Geographical Differential

‍What is Geographical Differential?

A geographic differential is when equivalent jobs are paid at a different rate depending on where they are located. In this context, geographic location is used to refer to cities, states, nations, territories, etc. The geographic differential's foundation is based on a number of variables, including the cost of living, market rates, and others. Living in a big metropolis like New York, for instance, will be different than living in a smaller city with lower living expenses.

Why is Geographical Differential used?

There are several justifications for using a geographic wage differential:

Different pay standards: The use of fixed pay versus variable pay is handled differently in several cities or nations. There may be variations in the tax system as well.

Cost of living: Due to a variety of causes, certain geographic areas are more expensive to live in than others. A geographic pay differential offers additional compensation to account for the high cost of living in these areas.

External variables: Among the external factors that might affect the requirement for a geographic pay gap are inflation and unemployment. 

How to determine Geographical Differential

There are two recognized ways to determine Geographical Differential:

• Obtaining geographic salary information: Numerous pay consulting companies carry out salary surveys and gather the information that can be used to calculate the standard of life and pay levels in a certain state, city, region, or nation. Typically, a percentage is used to convey this.
• Combining information on the cost of living and the cost of labor in a specific state, city, region, or nation. The government normally releases this information.

The two approaches listed below can be used to determine Geographical Differential;

Use of percentages: Most businesses have a base pay scale. For instance, a business is recruiting for a marketing executive with a $50,000 to $100,000 salary range.

Candidate A resides in a city with higher housing costs, but Candidate B does not.

A 15% premium is given to Candidate A's position based on the geographic data the company has gathered.

Therefore, Candidate A's initial compensation was $50,000, making the premium paid $7,500 ($20,000 x 15%). The resultant sum would be $57,500.

Utilizing a set sum: A corporation can allot a set sum per position and region based on research, survey results, and feedback from internal sources. For instance, a consulting firm might charge all of its consultants who reside in City B a $10,000 premium.

Conclusion

As the company's compensation policy is to pay competitively and not on the employee's living expenditures, geographic differentials should not be confused with the cost of living. But the two are connected (Cost of Living is the cost of goods in one location relative to another, whereas Geographic Differential is the cost of labor in our location relative to another.)