Remote workforce? Consider geographic pay for your compensation planning

Money for employees

It’s no secret that we are still feeling the lasting impacts of the pandemic — especially within the workplace. With the rising popularity of remote work and many companies having team members all over the map, businesses are starting to rethink how they compensate employees. A common practice that employers are adopting is geographic pay differentials. Geographic pay is typically varied compensation that addresses the variations in the cost of labor between different geographic locations.

According to a World At Work survey, among the 858 responses representing U.S. organizations of various sizes and from numerous industries, 28% said their company plans to modify their geographic pay policies via consolidation of pay differentials.

If you are contemplating implementing geographic pay differentials, consider what factors should determine changes in pay, the different methods to approaching this new practice, and the fairest way to implement your new pay policy.

Factors to consider

Most businesses use the local supply and demand of labor in the area where their employees work to determine how they will adjust base salary to fairly compensate their team. Data for determining the cost of labor in different regions is typically gathered through the cost of labor databases or salary surveys and helps employers determine differentials for their teams.

Beyond salary survey data, other factors can influence the way in which your company approaches geographic pay. Your company culture or the number of employees and positions that will be affected by a change in policy can be a determining factor in the way your philosophy is created.

Methods to approaching geographic pay

After determining what will influence geographic compensation differentials, the next step is deciding on the methodology your company will use to apply this new practice. The three most common methods for adjusting compensation are by region, state, or city.

  • Region: compensation based on the region that the employee works in. These region differentials are typically set by the cost of labor data identified in the salary surveys or cost of labor databases.
  • State: compensation in relation to the state that the employee works in.
  • City: compensation in relation to the city or metropolitan statistical area that the employee works in.

There are various pros and cons that come with each of these approaches. For example, people who live and work in cities are likely to have a higher cost of labor differential than those who reside in more rural areas. So while differentiating compensation based on cities is commonly regarded as a best practice for a geographic pay policy, it ultimately comes down to what works best for you and your employees.

Implementing the new system

Now that you have determined what factors and methods will go into creating your geographic pay philosophy, the final step is to decide how you want to implement your new strategy. Some companies choose to rework their entire compensation system and change compensation for all their employees who live in impacted locations. In contrast, others prefer to take a phased approach. Businesses can also elect to introduce geographic pay for new hires only. However you decide to implement your geographic compensation plan, be sure to make sure you comply with pay equity regulations.

Overall, geographic pay differentials can be a solid strategy when your team has remote employees. However, there are many important factors to consider when implementing this new policy.  While this isn’t always easy, hiring a compensation consultant can ensure that you get the job done in a fair and equitable way for all employees.

Interested in learning more about geographic pay differentials and how they can work for your business?  Contact Compensation Works today!