Author: ERI

A step rate pay program is a pay structure that provides automatic increases to pay based on predetermined events, such as years of service, hours worked, completion of skill development, or performance.  

A step rate pay program is commonly used in the public sector, government, higher education, and unionized organizations.  A step rate pay program can also be used to pay hourly employees in manufacturing, retail, and consumer goods.  Although market pricing continues to be used by the majority of organizations, it should be noted that step rate pay programs are used by fewer than 10% of organizations and typically within specific industries.   

Here are the typical components of a step rate pay program: 

• Pay grades 

• Market-competitive pay ranges (typically 20-40% range spread) 

• Steps within each pay range (5-10 or more from entry to top step) 

• Step increments 

• Progression criteria

Advantages 

These are some of the benefits of a step rate pay program: 

• Pay equity 

• Pay transparency 

• Employee retention 

• Administrative simplicity 

• Fair and equitable 

• Ease of budgeting 

Disadvantages 

These are some of the downsides of a step rate pay program: 

• Program inflexibility 

• May reduce employee motivation 

• Labor cost management over time 

• Program implementation complexity 

• Possibility of age discrimination claims by younger workforce due to seniority pay recognition 

These are four examples of a step rate pay program: 

• Automatic Step Rate (Seniority) 

• Variable Step Rate (Performance 

• Variable Step Rate (Skill Acquisition) 

• Higher Education Step Rate Program 

How to Calculate a Step Rate System –  Examples 

In the examples below, market pricing was utilized to develop the pay structure using grades and ranges.  Here is the pay range in this example: 

Grade 3 Hourly – $15.40 Minimum – $18.00 Midpoint – $21.05 Maximum 

The salary range progression between midpoints under a step program is typically 5-10%. For example, the Grade 3 midpoint is $18.00 per hour, where the Grade 4 midpoint is $19.44 per hour using an 8% progression between midpoints.  

The width of the example pay range is 37% ($21.05/$15.40) -1 = 37% range spread. Most organizations will use a 20-40% consistent range spread when designing a step rate pay program.  

Automatic Step Rate (Seniority) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule 

This time–based step rate pay system example includes nine steps for all jobs within the Grade 3 hourly structure with similar market value. You will notice that the market value (midpoint) is placed at the middle step, and each step value above and below the market value represents a 4% rounded increase or decrease from the previous step value. 

An automatic step rate program will typically include 5-10 steps with a 2-5% difference between each time-based step. This approach allows a company to recognize retention and seniority.  It does not recognize performance or skill acquisition. 

Variable Step Rate (Performance) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule with Performance Recognition 

Performance Achievement 

Exceeds Standards: 2 Steps 

Meets Standards: 1 Step 

Sometimes Meets Standards: 0-1 Step with Delay 

Does Not Meet Standards: 0 Step 

The variable step rate program is similar to an automatic step rate program but it also includes a performance modifier. Typically, there are 5-10 steps under a variable step-rate program, with a 2-5% difference between each step, and a time schedule for the review. 

This program works well for repetitive jobs when a step program is common in the marketplace and when a company wants to recognize and differentiate based on performance. 

Variable Step Rate (Skill Acquisition) 

5-10 Steps 

2-5% Difference between Each Step 

Defined Time Schedule with Skill Acquisition 

Skill Acquisition Achievement: 

2+ Skills: 2 Steps 

1 Skill: 1 Step 

0 Skills: 0 Step 

Using a step rate program based on skill acquisition allows the organization to recognize key skill development. This can be valuable in a manufacturing environment. Skills acquisition should be well defined, regularly used, challenging, but attainable over the course of the performance period.  Steps need to be taken to avoid significant cost increases due to skill acquisition.  Recognizing the review of skill acquisition every 6-12 months may support cost management of the overall increases in the program. 

Higher Education Step Rate Program 

Higher education has relatively sophisticated step rate programs. They are typically transparent, and many are available online. Consider this example of the University of California at Irvine Salary Scales and Step Rate Programs.   

Summary 

A step rate program can be an effective methodology to deliver employee pay. It is commonly used in the public sector, government, higher education, and unionized organizations. It can also be a viable pay delivery method within manufacturing, retail, and consumer goods. 

Every pay delivery program, whether it is based on merit, cost of living, or step rates, should always accomplish the following for an organization:

A geographic pay differential refers to the percentage or dollar difference in market pay for the same or comparable jobs across locations. These differences reflect variations in local labor supply, employer demand, and competition for workers.  

