Geographic Pay
Differential Practices
December 2009
Geographic location is one of the primary
factors used in benchmarking pay rates and developing salary
ranges for most non-executive jobs. The following article provides summary
results and analysis from a 2009 Culpepper Geographic Pay
Differential Practices Survey. It includes best practices
and policies for how companies use geographic pay differentials
to design salary programs and manage differences in pay between
different locations.
Key Survey Findings
-
Seventy-three percent of surveyed companies with employees
in more than one geographic location reported that they
either provide geographic pay differentials or adjust pay
rates based on location.
-
Sixty-eight percent of companies with geographic pay
differentials review their differentials annually.
-
Over 80 percent of non-executive employees are eligible for
geographic pay differentials.
-
Eighty-nine percent of companies use salary surveys (i.e.,
cost of labor) to determine
geographic pay differentials.
-
Three out of four companies with geographic pay
differentials adjust compensation by creating separate
salary structures for different locations.
Geographic Pay Differential Defined
A geographic pay differential is additional compensation paid to
an employee to account for variations in cost of labor and/or
cost of living between geographic locations.
Some companies use cost of living (e.g., cost of goods &
services) as a factor to determine geographic pay differentials.
However, most companies use cost of labor (e.g.,
compensation) as the primary factor to determine pay differences
between geographic locations.
The following approaches are typically used to compensate
employees for differences between geographic locations.
-
Separate base salary structures for different
locations
-
Individual adjustments to base salaries
-
Supplemental geographic differential payments
Use of Geographic Pay Differentials
Seventy-three percent of surveyed companies with employees in
more than one geographic location reported that they either
provide geographic pay differentials or adjust pay rates based
on location (Table 1). However, as companies increase in size,
they are significantly more likely to use geographic pay
differentials.
Only 28 percent of companies with fewer than 100 employees
across multiple geographic locations use geographic pay
differentials. In contrast, 76 percent of companies with more
than 100 employees across multiple geographic locations use
geographic pay differentials.
Table 1:
Use of Geographic Pay Differentials |
|
All Companies |
73% |
|
Number Employees |
|
|
1 to 100 |
28% |
|
101 to 500 |
66% |
|
501 to 2,500 |
72% |
|
2,501 to 10,000 |
80% |
|
Over 10,000 |
86% |
|
* Based on companies with operations in more than one
geographic location. |
Frequency Companies Review
Geographic Pay Differentials
Most companies review their geographic pay differentials
annually (Figure 1).
Geographic Pay Differentials by Job
Level
Over 80 percent of companies provide geographic pay
differentials to employees below the executive ranks. Executives
are less likely to be eligible for geographic pay differentials
than non-executive employees (Figure 2).
Two percent of companies reported Other/Varies. Companies
choosing “other” indicated that the types of structures used
varies by type of job, business unit, location, or union status.
Types of Data Used as Basis to
Determine Geographic Pay Differentials
Eighty-nine percent of companies with geographic pay
differentials use salary surveys (i.e., cost of labor) to determine geographic pay
differentials
(Figure 3).
Thirty-eight percent of companies use cost-of-living data as
a basis to determine geographic pay differentials. However, most
companies that use cost-of-living differentials also use
cost-of-labor data from salary surveys. Only 11 percent of
companies use cost-of-living data as their primary source to
determine geographic pay differentials.
Note: Percentages add up to more 100% because participants could
select more than one.
Note: Culpepper Compensation Surveys provide geographic
data cuts and pay factors based on pay data submitted by
participants for employees matching specific jobs in local
markets (i.e., cost of labor). Culpepper Surveys do not
use cost-of-living differentials.
Methods to Assign Locations to
Geographic Pay Differentials
Sixty percent of companies with geographic pay differentials use
data for individual cities to assign locations to geographic pay
differentials (Figure 4).
Market pricing jobs by city is widely considered a best practice
for assigning locations to geographic pay differentials.
However, it is not always practical or possible to use market
data for individual city locations. As an alternative, 24
percent of companies create geographic pay differentials by
grouping locations with similar market rates (e.g.,
Geographic Pay Zones).
Note: Percentages add up to more 100% because participants could
select more than one.
Note: Culpepper Compensation Surveys
allow participants to use both of these best practice methods
for benchmarking geographic pay differences. We provide
compensation data for individual jobs with geographic data cuts
for over 100 specific U.S. geographic locations and 50 plus
international cities. In addition, our U.S. compensation survey
reports provide larger geographic areas and pay zones that
amalgamate data from multiple geographic locations with similar
pay rates.
