Implementing Geographic Pay

With significant advances in technology and the availability of reliable internet service, professionals in every industry have the flexibility to work virtually anywhere. Distributed workforces with teams of employees and managers in different cities are increasingly common.

The result of this increasingly global workforce is twofold: employers enjoy increased flexibility to search more broadly for the right talent, and employees appreciate the opportunity to work from where they prefer to live. Despite the enormous benefits for both a company and its members, some questions come with virtualized work. The most pressing of these concerns is how to set base pay for employees in different geographic locations.

For many years, companies within the U.S. have set base pay depending on the city where the employee works. The cost of labor varies from city to city because of differences in local laws and living costs of that area. By spending thousands of dollars to consider surveys of pay within a specific area and industry, companies have measured these differences to set fair compensation levels of its employees. With increasingly globalized workforces, however, the question of how to set pay for employees in different regions of the world has arisen. In the early days of virtualized work, companies would pay each employee the same regardless of the area because the many other countries did not collect compensation data.

Although other countries have been slow to implement this practice, there have been some developments in the documentation of pay abroad. Within the last five years, countries such as China, Russia, India, and the United Kingdom have begun publishing information on geographic pay differences within various metropolitan areas. These are countries where many companies have virtual employees, and their participation in the creation of surveys have made it easier for companies to pay their employees fairly all around the world depending on their location.

Although many companies with global employment have already made geographic pay a standard practice, there are others that have been slow to implement this compensation philosophy because they do not recognize the benefits it holds. Even for a company that has domestically-separated employees, there are tangible benefits. If a company has operations in locations with a 10% difference between them, they could consider implementing a geographic pay approach to manage the compensation of its workforce better. This pay difference is more common than one may think, as the higher cost of labor areas such as San Francisco, New York, Boston, Washington D.C., and Seattle is as much as 15-25% higher than the U.S. national average.

Differentiating pay by geography benefits companies and its employees in two distinct ways. First, it is one of the most substantial steps a group can do to ensure base pay is competitive, which will reduce turnover. Second, the differentiation of compensation based on location will lessen the overpayment of employees in lower cost of labor areas. This balancing of payment will reduce costs to the company in the long run. Implementation of a geographic pay approach will allow a company to fulfill its goal of aligning compensation with the current market.

There are a few things to keep in mind when establishing this approach to compensation:

Geographic pay is only an approach to setting base salary. If you have jobs that are eligible for significant variable payment such as highly leveraged sales jobs, you should consider excluding them while developing your geographic pay solution. Pay for jobs with substantial bonus, commission, or other performance-based variable pay opportunities are typically set based on both total cash and base pay and are intentionally lower than non-sales positions to maximize performance-based compensation.

The scalable solution is to use base pay ranges. If your company has or anticipates expanding to many locations, establishing base pay ranges is the most practical approach to building a strategy of geographic pay in your organization. If your company already uses base pay ranges in its compensation, this makes geographic pay even easier to implement. Pay ranges provide sharp control points and if already in use are a familiar tool for managers and the talent acquisition team.

Take a balanced approach. Adding salary ranges increases complexity, so making meaningful distinctions (no less than 10% difference between structures, for example) and keeping the quantity small will help to balance geographic pay differentiation and the added administrative complexity.

Determine your range assignments. By using such data sources as Economic Research Institute’s Geographic Assessor for the city to city cost of labor differential data or surveys for a subset of essential positions by location, companies can evaluate base pay differences. Be sure the number of businesses and incumbents reflected in the data is high to avoid year over year differences resulting from a change in the participants. Once you have determined your range assignments, do the proximity test by answering the question “Are there any locations that are assigned to different ranges but are nearby?” Sometimes locations less than 25 miles apart in a similar region can have different results. You may not want to have employees on different ranges within commuting distance, and this check will surface those situations.

Use employee experience to test your solutions. Before implementing a solution, identify the different ways employees will use the ranges. Use this data to set clear guidelines on how to treat pay for employees who move from one range to another. For example:

  • How do employees transfer locations within your organization? Moves from the lower to the higher cost of labor locations and vice versa could mean an increase or decrease in pay. How will you handle these changes to ensure a positive experience?
  • Often transfers are accompanied by promotions or other job changes. Look at how this happens in your organization and establish clear guidance up front to avoid unintended negative impacts.

The use of geographic pay is a useful tool to help organizations achieve base pay alignment with local markets and can help to ensure base pay is competitive within the industry. If your group has operations in a variety of different pay markets or organizational growth will put you in this situation in the foreseeable future, geographic pay has the potential to support a balanced and fair pay philosophy.

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