How to Understand and Use Geographic Pay Differentials
Are you fielding more questions from employees and managers about how pay is determined? You’re not alone. Pay transparency laws have put compensation practices under the microscope, and employers are feeling the pressure to ensure their compensation strategies are clear and fair. This has led many compensation teams to review their methodologies, survey choices, and market pricing practices—especially when managing employees across multiple locations.
What Is a Geographic Pay Differential?
A geographic pay differential measures how much the cost of labor varies between locations. It’s typically expressed as a percentage that compares a specific area’s cost of labor to the national median.
For example, if you compare Las Vegas, Nevada, to the national average, you’ll see that the geographic differential for Las Vegas is about 3%. This means the cost of labor in Las Vegas is 3% higher than the national median, or 103% of the national average.
It’s important to note that while the cost of living influences pay decisions, geographic pay differentials are based on the cost of labor, which reflects actual market pay rates in a specific location.
How to Use Geographic Differentials
Geographic differentials can be used in two key ways when managing compensation:
- Adjusting Salary Survey Data
- Creating Geographic Zones or Ranges
Adjusting Salary Survey Data
When analyzing salary survey data, you often choose between looking at national data (all locations averaged together) or data for a specific location. While location-specific data can be helpful, filtering down too much—by city, industry, or role—can shrink the sample size and make the data unreliable.
To avoid this issue, many compensation professionals use national data as a baseline and adjust it using geographic differentials.
For example, let’s say you target the 50th percentile (median) for base salary. Using the table below, you can adjust the national data for New York City (+15%) and Cincinnati, OH (−5%) to reflect local labor costs:
| Location | National Median | Geographic Differential | Adjusted Pay |
| National Average | $65,000 | 0% | $65,000 |
| New York, NY | $65,000 | +15% | $74,750 |
| Cincinnati, OH | $65,000 | −5% | $61,750 |
This method ensures you maintain consistency while accounting for local pay variations.
Creating Geographic Zones or Ranges
Another way to apply geographic differentials is to build geographically differentiated salary structures.
Here’s how it works:
- Start with a “national” or base salary structure using regression analysis.
- Group locations by similar geographic differentials and assign them to appropriate pay structures.
For instance, a Clerk I job with a national market composite of $65,000 would fall into the following ranges based on geographic adjustments:
| Location | Range Adjustment | Adjusted Pay |
| National | 0% | $65,000 |
| New York, NY | +15% | $74,750 |
| Cincinnati, OH | −5% | $61,750 |
This method creates clear, fair salary ranges that account for local labor costs.
How Are Geographic Differentials Developed?
Geographic pay differentials are based on actual market pay rates in specific locations. For example, The Comp Consultants calculate geographic differentials by analyzing pay data through various survey houses and geographic differentiators. We build these differentials into our signature product The Comp Tool. These calculations reflect the cost of labor, showing what employers are actually paying to attract and retain talent in different areas.
Reliable sources like ours, go through rigorous quality assurance processes, unlike employee-provided or crowd-sourced data, which may lack accuracy for this purpose.
Need Help Managing Pay Across Locations?
Managing pay for employees in multiple locations can be tricky, but The Comp Tool makes it easier to stay competitive and fair. Interested in learning more? Contact us at The Comp Consultants for sample data and information on how we can help streamline your compensation strategy.