Compensation professionals use geographic pay differential data to develop and adjust salary structures that align with local labor market rates. This helps organizations attract and retain employees while managing compensation costs. 

The geographic pay differential can be significant depending on the market rate for the base and target locations. 

Why Do Geographic Pay Differentials Matter? 

Geographic pay differentials matter because they enable organizations with employees across varying locations to remain competitive for local talent, reduce employee turnover, and manage compensation costs. 

If compensation is too far below the market rate: 

• Higher employee turnover: Employees may leave for employers offering higher pay for similar work. 

• Difficulty attracting qualified talent: Below-market salary ranges can make job offers less appealing and reduce the number of qualified candidates willing to accept them. 

If compensation is too high above the market rate: 

• Less efficient use of the compensation budget: Overspending in lower-paying markets leaves fewer resources available for locations or jobs where higher pay is needed. 

• Greater risk of pay compression: Offering above-market starting salaries to new hires can narrow the pay gap between employees and their supervisors.  

What Factors Affect Geographic Pay Differentials? 

Geographic pay differentials are primarily based on differences in the market rate across locations. Each market rate is determined by local supply and demand for labor. Employers in different cities, states, or regions may face varying levels of competition for workers, differing supplies of qualified candidates, and varying concentrations of industries and occupations. 

When the supply of qualified workers is low, but employer demand is high, competition drives the cost-of-labor rate up, and vice versa. 

Local labor laws, union agreements, commuting patterns, and the size of the area used for comparison can also affect geographic pay differences. 

How to Calculate Geographic Pay Differentials 

Companies calculate geographic pay differentials by comparing the cost of labor in a target location with the cost of labor in a base location. 

Use the formula below to calculate the geographic differential: 

Compensation professionals can use geographic pay differential data to configure salary ranges for their employees at branch office locations. 

For example, if the market rate variance of a salary range in your target location is 10% higher than your base location, then you can adjust that pay range accordingly: 

Example of how a base salary structure range can be adjusted by a 10% geographic differential 

How to Create a Geographic Salary Structure 

A common way to create geographic salary structures is to adjust your base location’s salary structure based on the overall geographic differential of your branch location. 

Here are the basic steps in creating geographic salary structures: 

1. Establish your base market (headquarters). 
2. Establish your geographic level (city/neighborhood, state, or regional). 
3. Calculate the geographic differentials and assign branches to tiers. 
4. Adjust pay grades according to their assigned differentials. 

Design your geographic salary structures at the city, state, or regional level compared to your base market. This way, you can create your branch location’s salary structures by simply applying the differential to your base salary structure. 

The Four Basic Steps for Creating Geographic Salary Structures 

1. Establish Your Base Market 

Your base market is the labor market in your base location (e.g., headquarters). This market will serve as the benchmark for calculating cost-of-labor geographic differentials for other locations. You can alternatively use the national market as your base market. 

2. Establish Your Geographic Level 

The geographic level is the specific area used to calculate a pay differential against your base location. Decide which you will use as a basis for calculating the differentials from your base location. 

Types of Geographic Levels 

City Level 

Compensation professionals often calculate labor market differentials at the city or neighborhood level. This provides the greatest precision out of the three options as different cities or neighborhoods within the same state can have widely varying differentials. 

Example Using Two Cities in the State of California: 

At a salary level of $72,000, San Bernardino’s cost-of-labor rate is 82.4% of San Francisco’s cost-of-labor rate. This represents a -17.6% geographic differential. 

State Level 

Statewide labor market data are used to calculate one differential for all branch locations within the state. While geographic pay differentials by state are simpler to administer, accuracy may not be as precise when branches are in cities with market rates substantially above or below the statewide level. 

Regional Level 

You may group locations into multi-state regions, such as the Midwest or Pacific Northwest, and calculate one differential for each region. While this offers the greatest simplicity to manage, it combines vast metropolitan hubs with small rural markets. This can result in paying too much in some locations and too little in others compared to the local cost of labor.

3. Calculate Each Geographic Differential and Assign Them to Your Geographic Salary Structure Tiers 

Create your geographic salary structure by finding the differentials of your branch locations, establishing tiers in 10% increments according to the rounded percentages (e.g., 80%, 90%, 100%, 110%, 120%), and assigning the branches to those tiers.  

