Compensation Strategy

Best practices for creating a location-based compensation strategy

Best practices for creating a location-based compensation strategy
Liz Melton

Liz Melton

Published on

April 15, 2022

For years, people spoke of the inevitable emergence of remote work. But it wasn't until 2020 that the majority of the world actually turned to distributed work as a necessary response to the global pandemic.

Now, more than a year later, many organizations find themselves adopting distributed and remote work policies, which introduces many difficult challenges for organizations一especially when it comes to compensation.

If your company is hiring in multiple locations, should you structure your compensation practice differently? And if so, how should compensation look across varying locations?

This article outlines some considerations to make as well as our recommended best practices regarding location-based compensation. 

For more information or help with building out location-based compensation policies, request an Assemble demo.

Align on a philosophy

If your organization has employees in multiple locations, the first question your leadership should align on is this: is location a factor that should affect employees’ compensation?

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For some organizations, the answer is yes, and for others, it is no, and neither approach is wrong. But whatever direction you decide to go in, everyone needs to commit.

To ensure everyone continues to stay on the same page as your company evolves, we recommend incorporating your viewpoint into your compensation philosophy as a consistent driver of compensation decisions.

Align on an approach

If your organization believes that location should not affect someone's compensation, your compensation strategy becomes as simple as operating with one set of compensation bands within your job architecture.

On the other hand, if your company decides location should affect employee compensation, your strategy starts to get more complicated. Your organization will have to align on a secondary set of five other questions that will inform how you structure your compensation practice. Read on to learn more about what those questions are and how they influence your approach.

1. Should we address each city or metro area specifically, or "group" them?

If you’re employing people in a handful of cities, you may be willing and able to maintain specific compensation bands for each city or metro area.

But if you are a remote-first company, there may be too many cities to make this a viable strategy, and "grouping" based on location will be a better strategy.

When it comes to grouping, there are several approaches you can take:

  • Creating Regional "Zones" - This method groups locations based on geographic location (e.g., Pacific Northwest, Southeast).
  • Creating Cost "Tiers". This method groups locations based on market competitiveness (e.g., Tier 1 = San Francisco, New York).
  • Other. You can use another systematic way to group locations based on unique variables relevant to your organization.

2. Should location affect all positions equally?

Most organizations want to optimize for fairness and consistency across positions. However, this decision introduces some costs and challenges, as it can lead to overpaying for some positions (increasing financial costs to the organization) and underpaying for others (making it more difficult to recruit and retain talent).

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Because of these hurdles, some organizations optimize for competitiveness. This helps them attract and retain talent in high demand, in turn helping them manage costs. While managing compensation separately can increase complexity, it ensures that the organization remains competitive in various locations.

Example of optimizing compensation bands for competitiveness

Some high-growth tech companies don’t consider location for engineering and sales roles. In these organizations, all employees in engineering and sales departments get paid the same as their colleagues in the same position, regardless of where they work.

3. Should location affect cash and equity compensation equally?

The answer to this question is a more philosophical one that varies from organization to organization.

Some companies believe that location should only impact cash compensation because it drives the day-to-day quality of life for employees. They argue that long-term incentives (e.g., equity) should be unaffected by location.

Ideally, these organizations would have compensation bands to allow for cash compensation differences by location, while keeping equity bands consistent regardless of location.

Of course, other companies interpret this question differently, and take an all-encompassing total compensation view, reflecting the impact of location across all compensation types equally.

4. Should we derive location-based compensation bands from a source set or build individual compensation bands for each location?

Some organizations prefer to build compensation bands for each location, independent of one another. Doing so is more administratively burdensome, and, depending on the data, can lead to compensation band inconsistencies across locations. As employees transfer locations, this decision gives rise to pay inequities and can increase the likelihood of managers or employees "gaming" the system.

Photo by Michal Balog on Unsplash
Photo by L.Filipe C.Sousa on Unsplash

At Assemble, we recommend that organizations take a simpler approach where you build a source set of compensation bands first. Then, you apply adjustments for each location or location group you need compensation bands for. Not only is this technique more consistent and efficient, it is also easier to manage and explain.

Example of a compensation band source set

If your organization is based in San Francisco, you can create compensation bands for San Francisco and call that your source set. To build compensation bands for a less expensive location, you would adjust your San Francisco Bands lower via percentage discount (our recommendation) or a dollar discount.

