83: Designing a Geographic Salary Structure

Which would not be an appropriate approach for calculating a geographic salary structure?

A) cost of living

Pay rates move ____ the supply of labor.

A) inversely to

The area in which employers and employees are in close enough communication that the market value of jobs tends to be the same throughout the area is called the:

A) labor market

The best solution for a high cost-of-living situation is to:

A) provide a temporary cost-of-living allowance

A branch-office structure in a highly unionized city would probably have a pay-policy line that is:

B) flatter

Which of the following benefits is most likely to be different in a branch location?

B) health insurance plan

Cost of living is:

B) measured by a market basket of goods and services

A salary range is the:

B) minimum, midpoint, and maximum salary for a salary grade

If your branch office is having trouble hiring for clerical positions, while your headquarters is not, a possible solution is to:

B) provide signing bonuses

Which geographic pay approach recognizes unique pay rates in very hot markets but does not overpay in marketplaces with lower costs of labor?

C) city

The salary level of the branch-office location is used to:

C) decide if a geographic salary structure is appropriate

It's difficult to establish a geographic salary structure between headquarters and another country because:

C) different countries value jobs differently

Company Z, a U.S. manufacturing company, recently acquired a company that is located in a different geographic location and does mainly development work in the product field. Company Z should probably:

C) leave the salary structure of the acquired company intact

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CALCULATING A GEOGRAPHIC SALARY STRUCTURE AS A PERCENT OF HEADQUARTERS' SALARY STRUCTURE More and more companies are calculating their geographic salary structures as a percentage of the headquarters' salary structure. This provides simplicity to the process especially when their headquarters represents all functional disciplines and the business operates throughout the United States within one industry. The following is an extensive example of assessing a geographic salary structure comparing a state, regional, and city approach. Hypothetical Company Example Let's review a hypothetical example of a company headquartered in Denver, Colorado, with Customer Service offices in the following locations: CityStateMontgomeryAlabamaLos AngelesCaliforniaPlacervilleCaliforniaSan FranciscoCaliforniaSan JoseCaliforniaDenverColorado (HQ)Chicago-Lincoln ParkIllinoisBaton RougeLouisianaMissoulaMontanaNew York-ManhattanNew YorkColumbusOhioNashvilleTennesseeTylerTexasSuperiorWisconsinBellevueWashington For the purposes of this example, we have used data from ERI's Salary Assessor® and the market median of a Customer Service Representative (General Calls) for All Industries to determine the base salary difference by geographic location. STATE APPROACH Let's look at how the median annual base salary of a Customer Service Representative (General Calls) varies by state. For purposes of this example, we are comparing our headquarters location (Colorado) to each state in the United States. (As an alternative, we could use the United States national market data in lieu of the headquarters' location.) As a first point of review, we can calculate the percent difference of the median salary for the Customer Service Representative for each state as compared to the Colorado state market median. Based on 50 states, there are 27 different median market pay rates for the Customer Service Representative when compared to the headquarters pay by state, with a low of 84% in Arkansas and a high of 114% in the District of Columbia. This is overly complex for a geographic pay program and can be simplified by rounding the differentials to the nearest 10%. (Rates below 5% may be too small to recognize.) This then creates just four different geographic rates throughout the United States for the Customer Service Representative, which may be more appropriate. Although the Geographic Salary Structure by state will work, there are some items worthy of consideration: Differences by state combine many metropolitan, suburban, and rural marketplaces. For example, California has markets ranging from high-priced San Francisco and Silicon Valley to Los Angeles, Fresno, Bakersfield, and the even lower-priced Placerville and other similar lower-priced markets. The geographic salary structure by state does not sufficiently recognize hot job markets. The geographic salary structure by state can inflate compensation for lower-priced, small cities and rural markets. source: ERI's Salary Assessor - Customer Service Representative (General Calls) REGION APPROACH A regional approach provides simplicity in the process of managing a geographic pay program, although this benefit may be outweighed by the number of issues it creates. Similar to the state approach, large metropolitan areas are combined with very small cities and rural markets, often resulting in pay that is too high for some locations and too low for others as compared to their cost of labor marketplaces. One of the challenges under a regional approach is to create appropriate regional breakouts that reflect differences in the competitive marketplace. Consider these examples: Far WestPacific NorthwestMountain StatesMidwestSouthEastNew EnglandSouth East In order for a regional approach to work for the hypothetical company, it would be necessary to break out high cost locations even further, such as creating geographic breakouts for the following metropolitan areas: San Francisco Bay AreaGreater Los AngelesSeattle/BellevueNew York City The inconsistency between the regional and metropolitan approach creates additional complexities in the geographic pay program for our hypothetical company. These inconsistencies create the need for exceptions to the program, leading to additional requests for other metropolitan markets to be recognized. CITY APPROACH A city-specific salary structure can work very effectively for a business with a limited number of offices within a country. However, there are also ways to obtain the best of a city-specific structure for businesses with many business locations in a country. The vast majority of geographic pay rates by job throughout the United States do not vary by more than 50% from the lowest paid to highest paid locations. An effective way to manage city-specific pay rates is by applying a standardized formula to a geographic structure, as in the following example: Cost of Labor by CityGeographic Salary StructureVery high markets120%High markets110%HQ or national marketplace100%Low markets90%Very low markets (optional)80% A city-specific approach recognizes unique pay rates in very hot markets while not overpaying in marketplaces with lower costs of labor.

