Learn About Geographic and Location Pay Differentials

East coast of North America and Magnifying glas
Yuji Sakai / Digital Vision / Getty Images

Companies with employees in multiple geographic areas often have geographic pay differentials (or location pay differentials) in their salary scales. In a company with geographic pay differentials, an employee in an area that has higher prevailing wage rates for comparable jobs and/or a higher cost of living will be paid more than peers elsewhere in the company, all else equal. How these policies are administered could have a major impact on evaluating ​compensation planschoosing employers and setting a career path.

Prevalence of Geographic Pay Differentials

According to compensation consultants Culpepper and Associates, among companies with work locations in more than one geographic area, geographic pay differentials are used by:

  • 76% of companies with 100 or more employees
  • 86% of companies with 10,000 or more employees

Computing Geographic Pay Differentials

Also according to Culpepper, of the companies with geographic pay differentials:

  • 89% factor in local salary surveys
  • 38% factor in the local cost of living
  • 13% factor in inflation (CPI)
  • 3% factor in unemployment or employment data
  • 68% adjust the pay differentials annually
  • 19% adjust the pay differentials every two years
  • 4% adjust the pay differentials every three years

Implementing Geographic Pay Differentials

Culpepper cites three common methods for implementing geographic pay differentials:

  • Different salary structures in different locations
  • Individual adjustments to base salaries
  • Supplemental geographic differential payments

Of the companies with geographic pay differentials, 75% utilize the first method. The third method can encompass a formula-driven approach, in which a percentage adjustment is added to an employee’s base salary, according to the work location.

Geographic Pay Differentials by Job Level

Geographic pay differentials are offered to:

  • 38% of executives
  • 77% of directors and managers
  • 87% of professional-level staff
  • 85% of hourly and non-exempt employees

Defining the Geographic Area for Geographic Pay Differentials

Culpepper reports that, among the companies with geographic pay differentials, the geographic definitions used are:

  • Cities (60% of companies)
  • State or Province (20%)
  • Broad region or territory (20%)
  • Country (12%)
  • Locations within a given distance (11%)
  • Locations with similar market pay rates (24%)

The above figures add to over 100% because of companies that use multiple methods.

Caveat on Culpepper

The Culpepper data is based on a 2009 survey of 340 employers, 79% of which are in technology, life sciences, health care, energy, and engineering. Publicly-held firms are only 58% of the sample. Nonetheless, the Culpepper surveys are widely cited.

Considerations Regarding Geographic Pay Differentials

Before accepting a job with a company that has far-flung operations, you should inquire about what, if any, system of geographic pay differentials it maintains. This could have important ramifications if you ever are transferred between work locations, or are contemplating a move within the company. Among your chief concerns should be:

  • Whether pay adjustments are automatic and immediate when you change locations.
  • Whether a move to a lower-cost location triggers an automatic pay decrease.
  • What happens to your pay after a move if your pay rate was negotiated, and non-standard.

Additionally, situations in which you commute across state lines can add complexities of their own, especially if there are large disparities in the income or wage tax rates assessed by the respective states. Consider a case in which you initially live and work in the higher cost, higher tax state, but then accept a transfer to a work location in the lower cost, lower tax state.

In this case, if geographic pay differentials are driven by work location, changing your work location but not your home could trigger a reduction in pay. However, your own cost of living would not be going down.

Indeed, your total income tax bill would still be at the higher rate of the state in which you reside. You should determine in advance whether the company has exceptions for scenarios such as this.

Also note that, because federal income tax rates are the same nationwide, many people in the highest tax brackets are there simply because they live in higher-cost (and thus higher-wage) regions. Even before taxes, many of these people have a lower standard of living than people in lower tax brackets living elsewhere. This is another key consideration if you are open to living and working in a wide variety of places.