Determining your company’s geographic pay strategy is more relevant than ever as more companies permanently shift to distributed work structures. Here, we delve into all of our community members’ questions about setting fair, geo pay strategy with OpenComp’s Compensation Consultant, Alex Shaw.
Table of Contents:
- What are the components to getting the right benchmarks?
- What’s the difference between market priced data and pay ranges?
- When should a company move beyond market pricing to pay ranges?
- How many pay range structures should you implement?
- How to create pay ranges for roles with variable compensation?
- Can a company have too many pay range structures?
- Is using pay ranges more challenging that using market pricing?
- What’s the difference between cost of living and cost of labor?
- What are the four main geo pay strategies?
- Is geo pay managed the same across all roles?
- Is geo pay managed the same across job levels?
- How do you apply your geo pay strategy to your pay ranges?
- What are some common mistakes?
- What’s your number one recommendation?
When you price a job, what are the components that you need to calibrate in order to get to the right benchmarks?
Whenever you’re using market data, the first thing you need to do is get your internal jobs aligned to the market data set. You should calibrate the following components:
- Job Role: This is the specific job someone will be performing, such as a Compensation Analyst.
- Job Level: This can be determined by the years of experience or competencies needed to perform a role.
- For example: Perhaps you need a Level 3 Senior Compensation Analyst who can manage one direct report, has 3-5 years of relevant experience, and has mastered compensation compliance laws.
But not all benchmarks are created the same. What is the difference between market priced data and pay ranges?
Market priced data is the raw data delivered directly from a benchmark survey. A market data provider will give you a singular number that tells you what the market is paying for that role.
Alternatively, pay ranges aggregate multiple data points from similar jobs to create a unique range of pay for a role. You typically select a target percentile, such as the 50th, and you build a dollar range around it, including a minimum or a maximum you are willing to pay for a position. Pay ranges will be more tailored towards what is relevant for your company, instead of applying a blanketed, singular dollar amount seen across the market.
So, a company could leverage market pricing for quite a while. At what size or stage should a company consider moving from market pricing to pay ranges?
For an early stage company, initially getting calibrated to the market data market pricing will always be valuable. However, it becomes more difficult to maintain as you start to scale. Market data is always shifting, so you’re going to be consistently trying to hit a moving target. This can lead to inconsistencies across your benchmarks and how you target pay for employees.
The benefit of choosing to construct ranges is that you can decide to target a particular percentile. So for all of your range structures, you can target the 50th percentile and build a consistent spread around that target. That’s much more helpful for managing the entire comp system.
Pay ranges provide more balance to the system by providing more stability and consistency across job families. And when an employee is ready to move from one level to the next, fairer compensation is awarded. For these reasons, as you grow, it's much easier to manage ranges as opposed to managing the direct market data.
Pros of pay ranges:
- A one-to-many relationship; you are fairly compensation similar roles against the same pay range
- Provides more balance and consistency to the system
- Aids in determining when employees are ready for promotions
- Easier to manage
- Allows you to be transparent with candidates about compensation
- Incorporates your company’s compensation philosophy
Cons of pay ranges:
- Not a one-to-one relationship; you may have to create exceptions for premium roles or candidates with a lot of relevant experience
- Takes time to build out and implement across your organization
How does a company decide on how many pay range structures to implement?
It depends on what stage the company is at and what their overall strategy is. Across the board, however, you can begin with this process:
- Group jobs by function: HR, finance, product, etc.
- Group jobs by role: software engineers, product managers, compensation analysts, etc.
- Determine the market data for these roles
Then, you can apply some nuance to how you structure your pay ranges. If you’re a small company with not that many unique roles, you won’t have a need for that many pay range structures. At the most basic level, you can have “non-technical” and “technical” role pay ranges.
Whereas if you’re a company with a more sophisticated role landscape, your pay ranges and pay structures will likely shift, and you’ll want to create a further delineation between business vs. tech vs. product roles and ranges.
How do you create pay ranges for jobs with variable compensation, such as Sales roles?
Sales roles typically fall outside what you would do for everyone else. Normally, you’d group all jobs and job families together. But with Sales, they’re all a bit different from one another. So we will see things like different types of sales roles, different pay mixes when it comes to their base salary versus their commission, and so on. Trying to group all of them together doesn’t make sense from a fair practice perspective.
Do you see companies implementing more than three pay range structures? Is there a point where there's too many?
I have definitely seen more than three and that’s okay, especially when you think about your technical, non-technical, and sales roles. For each of those ranges, you can build out your A, B, and C ranges, with A being the most important or hard to fill roles earning the most premium salaries.
It’s important to remember that in this competitive hiring environment, there are some jobs that command an additional premium and that needs to be taken into account when the pay range is created or revisited. Instead of diluting the targets, raise your ranges so that you can effectively compete.
Is managing compensation using pay ranges more challenging than using market pricing?
