Remote Work Spotlights Geographic Wage Differentials

By Rachel Prine

Remote Work Spotlights Geographic Wage Differentials

With the increase in remote hiring, more than 50% of financial institutions have expanded their recruiting to other markets. With employees’ newfound ability to work from anywhere, geographic pay differentials (“geos”) have been thrust into the spotlight. According to a 2022 World at Work survey, 56% of those surveyed base their geo calculations on the nearest city/metro area vs. the other 44% who base theirs on HQ location.

What Does a Typical Geo Look Like?

If a role pays $20.00 per hour at the nationwide midpoint (50th percentile) and the geo for your location is 102%, then this same role in your market would pay $20.40 per hour. Local geographic pay differentials can be calculated by dividing the national midpoint wage for the targeted position by the percentage of your targeted geo location: [$20.00×1.02 = $20.40]. 

Geos also factor the cost of labor for a specific market to be competitive in that specific market, either higher or lower than the national midpoint. Utilizing geos in your organization’s compensation system allows organizations to be competitive within the market without paying more than necessary to attract and retain quality talent. 

Paying at the National Level vs. Managing Individual Salary Ranges by Location

Facebook remains a highly-profiled company with many workers performing similar jobs in different locations. When the pandemic was in full swing in May 2020, Mark Zuckerberg publicly announced employees should expect an aggressive ramp-up in the hiring of remote workers. As such, those who opted to leave Silicon Valley to live in areas with lower costs of labor should be prepared for a pay cut. This caused a significant, growing challenge for many companies in similar scenarios finding themselves now having to now figure out how to calculate salary wages for many employees living all across the U.S. while staying commensurate to national competitive wages. 

This can lead to a high number of salary ranges based on different market geos, which can quickly become a burden for HR to manage. The staggering rise of remote work and a red-hot labor market may cause many companies to take a more uniform strategy to either pay at the corporate level or at 100% of the national average. The downside to this approach is that many markets pay above the national average, and it likely decreases the application pool at a time when recruiting is already difficult. Regardless of which approach is taken, it is important to reassess the geo annually, as it is a number given to movement based on the supply and demand of the labor pool. 

3 Primary Compensations Philosophies: Lead the Market, Meet the market, or Lag the Market 

While assessing the pros/cons of each comp philosophy, let’s start with the Lead-the-Market perspective. This approach often provides employers more leverage during the hiring process due to an ample pool of qualified candidates. A company using this strategy may decide to add 10% to their midpoint after applying the geo to pay at the 60th percentile. This will allow the employer to be more selective of who is hired since there will likely be many candidates to choose from. 

A Meet-the-Market compensation strategy typically lends itself to controlling costs while being able to recruit qualified candidates within a reasonable time.

Finally, the Lag-the-Market compensation strategy, while controlling costs, will increase recruitment time, will yield less qualified candidates, and will encourage current employees to seek employment elsewhere.

Factoring Company Asset Size & Compa-Ratio

What happens to geos when banks and credit unions change asset sizes? Typically, more entry-level positions will have a minor change of around 2–4%. That means that prior to changing asset sizes, if an employee was at midpoint or 100% Compa-ratio, moving to a larger asset size may move the salary grade up 2 – 4%, moving the specific employee’s Compa-ratio to 96–98%. 

However, on higher level positions, the geo change can be much more dramatic. If an executive is currently at a 95% compa ratio and the asset size is moved, we would expect that compa ratio to be closer to around an 85% compa ratio. This movement to a lower Compa-ratio can generally be perceived by executives as negative. However, consider when an athlete moves from playing Division II to playing Division I – they are no less talented or valuable than before. In this case, the athlete is playing in a much more competitive division where the expectations are higher, and the consequences of a mistake are greater than playing in Division II. This is very similar for executives. As an organization moves up in asset size, the expectations of the market and of internal and external stakeholders are higher and the consequences of a mistake can be greater, thus needing the salary ranges to be higher to compensate for these expectations in a more competitive environment.

Additionally, moving to a lower Compa-ratio in a larger asset size, gives employees and executives more upside potential to earn money over the long term, since the salary grades are normally higher in larger asset-sized organizations. 

Not a One-Size-Fits-All Solution

Ultimately, there is no one ideal answer in every situation as to whether a geo should be based on the worker’s location or the corporate location. The industry is in the throes of figuring out what will work best and tweaking the solution. Any change should add value, be carefully crafted and communicated. Providing employees with the freedom to work where they choose when it can make sense for the company will continue to be crucial. Employees value the flexibility enough to start looking for another job if they don’t have it and they are likely to find an employer who is willing to hire them remotely.

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