Putting it all together: Selecting a compensation band framework

By now, you have most of the information needed to guide your location-based compensation strategy. But there is one more missing piece: your compensation band framework.

Generally, we see organizations use one of the three frameworks. This table gives a high-level overview, but we’ll explore each method in detail below.

1. Cost of Living Adjustments (COLA)

In this approach, the difference in cost of living drives the difference in compensation for the same position in various locations. Organizations collect cost of living data from many sources. We recommend examining Expatistan, Numbeo, and Council for Community and Economic Research.

Using COLA as a foundation for your compensation bands is easy to manage and explain to people. However, using COLA puts you at a higher risk of overpaying (resulting in increased financial costs to your organization) or underpaying (resulting in increased difficulties recruiting and retaining employees).

How to implement a COLA-based framework

  1. Collect cost of living data for each location.
  2. Calculate the difference between each location and your core location (e.g., +10% premium, -15% discount)
  3. Apply the differential to your source set to create compensation bands for each location

2. Cost of Labor Market Adjustments (COM)

In this approach, market data drives compensation across locations. Many survey providers generate benchmark datasets, though many are expensive, incomplete, or inaccurate, and very few are timely. To be as holistic as possible, organizations tend to procure and analyze multiple market datasets.

Even if you have fairly accurate data, COM can still be challenging, as data for each role and location must be inspected and set individually.

How to interpret COM data

If you create derivative compensation bands, you must decide how the data will influence your adjustments. Below are some of the many ways this can be done:

  • Average, in aggregate. Look at data for all relevant roles to calculate the average difference in compensation across locations.
  • Average, by Department. Look at data within a department to calculate the average difference in compensation across locations.
  • Average, by Ladder. Look at data within a ladder (or job family) to calculate the average difference in compensation across locations.
  • Average, by Position. Look at data for each specific position to calculate the average difference in compensation across locations.

Of course, this is not a fully-exhaustive list. Some organizations may use minimum, maximum, or median instead of average.

Interpreting COM data is a topic worthy of its own blog post, but when interpreting the data, remember that you won’t find the "perfect" framework. Instead, pick one that suits your needs best and is justifiable to your employees.

How to implement a COM-based framework:

  1. Collect market compensation data (often from multiple sources) for each relevant role in each location.
  2. Use that data to build location-specific comp bands. Alternatively, calculate the difference between each location and your core location (e.g., +10% premium, -15% discount).
  3. Apply the differential to your source set to create compensation bands for each location.

3. A hybrid of cost of living adjustments and cost of labor market adjustments

A hybrid approach leverages both cost of living and market compensation data, accepting that both data are important, and neither alone paints the whole picture. Combining COLA and COM offers the greatest control of the three approaches, but can become difficult to explain and manage.

How to implement a COLA + COM framework

  1. Collect cost of living for each location and market compensation data (often from multiple sources) for each relevant role in each location.
  2. Calculate the difference between each location to your core location (e.g., +10% premium, -15% discount).
  3. Apply the differential to your source set to create compensation bands for each location.

Getting buy-in and making a decision

If you've made it this far, you know that location-based compensation can be very challenging!

Besides doing all the necessary pre-work and research, you’ll need to get buy-in from your organization's leadership. At Assemble, we encourage you to incorporate these folks early on in your decision-making process.

Photo by Elena Mozhvilo on Unsplash

Start from a philosophical point of view, then move on to the mechanics. Consider what you are optimizing for, and what your constraints and limitations are. While we believe it is important to use data in your decision-making, we recommend that you let data inform but not dictate your decision.

In other words, let your compensation philosophy drive your decisions and build a process to support it. And remember, you are likely to have greater success getting buy-in from your organization if your approach is consistent, explainable, and easy to implement and manage.

Using Assemble to build your location-based compensation strategy

Assemble is a cloud-based compensation platform that makes it easy to create and manage your compensation bands, and even easier to incorporate location-based decisions.

With Assemble’s built-in process automation, you can reduce the time it takes to create location-based comp bands from months to minutes.

For further information, or help building your own compensation policies, request an Assemble demo.

Liz Melton

Liz Melton

Assemble is the world’s first compensation platform designed to empower your teams to attract, retain, and motivate top talent with fair and equitable pay.