News

Geographic Pay Differential Practices

December 23, 2009 | Culpepper & Associates

Location is one of the primary factors used in benchmarking pay rates and developing salary ranges for most jobs. Below are summary results and analysis from the 2009 Culpepper Geographic Pay Differential Practices Survey, which looks at how North American companies use geographic pay differentials to design salary programs and manage differences in pay among locations.

Key Survey Findings

73 percent of surveyed companies with employees in more than one location report that they provide geographic pay differentials or adjust pay rates based on location.
68 percent of companies with geographic pay differentials review their differentials annually.
Over 80 percent of non-executive employees are eligible for geographic pay differentials.
89 percent of companies use salary surveys (cost of labor) to determine geographic pay differentials.
Three out of four companies with geographic pay differentials adjust compensation by creating separate salary structures for locations.

Geographic Pay Differential Defined

A geographic pay differential is additional compensation paid to an employee to account for variations in cost of labor and/or cost of living among geographic locations.

Some companies use cost of living (e.g., cost of goods and services) as a factor to determine geographic pay differentials. However, most use cost of labor (e.g., compensation) as the primary factor to determine pay differences among geographic locations.

The following approaches are typically used to compensate employees for differences among geographic locations.

Separate base salary structures for different locations.
Individual adjustments to base salaries.
Supplemental geographic differential payments.

Use of Geographic Pay Differentials

Seventy-three percent of surveyed companies with employees in more than one location report that they provide geographic pay differentials or adjust pay rates based on location. However, as companies increase in size, they are significantly more likely to use geographic pay differentials.

Only 28 percent of companies with fewer than 100 employees across multiple geographic locations use geographic pay differentials. In contrast, 76 percent of companies with more than 100 employees across multiple geographic locations use geographic pay differentials.

Use of Geographic Pay Differentials
All Companies	73%
Number of Employees
1 to 100	28%
101 to 500	66%
501 to 2,500	72%
2,501 to 10,000	80%
Over 10,000	86%
* Based on companies with operations in more than one geographic location.

Frequency Companies Review Geographic Pay Differentials

Most companies review their geographic pay differentials annually.

Frequency of Reviewing Geographic Pay Differentials
Annually	68%
Every two years	19%
Every three years	4%
On as-needed basis	4%
Other	5%

Geographic Pay Differentials by Job Level

Over 80 percent of companies provide geographic pay differentials to employees below the executive ranks. Executives are less likely to be eligible for geographic pay differentials than non-executive employees.

Companies Providing Geographic Pay Differentials by Job Level
Executives	38%
Director and manager level	77%
Professional level	87%
Hourly and nonexempt	85%
Other/varies	2%

Companies choosing “other” indicated that the types of structures used varies by type of job, business unit, location or union status.

Types of Data Used as Basis to Determine Geographic Pay Differentials

Eighty-nine percent of companies with geographic pay differentials use salary surveys gauging cost of labor to determine geographic pay differentials.

Types of Data Used to Determine Geographic Pay Differentials
Cost of labor (e.g., salary surveys)	89%
Cost of living differentials	38%
Inflation data (e.g., consumer price index)	13%
Employment and unemployment data	3%
Note: Participants could select more than one response.

While 38 percent of companies use cost-of-living data as a basis to determine geographic pay differentials, most of these companies also use cost-of-labor data from salary surveys. Only 11 percent use cost-of-living data as their primary source to determine geographic pay differentials.

Methods to Assign Locations to Geographic Pay Differentials

Sixty percent of companies with geographic pay differentials use individual city data to assign locations to geographic pay differentials. Market pricing jobs by city is widely considered a best practice for assigning locations to geographic pay differentials. However, it is not always practical or possible to do so. As an alternative, 24 percent of companies create geographic pay differentials by grouping locations with similar market rates (geographic pay zones).

Methods Used to Assign Locations to Geographic Pay Differentials
By city	60%
By state or province	20%
By broad region or territory	20%
By country	12%
By locations within a certain distance	11%
By locations with similar market rates (geographic pay zones)	24%
Note: Participants could select more than one response.