First, calculate the geographic differential as a percentage of the base location for each branch by dividing the labor market rate for the branch location by the base location’s salary, and then multiplying the result by 100.

Then, round the percentage to the nearest 10%. Establish your geographic salary structure tier increments based off those branch locations’ differentials and assign each branch location to the corresponding salary structure tier.  

Example Using the City Level: 

Calculate Geographic Differentials: 

• • Base location (Seattle, WA) annual base salary: $144,000 
  • Branch location (Columbus, OH) annual base salary: $118,852 

Calculate the branch location’s base salary as percentage of the base location’s base salary: 

$118,852 ÷ $144,000 ≈ 0.825 

0.825 x 100 = 82.5% 

The geographic differential as a percentage of the base location of Columbus, OH, in Seattle, WA is 82.5%. 

Establish Tiers: 

You can simplify administration by rounding to the nearest 10%. 

If your differentials look like this: 

78.3%, 83.7%, 86.2%, 93.6%, 96.8%, 103.4%, 106.7%, 113.1%, 116.4%, 123.8% 

You can create tier increments like this: 

80%, 90%, 100%, 110%, 120% 

For the example of Columbus, OH, the differential of 82.5% would be rounded to 80%. 

Assign: 

Next, assign the Columbus, OH, branch to the 80% geographic salary structure tier. 

4. Adjust Pay Grades According to the Assigned Geographic Differential 

Finally, increase or decrease each pay grade according to the percent difference of the geographic salary structure.  

Adjust Branch Location Salaries: 

Adjust the salary ranges in the Columbus, OH, branch to be 80% of your base location’s ranges for the same pay grades. So, a pay range with a midpoint of $50,000 from your base location would be calculated accordingly for the branch location: 

• • Minimum: $40,000 × 0.80 = $32,000 
  • Midpoint: $50,000 × 0.80 = $40,000 
  • Maximum: $60,000 × 0.80 = $48,000

For a step-by-step breakdown of this process, see ERI’s How to Design a Geographic Salary Structure. 

Cost of Labor vs. Cost of Living 

Cost of labor reflects prevailing salary rates across different geographic labor markets, while cost of living reflects the price of a market basket of housing, goods, and services for each location. It is advisable to base your employees’ compensation on the cost of labor rather than the cost of living. Cost-of-labor differentials are used to ensure that compensation reflects the labor market supply and demand in specific locations, aligning pay with the market value of the job rather than funding the personal lifestyle choices of the employee. 

Although they may seem similar, cost of labor and cost of living are two distinct metrics, so basing your employees’ pay on one rather than the other can generate very different results.  

Example: 

The cost-of-living differential between these two cities is 39.4%:

Consider this scenario. An employer paying employees in Boise, ID, at the $144,000 salary level decides to base their employees’ salaries in Honolulu, HI, on the cost of living rather than the cost of labor (the market rate): 

• • $155,287 (based on cost of labor) 
  • $200,794 (based on cost of living)

→ +29.31% difference 

That employer would be paying 29.31% higher than the local labor market if they base this pay adjustment on cost of living rather than cost of labor. 

While applying cost-of-labor differentials is recommended, the Pay Grades feature in ERI’s Compensation Management platform enables you to apply either cost of labor or cost of living, at your discretion, or simply use the local market rates of each distinct location selected. 

Is a Geographic Differential the Same as a Cost-of-Living Adjustment?  

A geographic pay differential is not the same as a cost-of-living adjustment (COLA). A geographic pay differential is a salary variance reflecting local labor-market rates, whereas a cost-of-living adjustment is a pay modification, which is calculated based on the local price of everyday goods and services.  

While cost of living may affect compensation in limited cases, ERI’s Compensation Best Practices Survey found that employers more often rely on local labor market rates when setting pay across locations. Cost-of-living data are commonly used when evaluating relocation assistance rather than establishing ongoing salary structures. When relocating an employee to a higher cost-of-living location, ERI typically recommends a temporary cost-of-living allowance, which is separate from base pay and reduces over a specified period of time. 

Read ERI’s Cost of Labor vs. Cost of Living blog post to learn more. 

Conclusion 

Geographic pay differentials are used to align salary structures in branch locations, as well as pay for remote employees, with the labor market rate for each location when that location’s market rate differs from your base location’s pay rate.   