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Changing the Pay-Policy Line If there are large differences between pay levels at the headquarters' and branch locations, it may become necessary to create a geographic salary structure by adjusting the headquarters' salary structure for the new location. How do you go about it? Adjust the existing pay-policy line: upward downward OR by changing the angle of the slope (this is much more complicated) Let's take a closer look... Upward. Adjust the pay-policy line upward if the average salaries in the branch-office location are higher than the average salaries at headquarters. Downward. Adjust the pay-policy line downward if the average salaries in the branch-office location are lower than the average salaries at headquarters. Angle of the slope. When adjusting the angle of the slope, this is almost like creating a new salary structure for your branch office. As a result, the complexity in managing the two structures increases. Adjust the angle of the slope of the pay-policy line if either the high- or low-level jobs have significantly higher or lower pay averages. The slope will flatten out if the branch office is located in a unionized city or in one with a "living wage" ordinance that drives up pay at the low end of the pay scale. On the other hand, a city that has a big high-technology industry may have tremendous competition among organizations for high-level professionals. This will drive up the high end of the pay scale and make the pay-policy line a steeper slope. Angle of the line When the angle of the slope changes, it may not change evenly from top to bottom. This can even create a pay-policy line that is curvilinear in shape. Ideally, the slope or angle of the line will be the same between the headquarters' and branch office salary structures. For a business with multiple branch offices, a simplified approach to managing geographic pay is critical.

