How SMBs Can Navigate Geographic Pay Differentials

Quick look: The rise of remote work is projected to continue, and if they haven’t done so already, employers should review their pay policies to confirm they are compensating their staff fairly, no matter where they live. Here, we review what geographic pay differentials are, how organizations today are using (or not using) them, and how a PEO can help business leaders conquer the complexities of a dispersed workforce.

The dust has largely settled after the pandemic, and expectations surrounding work schedules may never be the same. Recent research shows that 14% of people work from home full-time, and another 29% have a hybrid schedule. This newfound ability means that employers must evaluate their pay strategies to ensure they’re fair and equitable. Otherwise, hiring and retaining employees in specific markets may be difficult, and staying competitive in the remote work era may be more challenging.

Remote work opportunities are expected to increase through 2023, and the time is now for employers to review their pay policies to ensure their guidelines are concise and straightforward no matter where their staff lives—something that is sometimes achieved through the use of geographic pay differentials.

What are geographic pay differentials?

The Society for Human Resource Management (SHRM) defines a geographic pay differential as “additional compensation paid to an employee to account for variations in cost of labor and/or cost of living among geographic locations.”

Most organizations use the cost of labor as the primary factor in determining pay differences between locations; however, some businesses use the cost of living. Common approaches to varying compensation among geographic areas include:

• Different base salary structures for separate locations
• Individual adjustments to base salaries
• Supplemental geographic differential payments

Whether or not your business decides to implement geographic pay differentials, it’s important to have a well-defined pay policy. Being unsure of protocols or navigating situations on a case-by-case basis can make for an unclear, inconsistent, and inefficient workflow. Below are two types of fair and transparent geographic pay differentials:

• Fixed pay differential: Designates a certain amount of money to be added or removed from an employee’s base salary, depending on their location. For example, a position with a base salary of $85,000 at a company’s Minnesota headquarters may have a premium of $10,000 in its Washington, D.C. office, making the salary for an employee there reach $95,000. And on the other hand, the role may have a salary discount of $5,000 for an employee based out of the company’s rural Texas office, bringing the pay down to $80,000.
• Percentage-based pay differential: When the salary premium or discount for specific locations is percentage-based. Often this method is used to adjust salaries to account for a difference in the cost of living. For example, if the cost of living in Salt Lake City is 7% higher than in Austin, Texas, a position that pays $85,000 in Austin would pay $90,950 in Salt Lake City.

It’s important to note that if you implement geographic pay differentials, you should do so in a way that’s fair to employees. Otherwise, you may upset staff, become less competitive when hiring, and retain fewer workers.

How many companies use geographic pay differentials?

Geographic pay differentials aren’t typically discussed very openly, and business leaders may wonder what their competitors and peers are doing regarding adjusting pay for location.

The 2022 Geographic Pay Policies report from WorldatWork surveyed 858 people from various sizes and types of U.S. companies. Of these respondents, 28% stated that their organization plans to modify its geographic pay policies via consolidation of pay differentials.

Additionally, 13% reported that they are considering eliminating the differentials, and the number of businesses using a single pay structure that doesn’t include geographic pay differentials has risen by 6% since 2021.

Interestingly, 45% of organizations were found to apply a standard premium or discount to either a baseline/single pay structure or individual pay. In comparison, just 24% stated they create different base pay structures for various locations.

Pay locations for in-office and hybrid workers are most commonly governed by their nearest work location (45%) or reporting location (31%). In contrast, over half of remote workers have pay locations tied to their place of residence. What’s more, 56% of businesses report that the city/metropolitan area is what they base their geographic pay differentials on, and the cost of labor is a greater influence than the cost of living when deciding their pay approaches.

On the employee front, almost 70% of employees claim that a pay adjustment would be a very influential or extremely influential factor in their decision to relocate voluntarily or not—approximately a 20% jump from 2021. And the report found that 70% of relocation requests are prompted by employees, demonstrating that a flexible workplace will continue to be critical for employers to provide when possible.

Achieving pay equity with a PEO

There is no right answer when it comes to geographic pay differentials. Each business must do what’s suitable for its organization.

The HR experts at a professional employer organization (PEO) can act as a sounding board as business leaders navigate their pay policies. PEOs can help your organization develop an appropriate geographic pay differential policy, as well as a pay equity policy ensuring that your company does not discriminate based on actual or perceived race, creed, color, religion, alienage or national origin, ancestry, citizenship status, age, disability, sex, pregnancy, marital status, civil union status, veteran status, sexual orientation, genetic information, or arrest record.

A PEO like ExtensisHR can also run a pay equity algorithm against your compensation data to identify and execute compensation adjustments to ensure you attain complete $1:$1 Controlled Pay Equity across all employee demographics. And ExtensisHR’s intuitive DEI Dashboard enables business leaders to analyze real-time data on pay equity, salary trends across both gender and race demographics, employee turnover, promotions, and more.

PEOs can also help small- and medium-sized businesses navigate other aspects of hiring and maintaining a multistate workforce, such as tax implications, labor laws and insurance coverage, and potential compliance issues.

Would you like some help navigating modern pay policies? Contact the experts at ExtensisHR today to get started.