Imagine a large employer with headquarters in Orange County, California, opening an office in Biloxi, Mississippi. The employer knows exactly what to pay employees in the Orange County market; however, the Biloxi market is unfamiliar. What assumptions should be made to evaluate the budget necessary to successfully operate in Biloxi? If the company applies the same salary range for the same type of job in Biloxi that it uses in its headquarters in Orange County, then the budget implications could be monumental given the cost of labor is vastly different in these two locations. Assuming Biloxi’s cost of labor is much lower than that of Orange County, then the same type of job in the same company would typically pay a much lower salary in Biloxi. To compete in the same labor market, whether Orange County or Biloxi, employers must diligently study the market and tweak their compensation strategies accordingly to achieve the desired results – to lead, lag, or match the going market rate – and effectively compete for talent.
Salary surveys are used to determine to what degree there are verifiable differences in competitive salary levels across labor markets, comparing industry and company size (e.g., revenue, assets, number of employees). If, on average, certain jobs in a particular city are 15% above the national average, then one can expect to pay 15% higher in salaries for those jobs in the given city. Salary ranges are then adjusted based on the data and applied accordingly to each location, facilitating perceptions of fair pay.
Geographic salary differentials, along with salary surveys, are important tools in leveling the playing field for organizations with employees in different locations. Geographic salary differentials allow translation of different labor costs from one locale to another, so that comparisons are apples to apples, creating fair and equitable compensation across labor markets. Salaries can fluctuate significantly based on where jobs are located and such factors as the rate of unemployment and the demand for and supply of a qualified labor force in the area.
Geographic pay differentials facilitate greater cost control. In the example above, if Orange County salaries are not necessary to compete for talent in the Biloxi location, then the company would realize savings by adjusting the salary range for the new location. The overall compensation philosophy and talent strategy should factor in attracting and retaining talent in premium markets, as well as managing labor costs in non-premium markets. Where practical and possible, market pricing jobs is a best practice in compensation planning.
While using geographic salary differentials can add a layer of complexity to managing pay, getting pay right must remain a top priority. “In today’s highly competitive market environment, a geographic salary structure is an excellent tool to ensure that competitive salaries are paid across a country, recognizing that jobs should be neither over-paid nor under-paid relative to their specific marketplaces. When a decision is made to recognize differences in geographic pay, it is important to implement a simplified process that is legal, market competitive, and equitable to your labor force. Geographic salary structures also ensure that jobs are market priced fairly to support a highly motivated, engaged workforce.” For more information regarding geographic salary structurers, visit erieri.com.