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City - Market Pricing Approach Applying this methodology to our hypothetical company, the Customer Service Representative (General Calls) is market priced for each city with an office location. Utilizing five different geographic salary structures from 80% to 120% ensures a simplified program. source: ERI's Salary Assessor - Customer Service Representative (General Calls) The state approach will pay all employees working in California a 110% premium to the salary structure over the headquarter location in Denver. The city approach appropriately recognizes the high-priced San Francisco and Silicon Valley marketplaces with a 120% premium, while not overpaying a lower cost of labor city such as Placerville, California, which is valued at 90% of the Denver marketplace. City - Cost of Labor Approach Another option is to apply a cost of labor approach. ERI Economic Research Institute's Geographic Assessor® provides a robust tool to assess cost of labor by geographic location. This provides a simplified approach to utilizing the cost of labor to calculate geographic differentials and salary structures, as well as ongoing maintenance of the program. The cost of labor of $40,852 is input for the Customer Service Representative (General Calls) at the Denver, Colorado, headquarters location. We can then compare the cost of labor for each city where we have office locations, as follows: source: ERI's Geographic Assessor Cost of Living Versus Cost of Labor The Cost of Living is determined by the supply and demand for expenditures in a location, including consumables, transportation, health services, housing, and taxes paid for by an employee. The Cost of Labor is determined by the supply and demand of labor across all industries and occupations by location. Cost of Labor represents differences in market rates of all jobs combined in each local labor market. For comparison, the increase in Cost of Living from Denver to Manhattan, New York, is +113.1%, while the increase in Cost of Labor for the same two locations is +13%. Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location. For these reasons, the cost of labor approach is used to assess the geographic compensation. Comparison of Market Approach to Cost of Labor Approach When comparing the city market pricing approach to the city cost of labor approach, 2 of the 16 city locations for the hypothetical company come out differently (Montgomery, Alabama, and Placerville, California). The reason for the difference is that the Salary Assessor is pricing one specific job for the hypothetical company, whereas the Geographic Assessor is pricing all jobs combined under the cost of labor approach. source: ERI's Geographic Assessor and Salary Assessor - Customer Service Representative (General Calls) A Geographic Salary Structure or Differential? Is it advantageous for an organization to implement geographic pay differentials or a geographic salary structure? A geographic pay differential will add or decrease a specific amount to an employees' pay due to differences in the local labor market. Although both approaches can work effectively for a business, a geographic salary structure may be a more effective tool to control salary expenses. A geographic salary structure will minimize employee relations issues created as a result of differences in geographic pay rates — especially as a result of employee relocation. Which Geographic Salary Structure Approach in the Example is Preferred? There are four options to consider when determining which approach is preferred: State Region City - Market Pricing City - Cost of Labor The city approach, based on five tiers of cost of labor compared to the headquarters salary structure, is our preferred approach for recognizing differences in geographic pay. This approach is market competitive and responsive to pay equity laws. Keep in mind some states require pay equity by county, so review to ensure compliance. It also ensures simplicity in the maintenance of the overall salary structure, rather than managing a city-by-city market pricing approach, or even a state or regional approach, which would not allow the hypothetical company to recognize important geographical differences in pay. Also, the cost of labor approach in this example is the preferred data source to calculate geographic structures. This eliminates individual pricing of each job within each city and ensures that the cost of labor calculation can be applied to the entire headquarters' salary structure. This not only provides simplified ongoing maintenance of the program but also consistency for all jobs within a geographic location. The Customer Service Representative (General Calls) in the United States would then be managed to the following geographic salary structure: Customer Service Representative (General Calls) This formula approach can also easily be applied to an entire salary structure in the hypothetical company. Customer Service Representative (General Calls) You can see that a geographic salary structure doesn't have to be overly complicated. A geographic salary structure such as this basically takes the headquarters' salary structure and applies it to the local market value of jobs in a very fair and equitable way.

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Cost of Living Cost of living is determined by the: demand for goods and services AND supply of goods and services Cost of living is very valuable for managing relocations and temporary assignments, but it is not traditionally used to determine the market value of jobs. Consumer Price Index (CPI) Q: What is the Consumer Price Index (CPI)? A: A market basket of goods and services likely to be used by the average family. The government keeps track of the cost of living through the CPI. When someone thinks that pay rates should be adjusted according to the cost of living, they've usually been looking at the change in the CPI. But each person differs in how the factors in the market basket affect their personal cost of living. So, establishing rates of pay according to cost of living alone will lead to overpayment of employees in high cost-of-living areas. CPI is not an indicator of the cost of labor. Cost of living and Relocations Companies that relocate employees on a regular basis have a base rate for the employee's job and add a cost-of-living allowance separate from the base-rate amount. When ERI subscribers use this method, they rely on ERI's Relocation Assessor® software, which breaks down the cost of living by: consumables transportation health services rent or home ownership/utilities/insurance income and payroll taxes miscellaneous expenses Want more information on setting pay for individuals based on cost of living? See DLC Course 57: Relocating an Employee Within the United States and Course 92: Expatriate Compensation. ERI generally recommends that cost of living be used as a consideration in establishing relocation benefits for employees, not for determining salary differentials for entire offices. Cost of Labor Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location. When ERI subscribers use this method, they rely on ERI's Geographic Assessor® software, which also prices the cost of labor. The cost of labor reflects the local demand for and supply of labor, where cost of living is dictated by the local demand for and supply of goods and services. Cost of labor typically will correspond to the labor market scope of a salary structure. Normal surveys price individual jobs, where the cost of labor approach prices all jobs combined for a particular geographic location Me

