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Developing a salary policy for an organization that operates in multiple locations can be complex. Employees expect the competitive market rate of pay. They also expect a policy that dictates similar pay for similar jobs within the organization (internal equity). The organization must have a wage and salary policy that satisfies its financial requirements and meets the needs of its employees. If an organization pays too much, the employees receive an inordinate share of the profits, which could lead to the failure of the company. Pay too little and profits might rise, but this policy will not attract or retain good people over the long-term. In addition, each office location has its own labor-market issues. If a competitor opens an office down the street from one of the organization's offices and offers higher wages to lure away its employees, the definition of the relevant labor market for this location has suddenly changed. These types of issues should not be ignored. However, moving too quickly to address them without understanding the impact of the actions taken has the potential to cause as many problems as doing nothing. One way employers address local labormarket differences while managing their overall costs is to use geographic pay differentials.
Geographic pay is typically based on variations in the cost of labor and cost of living among two or more geographical areas. Organizations that use geographic differentials are better able to set pay relative to local labor markets. Geographic differentials can be used for every position, but they are less common for senior managers and executives and often cut off at a level where the hiring pattern would be national. Most executives have annual and long-term incentives that offset the need for a geographic salary differential. Executives are more often transferred between jobs and receive relocation packages that adjust for geographic differences.
Common Practices
According to Runzheimer International's Survey of Geographic Pay Differential Policies and Practices, the use of geographic pay differentials varies by the size and complexity of an organization. Organizations with a labor force spread out in multiple locations use differentials more than half of the time. Smaller organizations using local market data or having only a few locations that are located in relatively the same labor market...