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Compensation  >>   Geographic differentials or National Pay Structures Search Discussion Posts
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Geographic differentials or National Pay Structures  
Posted: 02/11/2011 04:38pm   503 Views

We are expanding and need to simplify our pay structures across the US. Right now, we use geographic differentials based on cost of living in different areas (eg. more expensive to live in San Francisco than Reno). However, this city-by-city stuff is just too difficult to administer and keep up with in a growing company. Does anyone have examples, research or case studies on programs and structures deal with pay difference and needs across the US?


Geographic differentials or National Pay Structures  
Posted: 02/11/2011 06:28pm  
   (2 ratings)

Here is a free one-hour course on it.  It's a basic topic of tradecraft knowledge.  But I would strongly advise against basing salaries on family expenses or personal lifestyles.  Besides, COL doesn't track with competitive market survey results covering the same areas; for example, Houston is fairly inexpensive to live in for a major city but salaries are high, while Phoenix is the opposite, expensive to live in but paying relatively low salaries.  There are lots of search strings discussing the topic.  You might want to reference this too:  http://www.compensationcafe.com/2010/06/of-course-they-want-cost-of-living-pay-but-do-you-1.html.



Geographic differentials or National Pay Structures  
Posted: 02/13/2011 12:12pm   Revised: 02/13/2011 12:16pm  
   (2 ratings)


I would agree with the salary determining and administering complications that may be going through.

Here is a recommended step-by-step approach to address this issue effectively, something which I had done to a good effect for one my company’s US subsidiary a few years back –

  • Have a clear set of ‘Jobs’ (Roles) in your company’s existing and imminent manpower plans, using the ‘Job Family’ structure.
  • Using job evaluations and market surveys, determine the ‘Base Value’ of such jobs, keeping away any geographical biases.
  • You could determine external competitiveness for those jobs by using both or either primary or secondary data, good to use a professional consultant’s help for this (with a national presence).
  • Assign a ‘Base Pay’ or a ‘Pay Range’ for each jobs, the evaluation process would help you to have the internal equities for the different types of jobs in correct place.
  • Top  the base pay with a ‘COLA’ value, depending on the location of the state or city in consideration. You could get these figures from various government agencies or private consultancies and update the same periodically.
  • The final ‘Salary Structure’ would look somewhat like this : Total Pay = Base Pay plus COLA. Here, the Base Pay would remain constant for a particular job for the period in consideration, only the COLA value would be a variable factor depending upon the location where the employee is hired or deputed, so can be adjusted accordingly.
  • Any kind of variable pay programs (incentives or commissions or bonuses) should be kept out of this fixed cash structure and the same should be a variable independent of any performance pays.
  • You may also like to make any suitable adjustments based on the CPI movements, especially from a year to year basis or at that point where it becomes quite inflationary.

Hope this helps, but you may also like to have a couple of more opinions on this before going ahead.



Geographic differentials or National Pay Structures  
Posted: 02/14/2011 11:08am  

Since your goal is to ease salary administration while continuing to recognize geographic differentials, may I suggest an approach that the federal government uses, as well as a major competitor of ours in the package delivery business?

  • Have one national base pay schedule for use with hiring, merit increases, promotions, demotions, etc. 
  • For geographic differentials, simply provide an add-on percentage determined by a credible source. 

Whatever base salary is used in the "base" pay schedule is then rolled up by the geographic differential percentage.  In the federal govenments case, they use data supplied by the Bureau of Labor Statistics; in the package delivery firm, they use data supplied by ERI Economic Research Institute.

Agree 100% with Jim that the geographic differential add-on premium should be developed based on cost-of-labor, not cost-of-living.  The Houston/Phoenix anomaly he mentioned is a perfect example.    


Geographic differentials or National Pay Structures  
Posted: 02/14/2011 11:15am  

Thought I should also point out that in the US, cost-of-living pay policies are dwindling as they disappear from union labor contracts, and since the unionized workforce is also dwindling.  An article on this topic appeared in the Workspan Magazine "Why CPI-Based Pay Policies Are Not the Answer."


