Geographic Pay for Executives

by Malak Kazan, CECP, CCP, CBP, GRP 23. May 2011 15:00

 

Pay varies by geographic location for most jobs. Executive positions, however, tend to be treated differently for a variety of reasons.

Salaries for the same job have different competitive levels from one city to the next. The magnitude of the differential from a national norm also varies by income level, with entry-level positions showing the greatest sensitivity to local practices, particularly in places that override the federal minimum wage. Low-income workers are typically tied to jobs close to their homes. Professionals and managers tend to be paid on a regional basis since they are more apt to commute farther or to be recruited away by nearby rival employers; that drives up the area rate to a higher, more stable equilibrium point for their jobs. Directors and top executives operate in a national (if not international) job market for their talents. Local competitive market conditions for jobs tend to create pressures for companies to pay whatever is right for that particular place, but many employers hold their executives to a different (usually national) common standard rate.

Location does make a difference, even in top executive compensation. Researchers who have studied this for over forty years (1) see geographic pay differentials continue up into top executive levels. All else being equal, executive pay still varies by geographic location. Chief executive officers at same-sized hospitals in California earned 25% more than their peers in Indiana, for example. 

Nevertheless, there are many reasons why employers don’t pay all jobs according to the local pay pattern.

In the federal government, jobs paid according to the General Schedule can earn localized pay, but the geographic variances stop at the Senior Executive Service and the Executive Schedule levels. Private employers do much of the same. If a company has separate pay by location, then the geographic pay differences are usually greatest at the lowest levels where the entry level jobs are affected by the minimum market-clearing wage rate. Employer pay practice variances tend to change at different job levels, and typically the differentials taper off and stop at some level. 

The rationale is, if recruiting targets the national labor market for a particular job level, then national pay scales should be used. If recruiting is from local or regional labor markets for a particular job level, then local or regional pay scales should be used. Also, the total rewards offering for executives tend to make up for these geographic differentials with another form of long-term focused programs.

Even though the actual proofs of geographic pay differentials extending through CEO levels beyond $500,000 are indisputable (2), most employers don't choose to capture the reality with a separate offset to their top executive salary structures as they do for lower levels. Executive packages are so large and complex that the influence of any one component variable can be hidden or overshadowed by many others. Nevertheless, the reality remains true even at firms of identical size in the same industry (e.g., executives working in Manhattan earn a lot more than they do in central Kansas).  Most organizations find it more appropriate to exclude senior executive jobs from geographical pay differential programs than to call attention to an additional premium added to jobs already paid premium rates.  

1 D. Thomsen, “Geographic Differentials in Salaries in the United States,” Personnel Journal (Sept. 1974): 670

2 D. Thomsen, ERI Update, (Vol. 76, Oct 2006): pg. 3, bottom