Tag Archives: Geographic Pay

Location-Based Pay: An Evolving Philosophy

by | | Compensation, Human Resources

In the era before working remotely was popular, paying workers based on their location was a relatively simple and rarely-contested issue. Adjust employee salaries while taking into account what’s necessary to pay expenses in the area where they live – easy, right?

Well now in the age of COVID-19, we’re beginning to learn that things aren’t so simple anymore. With a vast increase in remote work in the name of safety, both employees and employers are finding themselves with a new range of options. Many employers now have the ability to expand their search for candidates beyond the company’s location, and many employees no longer need to limit their job search to what’s within a commutable distance. With this ever-evolving situation, many are starting to question the older, once-commonly accepted philosophies regarding location-based pay. When an employee lives hundreds of miles away (or more) from the company they work for, do you pay them based on where they are located, or where the company is located?

A recent poll by the Compensation Analyst Academy attempted to shed some light on this by reaching out to Human Resources and Compensation professionals to gauge their opinions on the matter. The results yielded a 65/35 split, with the majority of respondents voting in favor of paying employees based on the location in which they live. So, while it appears the majority still believes in the original methods, it would seem that they are not as widely accepted as they once were.

This idea has been reinforced by the revelation that several large, prominent organizations like Zillow and Reddit have come forward and announced that they will not adjust salaries for remote workers who choose to move to lower-cost locations, challenging the old philosophy. Meanwhile, other big companies like Facebook and Google will indeed lower salaries for remote workers who relocate to a less expensive area than where the company is located.

So, which method will work best for your company and remote employees? While scaling salaries down based on employee location is logical and makes financial sense, more people are subscribing to the belief that it could have a negative impact on employee retention and morale for remote workers, as it can seem unfair that they are being paid less for doing the same level of work as those who live closer to the company. Additionally, receiving a pay cut is never viewed positively regardless of the reason behind it. On the flipside, however, keeping their salaries the same has the potential to discourage employees who still work in the office or within the vicinity of the company, as their pay will not be as valuable as their remote counterparts living in lower-cost locations.

At the end of the day, each company is different, and you need to do what’s best for your organization, workforce, and culture. If you need assistance determining how to optimally pay your employees, feel free to reach out to us – we are happy to help.

How to Pay Competitively Across Geographic Markets

by | | Compensation, Human Resources

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.

https://paymattersbook.com/

© 2020 David Weaver. All rights reserved.