Geographic differentials or National Pay Structures  
Posted: 02/15/2011 10:30am   Revised: 02/15/2011 10:31am  

Many of my clients group together cities that have similar geographic differentials in specific pay structures.  This process is far more streamlined then having a pay structure for each city.  If you have any questions, contact me and I can walk you through the process.

Geographic differentials or National Pay Structures  
Posted: 02/15/2011 04:10pm  

I agree Claudia.  Over several years I have probably done it any number of ways, but what I found best was to have a ntional structure and 3-4 other structures and group various locations into the same group based on geographic salary differentails (not cost of living differentails).  Generally everthing can move in tandum with the national structure and only need to validate every 2-3 years (perhaps even longer periods in current economic conditions.


Geographic differentials or National Pay Structures  
Posted: 02/15/2011 04:15pm  

Hi Claudia, I like your idea...how can I find out cities that have similar geographic differential?


Geographic differentials or National Pay Structures  
Posted: 02/15/2011 05:13pm  

Knowing how to group certain cities is somewhat based on experience but I always try to obtain the most recent figures to validate placement.  If you have a geographic assessor software, you can run a report of the specific cities. 


Geographic differentials or National Pay Structures  
Posted: 02/15/2011 06:01pm  

This is what the federal gov't uses:





Geographic differentials or National Pay Structures  
Posted: 02/15/2011 06:09pm  

Those government geographic differentials are much higher than what I have seen in survey data.   With those adjustments, I wish I worked for the government in New York!


Geographic differentials or National Pay Structures  
Posted: 02/15/2011 07:30pm   Revised: 02/15/2011 07:31pm  

To Anon # 3,

Don't be fooled by the NYC locality percentage of 28.72%, or the San Francisco locality percentage of 35.15%.  Every federal locality in the 48 connected states gets at least 14.16% (see schedule for "Rest of the United States").  So the geographic differential from the lowest area to NYC is really 14.56% and to San Francisco is 20.99%.  And the federal locality premium of NYC and SF would be even smaller if compared to a national average locality premium if such a thing was actually calculated by the feds. 


Geographic differentials or National Pay Structures  
Posted: 02/16/2011 01:08pm  
   (1 rating)

Hi.  I agree with all above. 

You can use differentials based off of the US averages or another city.   What I have actually done before is to use the city I feel most comfortable with and apply 5% differentials off of that city's data.  For example, the corporate office is in Chicago and that is where the compensation staff is located and most comfortable with the market data.  We would assemble groupings of the other cities based on if they were closest to 90% of Chicago, 95% of Chicago, 100% of Chicago, 105% of Chicago, 110 % of Chicago.  Most of companies I have worked for have used ERI for their geographic differentials to find the appropriate percentages.  You can obtain the geographic differentials from one city to the next, as well as city to US averages easily with the Geographic Assessor.  Mercer also has a Geographic tool but I haven't used it.  Happy to answer other questions...   Good Luck.


Geographic differentials or National Pay Structures  
Posted: 02/16/2011 01:43pm  

Lisa's approach generally works well, especially if you match at the income level most representative of your local workforce's pay.  Be careful using your HQ as the base, however, because I've seen cases in The Day when the HQ city experienced aberrational market circumstances and that really throws off your relative scales.  There was one year CitiCorp used NYC as their geo base, but NYC had an oddly unique flat year with excess candidates for every job, while most every other city in the nation experienced strong pay increases; their relative ratios hinged on the base and their categories went crazy.  Safest, when the various local economies start moving at a different pace from each other, to always show every location (even HQ) in terms of the national norm, so you can catch any anomaly quickly.  Detroit and DC used to be rather high, for example, at what I used to term an A-minus level, but after 9/11/01, Detroit went downhill and DC was displaced by Boston in the relative ranking scales at most income levels.


Geographic differentials or National Pay Structures  
Posted: 02/17/2011 11:20am  

To add an additonal comment to Lisa's posting, you can group the geographic differentials in many ways:

  1. Region (Northeast, Southwest etc.)
  2. Subregion (Pacific Northwest, etc.)
  3. State
  4. Metropolitan areas (Los Angeles-Riverside-Orange County, CA)
  5. City (then grouped in 3 -6 geographic categories based on your specific situation)

The approach depends on how many different locations, etc.

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