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DESIGN AND ADMINISTRATION OF A GEOGRAPHIC SALARY STRUCTURE The decision of who will design and administer the geographic salary structure is important and can affect the success of the program. There are three situations that merit discussion: responsibility for salary structure pricing hiring difficulties employee transfers Responsibility for Salary-Structure Pricing To reduce conflict between branches and headquarters, clarify who will collect the data that determines the adjustment to be made to the ranch-office salary structure. Let's take a look at the options... Who will design the plan?Headquarters staffLocal human resources or managementWorks effectively when the headquarters or regional staff have company-wide responsibility for compensation program development.Local human resources or management may not have the skill or training to properly develop a geographic salary structure. They also will not have knowledge of the compensation strategy or design of the headquarters' plan to maintain company-wide internal equity. Typically, these programs are managed by headquarters' human resources staff who have expertise in the design and administration of geographic pay programs. Hiring Difficulties Branch office locations may experience hiring difficulties and turnover that aren't experienced at headquarters. In these cases, branch offices may desire to raise salaries for those jobs that are affected, in order to attract and retain employees. For example, a branch office in San Francisco, California, will need to pay at more competitive rates than a headquarter's office based in Dallas, Texas, to attract and retain employees. There are two things that you must remember in this situation: Avoid grading branch office jobs at higher salary grades than the headquarters' jobs. Salary grades should be consistent for all global jobs and be managed to ensure internal equity within a business. Grades may also manage short- and long-term incentive eligibility as well as benefit and perquisite eligibility. The salary ranges vary based on market rates within a geographic location. If there is a temporary labor shortage that is causing the compensation issue, it is important to provide a temporary fix to the issue rather than a permanent solution. (See signing bonus and variable pay below). The geographic salary structure should help to resolve the pay differences between the branch office and headquarters' locations. Other methods to reward new recruits and retain current employees should also be considered. Let's take a look at some possibilities... Signing bonus. A signing bonus may be a one-time payment made up front, or it can be spread out over a period of time (for example, three years). Variable pay. If variable pay is managed at a branch office location, the plan can be designed based on the output from the job in question. This can be a bonus plan that doesn't change the base pay, but allows the employee to earn a competitive compensation package based on individual/team/unit achievements. Here's an example: Mortgage processors were in short supply when interest rates fell. Companies responded differently to the problem: Some chose to move the job up into a higher-level grade, but this can be problematic if the market shifts downward again. Others established a variable pay plan that rewarded mortgage processors for the number of mortgages they processed. When demand for mortgages declined, these employees still had their base compensation.

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DEVELOPING A GEOGRAPHIC SALARY STRUCTURE DLC Course 82, Creating a Competitive Salary Structure, showed you how to design a salary structure for your company's headquarters. Let's take a look at how to adjust this structure for a branch office. Rates of pay aren't the same in all locations. So, basing employee pay on the headquarters salary structure(s) can lead to: overpayment OR underpayment Both of which can be costly... PAYMENTRESULTOverpaymentreduced profitsreduced ability to competeunhealthy low turnoverUnderpaymenthigh turnoverlow employee moraledifficulty hiring qualified staff Ideally, the headquarters' salary structure can be used or adjusted to meet the needs of a branch office. There are a few important considerations though. Headquarters' Salary Structure? When setting geographic pay, consider using the headquarters' salary structure if: the jobs in the branch office are the same or similar to the jobs in headquarters AND there is an interdependence and interaction between the branch and headquarters AND the labor market in the branch office is similar to the headquarters This would ease employee movement between offices. Separate Salary Structures What if the branch is truly a separate operation? A separate salary structure may be a better answer if the branch: performs different functions or is in a different industry than the headquarters AND rarely interacts with headquarters OR the labor market in the branch office is significantly different than headquarters Geographic Salary Structure What if the branch office has similar jobs, is in the same industry, but has different market values for pay? Looking for the best way to determine if you need a separate salary structure? Compare the pay rates between headquarters and the branch office. A separate salary structure may be called for if the pay differential is 10% or more. Many businesses have branch offices throughout the United States, so creating geographic salary structures that are simple to maintain, yet competitive to each local market place to support staffing effectiveness, are important goals. Be mindful that the use of geographic structures will increase the complexity of the organization's compensation program.

