She was desperate.
A Human Resources Manager was on the phone with me, and she needed help.
“Our corporate headquarters is in Detroit,” she said, “but we’re trying to attract and retain engineers in our Boston offices.”
“Where is your salary data coming from?” I asked.
“Michigan.”
I like Michigan and the Motor City just as much as anyone, but utilizing Detroit salary survey data for Beantown employees may not be the best approach to paying competitively. The cities have very different costs of labor, so people who live in each city should be compensated very differently.
It begs the question:
How do you pay competitively across geographic markets?
(Or, in HR speak: How do you develop and implement geographic pay differentials to be competitive in all cities where your organization operates?)
Let’s take a look…
Reliable Data Above All
Reliable compensation survey data at the local level is the most important factor in setting accurate geographic pay. Credible salary data will ensure you don’t overpay in some locations (like Detroit) and underpay in others (like Boston).
If you’re using reliable local compensation data and are aware of local labor market conditions, then your organization is on a perfect track to use geographic pay.
Cost of Labor, Not Cost of Living
Proper geographic pay is based on major differences in the cost of labor between various locations, rather than the cost of living.
What’s the difference?
The cost of labor measures market-determined cash compensation for similarly matched jobs, whereas the cost of living reflects the cost of goods and services in each city, including housing, groceries, and transportation.
My rule of thumb is this:
If the cost of labor in the satellite office city is at least 10% higher than in the headquarters city, then a geographic adjustment should be made for the higher cost of labor market.
In this example, the adjustment can be made in two ways:
1. Apply the 10% Differential by Job
Using this method, the 10% pay differential only goes to the jobs that need to reflect the local market. For example, in the case of the woman from Detroit who called me, she might only apply the 10% differential to the engineers she wanted to hire and retain in Boston.
The directors and executives located in Detroit may not be included in a location specific pay differential because the labor market for their jobs might be regional or even national in scope.
2. Apply the 10% Differential to All Jobs
This method is more straightforward, but it may be unnecessary, especially if (in our example) certain positions are only needed in Boston, but not in Detroit.
Review Geographic Salary Structures Frequently
In the end, the HR Manager who called me eventually chose to apply the 10% differential to specific jobs. Namely, the engineer positions. Within one year, she was able to increase her engineer retainment and attract even more qualified candidates from the fantastic Boston universities.
But, like all compensation experts, her work wasn’t done yet.
Whenever an employee transfers from one geographic salary structure to another, you need to review that employee’s base salary.
For example, if an employee moves from a higher geographic structure (Boston) to a lower one (Detroit) and stays in a similar job, typically no increase is given. However, if an employee transfers from a lower salary structure (Detroit) to a higher one (Boston), it may be time for an adjustment.
The point is, using reliable local compensation data and geographic pay can give you effective tools to attract and maintain high quality employees across states and regions.
Note: If you enjoyed this article, check out my new bestselling HR book Pay Matters: The Art and Science of Employee Compensation.
© 2020 David Weaver. All rights reserved.