Geographic differentials, in the world and terminology of employee compensation, are the differences in pay levels that exist between different locations (typically different cities). It is the task of the compensation professional to tailor the compensation program -- most specifically the salary range structure -- so that it provides pay opportunities that are appropriately competitive in every location where the organization has staff.
Information on geographic differentials is available through a number of sources; the ones with which I am most familiar (featuring domestic U.S. differentials) are the reports published by Mercer (www.mercerhr.com) and Economic Research Institute (www.erieri.com). From resources like these, you draw basic information on pay differences from city to city. You might learn, for example (to pick on some Midwest cities), that at a salary level of $50,000 and using the U.S. National Average as a baseline:
Chicago, Illinois is 109.2% of the national average
Rockford, Illinois is 101.1% of the national average
Billings, Montana is 89.8% of the national average
Information like this might lead you to the conclusion that there are three levels of salaries at work here; a level at, a level about 10% above, and a level about 10% below the national average. The decision might be made to implement three different salary range structures, accordingly.
The problem comes (and hence my call for caution) when we try to use this data to establish salary range structures at intervals that are too small and precise. The inspiration for this posting came after reviewing the recommendations of another compensation consultant for a series of salary range structures at 3-4% geographic intervals. In other words, there was a structure set at 100%, another at 103%, 107%, 110% and so on.
First of all, setting up range structures at such small differential intervals is creating administrative complexity where it doesn't need to exist (and where it, ultimately, will not add value). Secondly, and perhaps more importantly, it is important to know and keep in mind that geographic differentials tend to be fluid over time. In my experience, it is not unusual to see them drift up or down 2-3% or more over a couple of years - typically in response to local labor market influences. With this in mind, I recommend establishing salary range structures at intervals no smaller than 5%. In that way, you minimize the future risk of having to ratchet them up or down in response to minimal shifts in the local market, creating unnecessary hassle and leaving the credibility of the program open to question.
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