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Employee Transfers Employee transferees sometimes receive raises or cost-of-living allowances. But these can throw off a geographic salary structure. Example: The manager is transferring two employees: Amelia is transferring from Kansas City to San Francisco. Frank is transferring from Chicago to Kansas City. The San Francisco and Chicago branches obviously have higher costs of living than the Kansas City branch. Both employees expect a salary increase for their transfers. The manager thinks the easiest solution is to give Amelia and Frank an increase in pay. But look closely. There's a good chance that Frank's salary will be above that of others in the Kansas City branch. What can the manager do? Let's take a look... Low salaryHigh salaryThis one is easy. Simply raise the transferring employee's salary to be consistent with the branch office's salary structure.Lowering salaries is never popular, but neither is keeping the employee's salary above others. So, one option is to freeze the employee's salary until the salary range exceeds the employee's salary. Still, this is not ideal. Relocation bonus Relocation bonuses can also come in handy when transferring an employee to a location with a higher cost of living. The employer provides the transferred employee with a lump-sum bonus upon moving. Let's take a look at both sides of the coin... AdvantageDisadvantageIt provides the employee with cash at a time when he/she is experiencing a lot of out-of-pocket expenses.The bonus may appear large, but it's actually very small compared to continued higher living costs. Cost-of-living allowance Another option is to provide a temporary cost-of-living allowance that's clearly identified as separate from base compensation. Cost-of-Living Allowances are usually: established for a specified time period (up to three years) AND reduced over time Why? The employee gets used to the cost differential between the former and new city over time and doesn't need the allowance anymore.

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Geographic Differences in Benefits Benefits are usually established at the organizational level. There should be little difference in benefits at the branch-office level. But there are some differences in: required benefit programs AND voluntary benefit programs Required benefits Required benefits are those benefits mandated by law. They include: Social Security Workers' Compensation AND Unemployment insurance These three programs fall into two categories: Federal programsState programsSocial Security is operated by the federal government and is the same regardless of where the branch office is located.Workers' Compensation and unemployment insurance, on the other hand, are typically state-run programs. State-run programs present the most fluctuation. Let's take a closer look... If the branch office is located in a different state than headquarters, there can be differences in the: amounts the branch is required to contribute AND requirements and benefits from the perspective of the employee Different states also have unique required benefits. Example: California requires state disability insurance. States also differ in whether they have personal income tax, the amount of personal income tax, and personal income tax deduction requirements. Want more information? State requirements can be found at: https://www.adp.com https://www.doleta.gov/regions/ Voluntary benefits Most organizational retirement and insurance programs do not vary by location within the United States. Health and dental coverage is an exception. Not all health and dental insurance companies operate in all states. HMOs and DMOs are generally local in nature. The result is that the health and dental plan at headquarters may not be applicable to a branch office located in another state.

