Geographic location is one of the primary factors used in the development of pay ranges and salary structures for most jobs. This report highlights results from a Culpepper Pay Practices & Policies Survey on geographic pay differential practices in technology and life sciences organizations.

Use of Geographic Differentials
Eighty-one percent of responding companies with employees in more than one location adjust pay rates based upon the geographic location of employees, with the practice more prevalent in larger companies (Table 1).
 

Table 1: Use of Geographic Differentials
Company Size (# of Employees)	Percent of Companies
All Companies	81%
Up to 100 Employees	65%
Over 100 to 1,000 Employees	75%
Over 1,000 Employees	89%

Geographic Differentials in Salary Structures
Nearly three-quarters of respondents reported using between two to five geographic differentials in their salary structures. The number of geographic differentials is tied to the number of distinct employee locations, and therefore often related to company size. Small to mid-sized companies average three to four geographic differentials, while companies with over 1,000 employees average six geographic differentials (Figure 1).

Assigning Locations to Geographic Differentials
Nearly half of companies define geographic differentials by individual cities (Table 2). Market pricing jobs by specific cities is usually considered a best practice. However, it is not always practical or possible to use specific city locations, which is why many companies prefer to create geographic differentials using locations with similar market rates.

Culpepper Compensation Surveys allow participants to use both of these "best practice" geographic pay analysis methods. For example, our U.S. survey database includes geographic data cuts for over 100 specific U.S. geographic locations based on actual employee zip code. In addition, we also provide larger geographic areas and pay zones that contain locations with similar pay rates.
 

Table 2: Methods of Assigning Locations to Geographic Differentials by Company Size
Method of Assigning Locations	All Companies	Company Size (# of Employees)
		Up to 100	Over 100 to 1,000	Over 1,000
By City	48%	45%	62%	43%
By County	2%	0%	5%	2%
By State / Province	17%	9%	14%	20%
By Broad Region / Territory	11%	18%	14%	8%
By Country	17%	18%	10%	20%
By Location within a Certain Distance	7%	0%	0%	12%
By Location with Similar Market Rates	35%	18%	14%	47%
Note: Percentages add up to more than 100% since companies may use more than one method to assign locations to geographic differentials.

Factors Determining Geographic Differentials
Another best practice is using local market pay rates to determine geographic differentials (Table 3). Cost of living differences may also be considered when determining geographic differentials. However, it's important to keep in mind that "cost of living" is different from "cost of labor".

Culpepper Compensation Surveys provide participants with geographic pay factors based on "local market pay rates", not "cost of living". The Culpepper Geographic Pay Factor (CGPF) is calculated based on actual employee data by zip code and specific location from participating organizations. 
 

Table 3: Factors Used in Determining Geographic Differentials by Company Size
Determining Factors	All Companies	Company Size (# of Employees)
		Up to 100	Over 100 to 1,000	Over 1,000
Local Market Pay Rates	93%	91%	95%	92%
Cost of Living Differences	37%	27%	50%	33%
Note: Percentages add up to more than 100% since companies may use more than one factor to determine geographic differentials.

Eligibility for Geographic Pay Differentials by Job Level
Nearly all companies pay geographic differentials to managerial and professional-level employees (Table 4). Executives are less likely to be eligible for geographic pay differentials. Company size, not geography, is typically the predominant factor influencing executive pay. Larger companies are more likely to offer geographic differential pay to hourly and non-exempt employees.

Adjustments to Compensation for Geographic Differentials
The two most common methods for adjusting compensation based on geographic differentials is to create separate pay structures for different locations and to make adjustments to individual base salaries (Table 5). Differences emerge by company size, with large companies more likely to use different pay structures and small companies more likely to make adjustments for individual employees. Only 19% of companies compensate employees for geographic differentials with supplemental payments.

Employees that Move from a Higher-Paying Location to a Lower-Paying Location
When employees move from a higher-paying to lower-paying location, few companies report making adjustments to the employee's compensation to account for geographic differences.

For companies making adjustments in those cases, it is common either to remove the geographic differential from the employee's pay or impose a "red-circle rate". Red-circle rates effectively freeze the employee's salary at its current level and do not allow the employee to receive a pay increase while the salary remains above the maximum rate for the new location.

Summary
Geographic location is the dominant factor influencing market pay rates for most jobs. Companies with employees in multiple locations typically adjust pay based on the location of the employee, commonly using two to five geographic differentials. Most companies set geographic differentials by city location, though many also depend on local market pay rates.

Geographically-defined job level compensation data serves as a crucial tool when establishing geographic differentials for your company.

- Jennifer Berthiaume and Leigh Culpepper