Designing a Geographic Salary Structure

INTRODUCTION

In today's highly competitive environment, it is important to maintain a salary structure responsive to your organization's competitive labor market. Getting market pricing wrong can result in high labor costs or non-competitive rates, leading to high turnover or employee engagement issues. Getting it right can be cost effective and result in a highly motivated, engaged workforce with healthy turnover.

Geographic salary structures are a necessary tool in today's marketplace. One of the key challenges is to design a geographic pay program that is competitive in terms of market pay rates, and responsive to business needs and today’s legal environment. It is important to maintain simplicity in these types of programs.

Pay Equity

Pay equity laws may include location as a component of their pay equity requirements. When establishing geographic salary structures, it is important to stay abreast of and ensure compliance with local and national pay equity laws. Individual establishments may even be subject to state pay equity requirements.

For example, different state pay equity laws include terms such as pay equity within the same locality, establishment, workplace, office, or place of employment. The State of New York defines same establishment in even greater detail as follows:

Employees are considered to work at the "same establishment" if they work for the same employer at workplaces located in the same geographical region, no larger than a county, taking into account population distribution, economic activity, and the presence of municipalities.

Cost of Living or Cost of Labor?

"If we moved XYZ Company to a new location, our labor costs would be less because the cost of living there is a lot lower than it is here."

There's a problem with the statement above. It assumes a location's pay rates are tied to the cost of living.

The cost of living is determined by the supply and demand for expenditures in a location, including consumables, transportation, health services, housing, and taxes paid by an employee. The cost of labor is determined by the supply and demand of labor across all industries and occupations by location. Cost of labor represents differences in market rates of all jobs combined in each local labor market.

Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location.

For these reasons, we will use the cost of labor approach to determine geographic compensation.

We will cover the three common approaches used for developing a geographic salary structure:

• City
• State
• Region

A state or regional approach may appear to be simpler but can lead to underpaying or overpaying in key competitive locations. A city approach is generally considered to be a best practice and allows a company to manage geographic pay based on the city office location. When a business has operations in a multitude of cities throughout the United States or even globally, it may not seem practical to differentiate by city.

We will briefly address geographic pay outside of the United States.

You'll also learn how to use software to research a geographic salary structure.

Please note: This course builds upon the material found in DLC Course 82: Creating a Market Competitive Salary Structure. Please make sure you're familiar with the material in Course 82 before continuing on with this course.