introduction

In today's highly competitive environment, it is important to maintain a salary structure responsive to your organization's competitive labor market. Getting market pricing wrong can result in high labor costs or non-competitive rates, leading to high turnover or employee engagement issues. Getting it right can be cost effective and result in a highly motivated, engaged workforce with healthy turnover. Geographic salary structures are a prevalent tool in today's marketplace. One of the key challenges is to design a geographic pay program that is competitive in terms of market pay rates and responsive to business needs and today's legal environment. Meanwhile, it is important to maintain simplicity in these types of programs. Pay Equity When establishing geographic salary structures, it is also important to stay abreast of and ensure compliance with state and federal pay equity laws. Pay equity laws may include location as a component of their pay equity requirements. For example, pay equity may be required by locality, establishment, or even within a county. Cost of Living or Cost of Labor? "If we moved XYZ Company to a new location, our labor costs would be less because the cost of living there is a lot lower than it is here." There's a problem with the statement above. It assumes a location's pay rates are tied to the cost of living. In fact... The correlation between pay rates and the cost of living is quite low - only around 10%. The cost of living is determined by the supply and demand for expenditures in a location, including consumables, transportation, health services, housing, and taxes paid by an employee. The cost of labor is determined by the supply and demand of labor across all industries and occupations by location. Cost of labor represents differences in market rates of all jobs combined in each local labor market. Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location. For these reasons, we will use the cost of labor approach to assess the use of geographic compensation. We will cover the three common approaches used for developing a geographic salary structure: City State Region A state or regional approach may appear to be simpler but can lead to underpaying or overpaying in key competitive locations. A city approach is generally considered to be a best practice and allows a company to manage geographic pay by the city office location. When a business has operations in a multitude of cities throughout the United States or even globally, it may not seem practical to differentiate by city. We will also briefly address geographic pay outside of the United States. You'll also learn how to use software to research a geographic salary structure. Please note: This course builds upon the material found in DLC Course 82: Creating a Competitive Salary Structure. Please make sure you're familiar with the material in Course 82 before continuing on with this course. The ERI white paper, Developing a Competitive Salary Structure, may also be of value.

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International Locations It is not advisable to take a salary structure from the United States and adjust it for a Canadian branch office or any other international location using a geographic salary structure. Each international market (including Canada) requires a separate salary structure for each country. Why? Because the United States and all other countries have different labor markets, economies, total reward practices, laws, tax systems, and health and welfare programs. The jobs may be valued differently in other countries as well. Instead, you will need to set up a separate salary structure by using local labor market data. For European Union pay data, see ERI's Salary Assessor tool.)

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LABOR MARKETS Why is a geographic salary structure necessary? Because the home office and branch offices may be in different labor markets. The Meeting of Supply and Demand The demand for and supply of jobs meet in labor markets. Labor marketsEmployers provide the demand for laborEmployees provide the supply of labor The labor market determines the market value for jobs AND connects employers and applicants in the marketplace. MarketAn area across which prices normalize through regular interaction between a set of buyers and sellers exchanging goods, services or information. In labor markets, the size of the area may vary from a city to the global marketplace. The size of the Labor market varies with the KSAs (knowledge, skills and abilities) of the labor supply: KSA type AND KSA level Recruiting for various levels of positions depends on the labor supply. The variation usually goes something like this: National/International MarketRegional MarketLocal Market A labor market contains many specialized markets for various occupations. These markets are linked by the possibility of transfer between jobs. There are two reasons that each organization can be considered a separate "internal labor market": Organizations often promote from within for jobs higher in the hierarchy of jobs. AND Organizations create jobs that are organization specific; the organization provides training for the employee so that the skills obtained may have little transferability to the outside labor market.

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Labor Markets Aren't Perfect Neither workers nor employers have sufficient information about labor markets. However, both groups must seek enough information to make educated decisions about pay and employment. Unemployment and job vacancies exist simultaneously. Of course, there are usually more job vacancies than unemployment at any given time, except in a recession. There are several reasons for this, including that: workers are reluctant to quit their jobs AND employers are aware of their investment in present employees Here's how it works... Think of a labor market as a flow of people from unemployment to job vacancies, where both pools are constantly renewed. The two pools of people are related since a change in either pool creates forces that change the other. The flow during the year is much larger than the net change over a year. Cutting recruitment costs Let's assume that employers pay the market rate for labor. There are several ways those employers can cut recruitment costs: Pay above-average rates in hopes of attracting a larger number of more qualified candidates. Attempt to retain present employees and recruit from employee referrals. Expand the reach and type of advertising in the marketplace to increase the applicant pool. This might be simply by advertising through a professional association or including a secondary advertising source. Expand the recruitment strategy to target the appropriate actions needed to increase the applicant pool. Reduce voluntary turnover within the company by understanding the reasons employees are leaving the company and then targeting the required change to eliminate the regrettable turnover. Use internal labor markets as a source of employees so that only a few jobs are filled from external labor markets. This may be through an Employee Referral Program. Different labor markets Each labor market has a different: supply of workers AND demand by employers that need different workers What does that mean? It means it's likely that a branch office located in a different geographic location will be in a different labor market with different supply and demand conditions. This creates different market rates for employees of the branch office.

