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It’s no secret that salaries across the United States can fluctuate significantly (up to 23%) 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 laborers 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 still make sense of the ever-changing differences by comparing aggregated national data against a specific location to determine an appropriate workforce compensation strategy in that area.
The below graphic, based on data collected from Mercer’s 2018 salary surveys, shows the salary differences for both the highest paying and lowest paying US cities, as compared to the national average.
When it comes to compensation planning, the 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 2018 data from 10 cities that have the largest aggregate difference.
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. But, 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. In San Francisco, however, where positions pay nearly 23% more than the national average, a competitive salary for the same job should pay $61,500. If all 250 employees were located in San Francisco, the budget needed for these salaries is over $2.8 million more — a difference that would give most CFOs cause for concern. Comparatively, if these employees were all located in Columbus, Georgia one could safely estimate a budget of $11,300,000 in annual salaries payments, saving the company about $1.2 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 San Francisco is actually 5% tacked on after the 23% differential is accounted for. In Columbus, Georgia, positions pay about 10% less than the national average. So even when paying their Columbus 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 Columbus.
Mercer’s US Geographic Salary Differential Tool gives employers accurate geographic salary estimates in one easy-to-understand location. Some key advantages of this tool include:
View the US Geographic Salary Differential Tool product information to learn about purchase options.