employee-compensation-12-trends-for-2012>.

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