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Market Value of Jobs The market value of jobs is determined by the: supply of labor AND demand for labor What happens when the supply of labor is extremely high or low? Let's take a look... Excess laborersLaborer shortageAn excess of laborers causes pay rates to drop.A shortage of laborers causes pay rates to rise. Area When a particular geographical area is seen as an attractive place to live, a large number of people move there and salaries may decrease due to an eventual oversupply of labor. Occupation A drop in pay rates may also occur within occupational areas. For instance... If recent college graduates prefer certain types of jobs and then move into the workforce in large numbers, pay in those occupations may drop. The increased use of robotics will decrease the need for labor in certain occupations. As a result, pay in those occupations will likely drop due to an oversupply of labor for those occupations. Of course, the opposite is also true - a shortage of labor will raise salaries. Here's an example: The demand for software developers exceeds the availability in the current applicant pool. As a result, the market value of the job has risen rapidly. Many times, companies find themselves in a bidding war to find and retain employees with strong software development skills. Top companies will retain their top employees through equity grants — making it difficult for new companies to recruit. The market value of software developers' compensation remains strong compared to other jobs in an organization. Salary surveys Pay rates are determined by the interaction of the: supply of labor AND demand for labor For the organization, the result is a series of pay rates for the organization's jobs. Information on these rates is collected through salary surveys. Salary SurveyThe collection, analysis and use of compensation data pertaining to other employing organizations within the labor market area. The result of the salary survey process can be a simple or a comprehensive analysis to guide an organization in paying its employees competitively in comparison to its defined marketplace. DLC Course 73: Analyzing Salary Surveys, covers how to collect and analyze salary survey data.

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Pay grades and ranges Ideally, a branch salary structure will provide grading consistency with the jobs at the headquarters. The salary grades will ensure company-wide consistency and become an important tool to manage internal equity throughout a business. Salary gradesA group of jobs of the same or similar value, used for compensation purposes. The groupings typically appear on the horizontal axis of the salary structure and help to support internal equity within an organization. These represent the organization's valuation of the jobs within a salary structure. Q: What is the effect of a branch pay line that differs from headquarters? A: The salary grades help to support internal equity within a business. Some companies will manage short- and long-term incentive eligibility and sometimes even benefit or perquisites based on grades. The branch pay line should represent the competitive marketplace for the branch office. Pay Grades in a Salary Structure Salary rangesThe minimum, midpoint, and maximum that can be paid an employee whose job falls within a particular salary grade. If you raise the pay-policy line of a branch office, this will then raise the salary range for each grade. Now there will be different: minimums midpoints maximums If the pay-policy line rises or falls at the same slope, then each pay grade changes the same percentage. This is the ideal approach when managing geographic pay. Q: What will change when there's a change in the slope ofthe pay-policy line? A: The amount of overlap between salary grades. Caution should be exercised when changing the slope of a pay policy line. A headquarters salary structure will have many more benchmark jobs used in the analysis. A branch office salary structure with a limited number of benchmark jobs may produce a different slope but may not be the desired outcome. Except for the minimum of the lowest grade and the maximum of the highest grade, there should always be an overlap in pay between adjacent salary grades. So, an employee at the top of a lower grade will earn more than an employee at the bottom of (or even up to the midpoint of) the next higher grade. This overlap: decreases when the slope is steeper AND increases when the slope is flatter

