What is Location-Based Compensation?

It’s no surprise that the cost of living is vastly different in different locations, and this often leads to different compensation expectations in each market. Some businesses take into account the cost of living and local labour market conditions when determining their compensation strategies. In order to effectively compete in a high-cost jurisdiction, they offer higher salaries than in lower-cost jurisdictions, even if the type of work and quality of the employee are exactly the same.

The emergence of remote work as a result of the COVID-19 pandemic has made location-based compensation a hot topic. In companies that have historically had pay differences based on employee location, it’s been a challenge to maintain fairness when somebody who historically worked in a high-cost location moves to a lower cost zip code, but still expects the same pay as before. According to a recent poll conducted in Canada (WorldatWork’s “2022 Geographic Pay Policies” report), 28% of respondents said they would try to implement new or more sophisticated location-based compensation rules to handle the changing working environment.

The poll’s findings show that seventy one percent of respondents with staff in several locations offer regional pay differentials or adjust pay rates based on location. Forty five percent of the organizations surveyed indicated they apply pay differentials as a premium or discount to an individual’s pay and twenty four percent make distinct base pay structures for various geographic areas.

Should All Companies Move to Location-Based Compensation?

Location-based compensation isn’t a blanket policy that is suitable for all organizations. The choice to go with location-based compensation must be supported by each organization’s business and strategic goals. Some companies choose to have single pay structures, regardless of employee location, and ignore location as a factor. In these cases, there is a risk of not being able to offer competitive compensation in higher-cost locations or “overpaying” for equivalent skills in a lower-cost jurisdiction. These companies may end up naturally biased against recruiting in high-cost areas.

Location-based compensation can enable companies to effectively recruit in more labour markets without fearing they are overpaying for talent. They often need to be mindful of ensuring employees feel fairly compensated and are not resentful of pay differences based on where people reside rather than the quality of work. Furthermore, if you make any modifications to the wage structure, you run the risk of some employees using to negotiate a high salary based on location, then moving to a lower-cost jurisdiction.

The decision to implement or modify location-based compensation is organization and culture-specific and requires thoughtful consideration before moving forward.

How Many Companies Implement LBC?

The first step to implementing location-based compensation is to design a compensation model that introduces geography as a new factor used to determine individual pay. Conceptually, this is like defining HQ as “sea level” on a map, with other jurisdictions above or below this level by a certain amount or percentage based on local job market conditions for each role.

While this sounds simple, it can become complex rather quickly, because location is not a universal determinant for all roles. For instance, the job market for developers in Silicon Valley will likely have a significant premium versus other zip codes. But the premium for other roles, such as marketing and customer service, will likely be smaller.

We recommend gathering market salary data from a variety of sources for each relevant function in each area, as well as the cost of living information. Luckily, there are large datasets available that can be a great starting point, and compensation consultants can help you interpret and translate this information into a format you can use.

Your translated dataset will effectively define compensation bands for each location by applying a differential between your standard compensation band for each role and each local market. This is essentially a compensation topographical map, and this data should reside in your HRIS or in an accessible and manageable datastore (such as Snowflake).

Automating Location-Based Compensation

This dataset is a giant look-up table that can be used to automate job offers and compensation adjustments. Using tools such as Workato or Workday Studio, we can create automations that retrieve location-based compensation adjustments from this dataset and directly apply them to job offers and compensation adjustments in real-time. This saves HR or Talent Acquisition teams from having to manually look up adjustments, which is extremely tedious and error prone. Keep in mind, errors in compensation are extremely expensive, and so automating these processes is considered well worth it.

As you will be updating your location-based compensation tables on a regular basis, we can also build automations and dashboards to give you a sense of how your compensation stacks up in each jurisdiction, as well as provide insights to individuals who may be outside of these adjusted bands.

What are your Next Steps?

If you are contemplating a move to location-based compensation policies but are unsure how to operationalize these changes, we can help you develop a strategy that will avoid common pitfalls. Alternatively, if you have already implemented this type of policy but are struggling with the additional workload this puts on your recruiting and HR teams, we can work with you to build simple, error-proof and automated processes that eliminate manual lookups and adjustments.

Abhi Chaudhary
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