When and Why To Add Geographic Pay to Your Compensation Toolbox

Geographic pay or “geo pay” refers to the use of geographic locations as a determining factor when creating pay ranges and therefore how salaries are set for employees within those different locations. With today’s abundance of market data, it’s possible to find compensation data broken all the way down to individual Metropolitan Statistical Areas (sample below). A geo pay strategy is typically built by HR and Compensation leaders and addresses how geographically broad or specific their salary structures will be. 

As an example, if you work in the retail and hospitality industries, you’re likely familiar with extremely geo-specific pay ranges, because companies in those industries hire locally. At one point in my career I worked with a company that was a member of the Chain Restaurant Total Rewards Association (https://crtraweb.org). It was not unique for many of those restaurant companies to research hiring rates at individual intersections and neighborhoods. Similar to the way gas prices behave, you would see one restaurant raise its hiring rate for a crew member by $0.50 per hour, and the following week other surrounding restaurants, stores, hotels, etc. raised their hiring rates to match. 

Before the pandemic, smaller technology start-up companies tended to hire locally as well, so their first salary ranges reflected the local metro area where they were founded. Post-pandemic, it’s a very different situation. It’s not uncommon today for a start-up’s fifth or sixth hire to be in a location completely different from where their founding headquarters is located. As a result, it’s very important to get the topic of geo pay addressed as quickly as possible, because, as many of us are very aware, the early pay decisions a company makes can potentially lead to some inequitable pay conditions in the future. 

Opinions on how to design geo pay structures vary widely. It should be clear, however, the decision to use a single national pay structure vs. a geo-specific structure should not be decided in isolation. It is important to consider how a geo pay policy links to your company’s broader talent strategies. Where will your organization source talent in the future, and what factors (e.g., local competition, regulations, etc.) may impact your ability to attract and retain talent in these same locations?

A few additional considerations to keep in mind: 

• Geo pay is specific within a single country. If you are looking to create pay ranges in Germany, it’s not as simple as applying a discount or premium to U.S. salary ranges and then applying the latest exchange rate. If you are in a company that hires or plans to hire across multiple countries, you should invest in a market data vendor that provides reliable data in those countries or work with local recruiting agencies to understand how salaries in one country differ from your company’s home country. Then the question of whether you have a single national range structure or more geo-specific ranges can be addressed for each individual country. 

• The cost of living is not the same as the cost of labor. When I mentioned high, middle and low pay zones above, many of you may read that as high, middle and low cost of living. I am referring to the cost of labor which more accurately measures the salaries and other compensation companies pay for different jobs. While these two economic drivers definitely correlate throughout the world, they measure very different things, and your company should be clear with employees that the cost of labor is the primary (or only) driver of where your company sets its salary ranges. 

• What’s the magic number? Companies will regularly ask me what’s the magic number of pay zones to use or what’s the magic premium or discount to apply to these high and low pay zones. That definitely depends on the number of locations and the difference in the cost of labor between those locations for the specific jobs you’re hiring. In general, San Francisco and New York City don’t demand the premium they once did thanks to the pandemic-driven shuffling of workers throughout the country, but those premiums can still be 15%, 20% or more if you’re looking for specific technical skills (e.g., AI and Machine Learning). 

I’ve included some additional resources below for anyone looking to dive into the issue of geo pay a little deeper. If you do any research on this issue, there were a lot of discussions during the pandemic on whether geo pay was still needed. Now that organizations are swinging back towards on-site and hybrid work location strategies, the issue of where employees live and how we pay them is still very relevant. 

Sources

The Great Leveling of Geographic Pay Differences in Tech – Six Ways it Will Change our Future by Thomas Frey | Aug 25, 2022 | Future of Work
https://futuristspeaker.com/future-of-work/the-great-leveling-of-geographic-pay-differences-in-tech-six-ways-it-will-change-our-future/

The Death of Location-Based Pay? by David Wohlreich and Tristan Orford | November 17, 2021 | LinkedIn
https://www.linkedin.com/pulse/death-location-based-pay-david-wohlreich/

Amid Inflation, Organizations Should Stick with Cost-of-Labor Budgeting by Jim Fickess | July 28, 2022 | Workspan Daily
‍https://worldatwork.org/publications/workspan-daily/amid-inflation-organizations-should-stick-with-cost-of-labor-budgeting