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SUMMARY In today's highly competitive market environment, a geographic salary structure is an excellent tool to ensure that competitive salaries are paid across a country, recognizing that jobs should be neither over-paid nor under-paid relative to their specific marketplaces. When a decision is made to recognize differences in geographic pay, it is important to implement a simplified process that is legal, market competitive, and equitable to your labor force. Geographic salary structures also ensure that jobs are market priced fairly to support a highly motivated, engaged workforce. The cost of living is determined by the supply and demand for expenditures in a location, including consumables, transportation, health services, housing, and taxes paid by an employee. The cost of labor is determined by the supply and demand of labor across all industries and occupations by location. Cost of labor represents differences in market rates of all jobs combined in each local labor market. Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location. There are three options to consider when determining which salary structure to use for a branch office: Headquarters' Salary Structure When setting geographic pay: consider using the headquarters' salary structure if the jobs in the branch office are the same or similar to the jobs in the headquarters AND there is an interdependence and interaction between the branch and headquarters AND the labor market in the branch office is similar to that of the headquarters Separate Salary Structures A separate salary structure may be a better answer if the branch: performs different functions or is in a different industry than that of the headquarters AND rarely interacts with headquarters OR the labor market in the branch office is significantly different than that of the headquarters such as an international location Geographic Salary Structures A geographic salary structure should be considered if a branch office: has similar jobs AND is in the same industry and country AND has different market values for pay A separate salary structure may be called for if the pay differential is 10% or more. Many businesses have branch offices throughout the United States so creating geographic salary structures that are simple to maintain, yet competitive to each local market place, that support staffing effectiveness, is an important goal. Geographic salary structures may be created through the creation of a separate pay policy line using appropriate market data for the branch office. Pay policy lines may be: higher or lower sloped flatter or more steeply OR in the extreme, not even a straight line Geographic salary structures may also be created as a percentage of the headquarters' salary structure by evaluating geographic pay differences between the branch office and headquarters by: city state region The city approach to evaluating geographic pay ensures competitive market rates for all locations where the state and region approach may over pay and under pay some locations. The vast majority of geographic pay rates by job throughout the United States do not vary by more than 50% from the lowest paid to highest paid locations. An effective way to manage city-specific pay rates is by applying a standardized formula to a geographic structure, as in the following example: Cost of Labor by CityGeographic Salary StructureVery high markets120%High markets110%HQ or national marketplace100%Low markets90%Very low markets (optional)80% When establishing geographic salary structures, it is also important to stay abreast and ensure compliance with state and federal pay equity laws. Pay equity laws may include location as a component of their pay equity requirements. For example, pay equity may be required by locality, establishment, or even within a county. International Each country should always have its own salary structure, and, as a result, not be a candidate for a geographic salary structure. Why? Because the United States and all other countries have different labor markets, economies, total reward practices, laws, tax systems, and health and welfare programs. The jobs may be valued differently in other countries as well. Previous

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Salary Level Establishing a geographic salary structure requires an examination of the: organization's salary levels organization's salary structure AND salaries levels of a branch office Salary levelThe average salary paid to a group of employees. We're trying to compare two locations: headquarters and a branch office. Look at the average salaries paid in each location. This comparison determines whether a branch-office salary structure is required. Salary-level information can be obtained in salary surveys. ERI's Geographic Assessor®, for example, provides salary differentials between any two of nearly 7,000 areas in North America. This software shows percent differences between pay levels of multiple cities. You can use these percentages to determine if the city selected for the branch office has lower or higher pay levels than the headquarters city. We will demonstrate the use of this tool in the Interactive Exercise at the end of the course. Pay Policy Line Approach There are a number of steps used in the development of a salary structure (as described in DLC Course 82). A short review may help you to understand how to adapt the headquarters structure to the branch. The first step in designing a salary structure is to develop a pay-policy line. Pay-policy line A graph with: salary rates on the vertical axis the organization's method (usually salary grades or job evaluation points) of determining internal job-worth relationships on the horizontal axis Benchmark jobs are plotted on this graph and a line is drawn according to the plotted points, as shown below. Example Pay-Policy Line It's the headquarters' pay-policy line that will be adapted to the branch operation. Valuing benchmark jobs Once you have a pay-policy line for headquarters, you can compare the pay for benchmark jobs for each grade level to the pay scale in the labor market of the branch office. Benchmark JobA job that is commonly found in the organization and the general labor market. Because pay data for these jobs are readily available in published surveys, they are used to make pay comparisons. For example, ERI's Salary Assessor® tool can be used to compare the pay rates of selected benchmark jobs. This software can show you the percentage difference for the midpoint of each pay grade. Then you can use this percent differential to adjust the pay-policy line. We will demonstrate this in the Interactive Exercise at the end of this course.

Employers can reduce their recruitment costs by:

all of the above