Location, Location, Location: The State of Geographic Pay Differentials
Workspan Daily
June 03, 2022
Key Takeaways

  • Geographic pay becomes a priority. The remote work explosion of the past two-plus years has thrust the issue of geographic pay differentials into the spotlight. 
  • Taking steps to simplify. Nearly 30% of respondents in a WorldatWork survey said their company plans to modify their geographic pay policies via consolidation of pay differentials.
  • An increased emphasis on flexibility. Employees want freedom to work where they choose, and will leave an employer if they feel they don’t have that flexibility.
  • Communication is crucial. Organizations making changes to geographic pay policies must communicate these changes effectively. Even the most well-designed compensation programs are not as effective if employees do not understand them. 

The coronavirus pandemic has proven that, by and large, remote work works. 

As a result, the workforce is more dispersed than ever, and it’s likely to stay that way. And, with employees’ newfound ability to work from anywhere, geographic pay differentials have been thrust into the spotlight during the past two-plus years of the COVID era. 

Facebook might be the most high-profile example of the tricky nature of setting compensation for workers performing similar jobs in different locations. In a May 2020 videoconference, Facebook CEO Mark Zuckerberg told employees that the social media giant was going to “aggressively” ramp up the hiring of remote workers, and that he anticipated about half of the company’s workforce would be remote five to 10 years down the road. 

He also informed his employees that those who opted to stay with Facebook but leave Silicon Valley to live and work in less costly locales should expect a pay cut if they go that route. 

“That means, if you live in a location where the cost of living is dramatically lower, or the cost of labor is lower, then salaries do tend to be somewhat lower in those places,” Zuckerberg told employees. 

Facebook is not the first company to approach compensation this way. But it’s fair to say that geographic pay differentials have become a bigger concern for many employers since the arrival of the coronavirus. In response, many organizations are rethinking their pay philosophy and policy surrounding geographic pay strategies. 

Consider some of the key findings from WorldatWork’s "2022 Geographic Pay Policies" report:

  • Among the 858 responses, representing U.S. organizations of various sizes and from numerous industries, 28% said their company plans to modify their geographic pay policies via consolidation of pay differentials. 
  • In addition, 13% said they are weighing whether to eliminate the differentials by geographic area, and the number of organizations using a single pay structure where pay is not differentiated by geographic areas increased by six percentage points from a similar study WorldatWork conducted in 2021. 
  • Forty-five percent of companies polled said they are applying pay differentials as a premium or discount to either a baseline/single pay structure or individual pay, and 24% create separate base pay structures for different geographic locations. 
  • For in-office or hybrid employees, geographic pay locations are most often determined by their nearest work location (45%) or reporting location (31%), while more than half of full-time remote workers are tied to their location of residence.More than half of organizations (56%) use city/metro area as the indicator in which geographic pay differentials are based, and cost of labor is overwhelmingly a greater influence than cost of living for determining the pay policy approach. 

Overall, nearly seven in 10 workers say that a pay adjustment would be a very or extremely influential factor in their decision to voluntarily relocate, representing a nearly 20% increase from WorldatWork’s 2021 survey on geographic pay policies. Among the 56% of companies saying they provide “moderate” to “extreme” flexibility in terms of allowing full-time remote workers to voluntarily relocate, 70% of relocation requests, on average, are prompted by the employee.

Offering employees the freedom to work where they choose will continue to be crucial. 

“Remote work has exploded over the past two-plus years, and, as a result, geographic pay differentials have become part of the highlight reel of employer challenges. Employees have made it clear that they want flexibility in how and where they work,” said Alicia Scott-Wears, director of total rewards content at WorldatWork. 

“They value that flexibility enough to start looking for another job if they don’t have it. One aspect to emerge from the COVID era was that people came to understand what they really value with their newfound flexibility; it’s a value in living life’s moments.” 

Given this increased emphasis on flexibility, Linda VanDeventer, vice president and senior consultant at HR and employee benefits consulting firm Segal, sees companies simplifying their approach to geographic pay policies.  

“I’m finding employers who are making changes tend to eliminate the differentials and use a 100% national average approach, unless employees are connected with a worksite based on a very high cost of labor market such as San Francisco or New York,” she said.  

“Companies tend to use a national average approach when they compete nationally for talent, including hiring and relocating talent. With the Great Resignation, more organizations are needing to compete nationally for talent for certain jobs, so it makes sense to use the national average approach.” 

For those that continue to set different compensation levels for similar jobs based on location, VanDeventer advises careful consideration. 

“Be strategic. Consider this change holistically with other compensation programs and potential changes. Understand the drivers of talent attraction and retention at your organization. Organizations are unique and each has different circumstances and challenges.”

Ultimately, there’s no one ideal answer, said VanDeventer.  

“Do what’s right for the organization. Any change should add value and be carefully crafted, versus simply doing what we read about in the news that a single employer is doing. [And], if you do make a change, be sure to communicate the change effectively across the organization. We can design the best compensation programs, but if employees do not understand them, the programs are not as effective.” 

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