Inaccurate salary structures can increase turnover, weaken competitiveness, create legal risk, and cause compensation costs to exceed budget. Verified geographic pay data help ensure that salary structures remain aligned with current local labor markets.

ERI Economic Research Institute recently released its 2026 Benefits Benchmarking Survey, providing an invaluable resource to organizations in the process of building and updating competitive employee benefits packages. In addition to a comprehensive analysis of health care benefits, this 19th edition of the survey includes detailed sections on life and disability insurance, paid time off, retirement, and executive prerequisites. Participation was solicited from employers in the public, private, and nonprofit sectors, as well as government entities in the United States. Data cuts are provided by organization sector, industry group, organization size (number of employees), and geographic region. 

Overview 

While health care continues to be the primary and most expensive employee benefit, there are myriad other benefits to consider in an employee’s total compensation package. Having a well-rounded and clearly communicated benefits package can give an organization an edge to both recruit and retain top talent. Knowledge of the marketplace is powerful, and the ability to benchmark one’s benefits practices with those of other employers in the external marketplace is the first step in evaluating the effectiveness of current and future benefits strategies.  

Benchmarking employer-provided employee benefits is the focus of ERI’s 2026 Benefits Benchmarking Survey. Selected findings based on this year’s survey are presented below, along with some trend information that may be influenced by the mix of survey participants from year to year. Sixty-nine (69) data submissions representing 564,433 employees were received from participants in this survey. Representation by region in the United States is as follows: 

General Benefits 

Sixty-seven percent (67%) of the respondents supplied information on the overall cost of benefits as a percentage of payroll. Of the responding organizations, 63% reported the cost of benefits for executive officer(s) at less than 25% of payroll. Thirty-three percent (33%) reported the cost of exempt employees’ benefits at less than 25% of payroll. Forty-three percent (43%) reported the cost of nonexempt employees’ benefits at less than 25% of payroll. 

The top five employee programs offered by respondents that fall outside the scope of health insurance, life insurance, disability, retirement, and paid time off are paid holidays at 96%, holiday parties at 78%, hybrid workplace at 75%, full-time business casual policy at 67%, and remote workplace at 65%. Forty-five percent (45%) of respondents reported that part-time employees are not eligible for benefits, including paid time off. Eighty-three percent (83%) of respondents reported that retired employees are not eligible for benefits. 

General Health Care Practices 

Most organizations understand the value of providing well-rounded health care coverage that includes medical, dental, and vision benefits. Sixty-seven (67) respondents offered at least one medical plan to full-time employees. Two of the sixty-nine respondents did not offer dental benefits, and three did not offer vision benefits. Of the fifty-one (51) respondents offering details of vision benefits, three included vision as part of the medical plan. The most prevalent primary medical plan offered was a Preferred Provider Organization (PPO) plan, and the most prevalent dental plan offered was a Dental Preferred Provider Organization (DPPO) plan.  

With the cost of health care constantly increasing, organizations need to strike the right balance between cost-saving methods and the provision of attractive benefits that retain and motivate employees. Forty-six percent (46%) of respondents reported increasing employee contributions to premiums as a cost-saving measure. Nineteen percent (19%) of respondents introduced a health promotion and/or wellness program as a cost-saving measure. Twenty percent (20%) of the respondents moved drugs off their prescription drug formulary. 

Medical Benefits 

Eligibility for health care benefits and the type(s) of medical benefits offered to employees are critical decisions for all organizations. Thirty-nine percent (39%) of respondents reported that executives become eligible for health care benefits immediately upon employment and, similarly, 39% of participants reported the same eligibility for exempt employees. Slightly fewer respondents, specifically, 38% of participants, reported that nonexempt employees become eligible for health care benefits immediately upon employment.

This year, the two most popular plan types amongst eligible employees enrolled in health care plans were the Exclusive Provider Organization (EPO), enrolling 51% of employees, and Preferred Provider Organization (PPO), enrolling 43% of employees, followed by Health Maintenance Organization (HMO) plans at 5% and Point-of-Service (POS) at 1%.   

Keeping track of current trends in employer-provided medical benefits can be immensely valuable as organizations strive to strike the right balance between employee and employer costs. The average monthly employee cost for Preferred Provider Organization plans for employee-only coverage was $153.41, up from $144.89 in 2025 but still lower than $159.94 in 2015. The employer cost for employee-only coverage for Preferred Provider Organization plans equaled 81%, the same as in 2025. In this year’s survey, the average deductible reported in a High-Deductible Health Plan (HDHP) arrangement was $2,841, down from $3,102.00 in 2025.  