Using pay ranges is actually less complicated than using market data, because it creates standards and consistency. With ranges you generally know what price someone will be hired at every single time. It allows you to mirror the range of performance on top of the pay range to determine whether an employee is paid appropriately.
You can also more easily visualize the progression of the employee's development within a range from a job competency perspective. This visual range is tremendously helpful when discussing employee career development and compensation development.
With pay ranges, your compensation philosophy comes to life. You can set your ranges around your business objectives and how aggressively you want to compete for talent. If you decide you need to be in the 75th percentile for highly technical roles, you will know exactly what that means as you begin your talent search. It also helps you be transparent with candidates about what you are able to offer.
When considering geo-pay strategies, can you first tell us what the difference is between cost of living and cost of labor?
- Cost of Living: The cost of living is the cost associated with maintaining a certain standard of living within a geographic region. It takes into account things like the goods and services in a particular area, such as rent and housing costs.
- The Cost of Labor: The cost of labor is determined by supply and demand of labor in a geographic region. What is the cost to hire and retain locals and what is the cost of their knowledge or skill?
It could be that you live in a very expensive place to live, but the job you do is not necessarily in high demand there. This is how the cost of labor and cost of living may be mismatched in certain areas. Fair and accurate benchmark data should be reflective of the cost of labor, not cost of living.
What are the four main geo pay strategies?
- Individual Employee Locations
This strategy is implemented when you want to base comp on unique employee locations across the board. They are being paid to match the market they reside in. This, in theory, is the most equitable, but the hardest strategy to manage. One reason a company might deploy this strategy is because they might need boots on the ground in every location they hire for.
- Nearest Office Locations
Since the pandemic, companies have less and less offices spread throughout the country, so this is probably the strategy we see deployed the least these days. This strategy is good for folks who are going to require their employees to commute to the closest office a few days a week, for example. But, unlike the individual employee locations, you wouldn't delineate between someone living in the city and someone living in the suburb surrounding that same office.
- Major Metropolitan Areas Grouped by Tiers
Based on a recent World at Work survey, we know that 55% of companies are deploying this geo pay strategy. It takes into account which city, or which nearest city, an employee lives in. Compared to the individual employee location strategy where you’re getting as granular as zip codes, this method can simplify your geo pay approach.
You can simplify it further by breaking it up into premier markets, mid-tier markets, and so on, and apply the same pay range within each tier. OpenComp has “cost of labor differential data,” which can help you group major metropolitan areas. But, maybe an individual company might have particular markets that are very important to them depending on which industry they're in, and they will have to take a more unique approach to how they set up their tiers.
- National Rate/Headquarter Rate
To keep things fair and incredibly simple, some companies will target a national average and apply it across the board. Others will blanket their comp in the rate that is seen at HQ. Approximately 38% of organizations leverage these strategies.
For example, OpenComp is based in San Francisco, so we apply a San Francisco rate across the board. With this strategy, you can sometimes over or under pay for certain roles depending on where your HQ is. It all comes back to what your company strategy is, what the nature of your industry is, and what are the most valuable roles at your company? You can customize your compensation strategy to account for all of your company’s particulars, and compete where it matters most to you.
Is geo pay managed the same across all roles?
It depends. You don’t need to apply the same strategy across every single role. For example, there will typically not be a geo differential for executive level, sales, or field sales roles. Because sales folks can often sell a product across the country, it doesn’t matter where the salesperson is located.
Additionally, if you have vital or mission-critical roles for the business, you will simply need to target “whatever it takes'' to bring them on. So long as you are consistent with this approach, you shouldn’t run into any issues.
Is geo pay managed the same across job levels?
This also depends on what your compensation philosophy outlines. Like I mentioned, executive roles are typically excluded from geo pay. You might see different strategies between your individual contributors, and then once they move into upper levels of management, a different set of rules may apply.
So we’ve laid the groundwork for pay ranges, as well as geo pay strategy. Bringing them together, how do you apply your geo pay strategy to your pay ranges?
You would start by applying geographic differentials to your pay ranges which act as a target. Determining differentials based on an employee's work location is a part of your overall compensation philosophy, and these differentials are easily applied to pay ranges.
For example, in one range structure the midpoint may be $100,000 and the employee works in a market where we’ve decided to pay an 85% differential. So, we would offer this employee $85,000.
What are some common mistakes you see with geo pay and pay ranges?
If you’re using the wrong differential or inconsistently applying your pay strategy, you can end up under or overpaying employees. This can happen especially in times of high turnover. Additionally, sometimes pay differentials just don’t work for your organization based on something unique about your structure, so ensuring you take a custom approach is key. Unfortunately, there’s no hard and fast rule as to what type of structure to apply.
If you could give one recommendation that would change the geo pay game for our community members, what would that be?
Ultimately, companies have to set their philosophy, test your philosophy, and know that your philosophy will inevitably need to evolve. This strategy is a great thing to be able to fall back on and it’s something you can easily communicate to employees. It’s also easier to adjust when you have a documented strategy. This is something we are all going to have to address as the workforce becomes increasingly remote.