Geographic pay policies that set and adjust pay for far-flung workers based on local compensation factors, such as cost of labor and cost of living rates, are becoming more common among employers, new research shows.
The most recent surveys show that 67 percent of employees expect their compensation to reflect their location. Thus, geographic pay has become a pressing issue for employers, according to WorldatWork’s Geographic Pay Policies Study, based on a February survey with responses from 1,063 organizations and 503 employees.
“Work is no longer a place,” said Scott Cawood, CEO of WorldatWork, an association of total rewards professionals. “With remote working requests continuing to emerge and surprise leaders, companies are re-evaluating how to create cohesive, consistent and fair geographic pay policies.”
Of the 62 percent of organizations with existing geographic pay policies, 44 percent are considering modifying or have recently modified their policies due to the increase of full-time remote work, the survey found. Among other results:
- The top two considerations for organizations addressing localized compensation are expanding (38 percent) or consolidating (20 percent) pay differentials by geographic area.
- The more locations an organization has, the more likely it is to consider creating a U.S. geographic pay policy, especially as full-time remote work rises.
- 41 percent of organizations apply pay differentials as a premium/discount to either a jobs-based pay structure or to individual pay, and 33 percent create separate base pay structures for each different geographic location where employees are working.
Localized Pay Factors
Over half (55 percent) of organizations use city/metro areas for setting geographical pay differences. Cost of labor is overwhelmingly a greater influence than cost of living for determining the pay policy approach, employers said.
Almost all organizations are somewhat or moderately flexible regarding voluntary relocations for full-time remote workers. As for their employees, 50 percent say that a pay adjustment—either higher or lower—would be very or extremely influential in their decision to voluntarily relocate.
A determining factor for many employers will be if pay localization policies affect retention. Remote work, which “used to only be an occasional issue is now, due to Covid, a frequent request. Employers will need to respond with fair, transparent and attractive geographic pay policies for distributed workforces if they wish to remain competitive,” Cawood said.
Limits on Adjustments
While more companies are adopting geographical pay policies, the extent to which pay rates will vary by location is unclear.
Silicon Valley tech firms that adjusted pay for those who moved out of the San Francisco Bay Area, for instance, make smaller downward adjustments than might be expected, Tauseef Rahman, a partner at HR consultancy Mercer in San Francisco, observed last year.
“National data would suggest that a job paid $100,000 in San Francisco would be paid about 13 percent less in Puget Sound” in Washington state, he noted. “However, our research indicates that the current pay differential is smaller—closer to 6-7 percent. So instead of expecting a $13,000 pay cut, the hypothetical reduction would be closer to $6,000.” Of course, such determinations may be different depending on the location, industry, and nature of work.
Much less certain, however, is whether the trend among big tech companies toward a national labor market, give or take 10 percent of pay, will be repeated by industries where competition for talent is less severe.
The desire to keep pay policies simple could be a factor here. “Multinational companies are already well-versed in the practice of differential pay policies at a global scale,” wrote Brett Christie, managing editor of WorldatWork’s Workspan Daily. However, for companies with offices exclusively in the U.S., “the prospect of overhauling pay structures to account for geographic differences might seem daunting.”