Many medical plans offer an array of provisions beyond the typical health care benefits that employees have come to expect. Most medical plans offered some form of wellness and/or disease management programs to participants. Fifty-three percent (53%) of plans provide an Employee Assistance Plan (EAP), while 15% offer Complementary and Alternative Medicine (CAM) provisions.  

Life and Disability Insurance 

When employees face accidents, short- and long-term illnesses, and death, life and disability insurance become essential, making these benefits commonplace in most organizations. Ninety-four percent (94%) of respondents offered some form of basic life insurance to employees. Eighty-seven percent (87%) offered supplemental life insurance and 80% of respondents offered supplemental dependent life insurance. Ninety-one percent (91%) of respondents offered long-term disability insurance and 88% offered short-term disability insurance. 

Employee Leave Practices 

How organizations administer time off for employees can be a complicated decision, particularly as employees increasingly value a healthy work-life balance. Fifty-five percent (55%) of respondents offered traditional leave plans that typically consist of vacation, sick time, bereavement, personal leave, holidays, and floating holidays. The average number of fixed holidays among respondents was nine days per year. Forty-five percent (45%) of respondents used a pooled-leave system that combines all or part of paid leave into one pool. The average number of days granted at one year of service in reported pooled-leave plans was eighteen days. The average number of days granted at 10 years of service in reported pooled-leave plans was 30 days. Ease of administration was the most common reason given for using a pooled-leave system. 

Retirement 

Saving for retirement is essential for employees of all ages, so the retirement benefits offered by organizations are an important piece in an employee’s overall total compensation package. Sixty-six (66) of the 69 respondents offered some type of retirement plan to employees. Eighty-three percent (83%) of the organizations providing a retirement plan offered a 401(k) plan. The most common form of vesting schedule in reported defined contribution plans was 100% immediate vesting. 

Executive Perquisites 

In a highly competitive market for top-tier executive talent, organizations often include executive perks, including financial and non-financial benefits, in their executive compensation packages. Sixty-seven percent (67%) of respondents offered at least one executive perquisite. The five most prevalent executive perquisites included association or professional society dues/membership, conference travel expenses, conference registration fees, car or car allowance, and relocation expenses. 

To drill down on actual costs and further details on employer-provided employee benefits in today’s competitive marketplace, please see the full 2026 Benefits Benchmarking Survey report, which is available for purchase by contacting ERI at [email protected] or 1-800-627-3697. For more information on this important annual survey, including the opportunity to participate in next year’s survey, please visit www.erieri.com/salarysurveys/benefits. 

How Can ERI Help? 

Building a competitive employee benefits package that attracts, retains, and motivates employees, while aligning with an organization’s budgetary requirements, is critical for organizations of all sizes. HR and compensation professionals need to stay on top of current trends in employee benefits with data customized to reflect comparable organizations in their market. ERI’s Benefits Benchmarking Survey provides an in-depth report of employer-provided employee non-cash benefits from a broad range of participating organizations, with actual costs and coverage details reported by organization sector (privately and publicly owned for-profit, nonprofit, and government organizations), industry group, organization size (number of employees), and geographic region.  

For a broader analysis, the Benefits solution in ERI’s Salary Assessor provides a robust database of employee benefits data, including information contributed by the Benefits Benchmarking Survey and additional sources of employer-reported data, in an easy-to-use online platform that helps you quickly drill down on the data you need and export customized reports.  

Beyond benchmarking employee benefits data from comparable organizations, HR and compensation professionals need to carefully design, administer, communicate, and maintain their benefits plans. Using the Compensation Management solution in ERI’s Salary Assessor, organizations can efficiently and effectively manage all aspects of their employee benefits packages, including budget adherence and ongoing annual reviews. ERI’s Total Rewards Statement provides a complete breakdown of individual employee pay with employee and employer contributions to optional and mandated benefits, helping organizations communicate their benefits decisions to both stakeholders and employees. ERI is here to help you with all the steps involved in building a competitive employee benefits package, saving you time while ensuring accuracy.  

For more information about ERI’s Assessor Platform, please sign up for a guided tour and let us show you how we can help you create and maintain a competitive benefits package tailored to your organization.