Five tips for employers to set geographic pay differentials: A growing consideration for remote workforces
Employers with operations in multiple locations have long grappled with concerns about how to handle compensation. Employers often offer geographic pay differentials, by adjusting base pay with locality pay to account for variations in the cost of labor and the cost of living.
With increasing numbers of employees working remotely, many employers are facing new and complicated questions. In determining the right approach to locality pay, employers should consider the following recommendations.
Set expectations with a clear policy that applies to all employees.
Employers should adopt a formal policy that sets clear expectations about how locality pay applies to all employees. For example, the policy should make clear how location is determined–by city, state, region, country, etc. Employers should avoid ad hoc decisions based on a specific situation or individual negotiation at time of hire.
A system that applies a locality differential on top of regular base pay can make it easier for employers to address situations where employees move from higher-cost to lower-cost areas. The federal government’s pay system offers a clear, transparent approach to setting locality pay that utilizes locality adjustments to base pay. The standard pay scale is adjusted upward for 54 specific localities. For example, in 2022, the base pay for an employee at the Grade 8, Step 1 level would be $42,641. But an employee in San Francisco would be paid an additional 42.74% locality adjustment, bringing total salary to $60,866 in San Francisco. By comparison, an employee at the same level would be paid $49,813 in Corpus Christi, with an additional 16.82% locality adjustment to standard base pay.
| 2022 Federal Locality Pay | Corpus Christi, TX | San Francisco, CA |
| Base Salary for Grade 8, Step 1 | $42,641 | $42,641 |
| Locality Adjustment Percentage | 16.82% | 42.74% |
| Locality Adjustment Additional Pay | $7,172 | $18,225 |
| Total Salary | $49,813 | $60,866 |
Smaller employers could adopt a more streamlined approach that identifies just a few high-cost locations eligible for a geographic differential, like New York and San Francisco, rather than try to benchmark all salaries for each different location.
Consider the potential costs and budgetary impacts.
In weighing different options, employers should consider any potential budgetary impacts. Do most employees live in higher cost areas or lower cost areas? What will be the total annual cost of additional compensation to raise pay for employees in areas with a higher cost of living? Consider the possibility that some employees may relocate in the future, which could translate to additional costs.
Consider potential impacts on employee recruitment, morale, productivity, and retention.
A new locality pay policy should be viewed as a net positive by employees. The policy should help attract and retain talent. A reasonable policy should reassure employees that they are compensated fairly.
To the extent possible, employers should avoid adopting policies that reduce pay for incumbent employees who live in lower cost areas. While some employers may seek to cut costs by reducing pay for remote workers who opt to move to a lower cost area; an unexpected cut in pay may have negative consequences for employee morale, productivity, and retention. An alternative to cutting pay is to phase in adjustments over time for employees in higher cost areas and freezing pay for employees in lower cost areas.
Employers also should consider how locality pay factors into the calculation of raises and bonuses. For example, when employers use a high-cost area as the baseline for all employees, employees who live in the high cost location may perceive that their raises will not go as far.
Identify opportunities to communicate and reinforce the policy.
Once a new locality pay policy is in place, employers should seek multiple opportunities to communicate the policy verbally and in writing. Encourage open discussions about compensation.
Regularly review employee compensation and address inequities.
To ensure pay equity, employers should regularly review overall compensation to identify potential concerns and correct unexplained gaps and discrepancies. This review should include an assessment of geographic pay differentials.
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