It’s no secret that salaries across the US can vary significantly based on where the job is located. Average salary variations are fluid due to several factors that affect the salary range within a specific region or city. Such factors can include labor market specifics and average cost of living.
While many people assume pay differentials are the same as adjustments for cost-of-living measures, high (or low) living costs in an area may only have a moderate impact on pay levels. Salary levels in geographic areas relate more specifically to items such as the rate of unemployment and number of qualified job applicants in the area (supply and demand). But analyzing all of these factors separately to determine appropriate salaries based on geography can be time consuming, especially when considering multiple markets and multiple positions.
Even with all the fluctuations, employers can make sense of the ever-changing differences by periodically comparing aggregated national data against a specific location to determine an appropriate workforce compensation strategy in that area. Looking at this data using a tool such as Mercer’s 2020 US Geographic Salary Differential Tool annually or every-other-year is suitable.
Insights from Geographic Salary Differential Results
The following graphic depicts US cities with the highest and lowest geographic differentials when compared to the national average detailed in the 2020 US Geographic Salary Differential Tool.
When it comes to compensation planning, Mercer’s 2020 US Geographic Salary Differential Tool provides some key advantages for HR and financial professionals alike. Let’s look at some of the more common use case scenarios by analyzing actual 2019 data from 10 cities that have the largest aggregate difference.
Hiring Across Multiple Markets
Most commonly, employers leverage salary differential data when budgeting for large, multi-location hiring efforts. An organization hiring for the same position in multiple US markets might know exactly what to pay employees at their current location and may even know the national salary average for that specific job. What about the pay differentials in unfamiliar markets? There could be enormous budget implications if compensation planning doesn’t account for the appropriate deviations in other markets.
For example, if the average US salary for a particular position is $50,000, and a company needs 250 new hires at this position, a quick calculation indicates they should budget $12.5 million to cover the annual salaries, not including additional compensation, benefits, etc. However, in Palo Alto, California, where positions pay over 37% more than the national average, a competitive salary for the same job should pay approximately $68,500. If all 250 employees were located in Palo Alto, the budget needed for these salaries is over $4.6 million more — a difference that would give most CFOs cause for concern. Comparatively, if these employees were all located in Jacksonville, North Carolina one could safely estimate a budget of $10,387,500 in annual salaries payments, saving the company about $2.1 million from the national average calculation.
More commonly though, positions are spread across multiple cities with varying differences. In these situations, it’s crucial to ensure that one is properly calculating the expected costs of salaries in each specific city.
Let’s say that an organization and its employees are spread across multiple geographic locations within the country. The organization may already have remuneration and salary data to help with their compensation planning. To competitively attract and retain top talent, their compensation strategy is to target the market median for the position.
Again, a fair 5% higher salary in Palo Alto, California is actually 5% tacked on after the 37% differential is accounted for. In Jacksonville, North Carolina, positions pay about 16.9% less than the national average. So even when paying their Jacksonville employees 5% more than the aggregate local average, they are still paying a bit less than the national average while offering what would likely be an appealing figure to potential hires in Jacksonville.
Cutting through the Clutter to Get the Specifics
Mercer’s 2020 US Geographic Salary Differential Tool provides accurate geographic salary estimates in one easy-to-understand location. Some key advantages of this tool include:
- Strategic survey methodologies that ensure the utmost accuracy with reported figures.
- Projected 2021 pay increase data for each analyzed US market across various positions.
- Details regarding the percent of difference at various pay ranges, from $20,000 to $200,000.
- Comparative analyses with ability to view and compare multiple markets at once.
For additional resources, check out Mercer’s Knowledge Library for compensation planning, benefits, policies and practices, and more.