Designing a Geographic Salary Structure

SUMMARY

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.

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. There are three options to consider when determining which salary structure to use for a branch office:

Headquarters' Salary Structure

When setting geographic pay:

• consider using the headquarters' salary structure if the jobs in the branch office are the same or similar to the jobs in the headquarters
  
  
• AND
  
  
• there is an interdependence and interaction between the branch and headquarters
  
  
• AND
  
  
• the labor market around the branch office is similar to the one around headquarters

Separate Salary Structures

A separate salary structure may be a better answer if the branch:

• performs different functions or is in a different industry than that of the headquarters
  
  
• AND
  
  
• rarely interacts with headquarters
  
  
• OR
  
  
• the labor market in the branch office is significantly different than that of the headquarters such as an international location

Geographic Salary Structures

A geographic salary structure should be considered if, compared to headquarters, facilities or remote workers at different geographic locations:

• have similar jobs
  
  
• AND
  
  
• are in the same industry and country
  
  
• AND
  
  
• have different market values for pay

Many businesses have branch offices throughout the United States so creating geographic salary structures that are simple to maintain, yet competitive to each local market place, that support staffing effectiveness, is an important goal.

Geographic salary structures may be created through the creation of a separate pay policy line using appropriate market data for the branch office. Pay policy lines may be:

• higher or lower
• sloped flatter or more steeply
  
  
• OR
  
  
• in the extreme, not even a straight line

Geographic salary structures may also be created as a percentage of the headquarters' salary structure by evaluating geographic pay differences between the branch office and headquarters by:

• city
• state
• region

The city approach to evaluating geographic pay ensures competitive market rates for all locations where the state and region approach may overpay and underpay some locations.

The vast majority of geographic pay rates by job throughout the United States do not vary by more than 50% from the lowest paid to highest paid locations. An effective way to manage city-specific pay rates is by applying a standardized formula to a geographic structure, as in the following example:

When establishing geographic salary structures, it is also important to stay abreast of and ensure compliance with state and federal pay equity laws. Pay equity laws may include location as a component of their pay equity requirements. For example, pay equity may be required by locality, establishment, or even within a county.

International

Each country should always have its own salary structure, and, as a result, not be a candidate for a geographic salary structure. Why? Because the United States and all other countries have different labor markets, economies, total reward practices, laws, tax systems, and health and welfare programs. The jobs may be valued differently in other countries as well.