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How to Calculate Equivalent Salaries Across the States
When calculating equivalent salaries across the United States, you should consider an employee's salary level and the city in which she works. While there are some regional differences in salaries, geographic differences are usually city-specific. For example, a location in upstate New York doesn't carry the same premium as New York City. Geographic differences in pay are also less pronounced at higher pay levels. For example, a company might pay the same salary to a CEO if he worked in Atlanta or San Francisco, even though there is a 15 to 20 percent difference in pay at lower pay levels.
Geographic Differential Data
One method to calculate equivalent salaries across the United States is to purchase data from consulting firms that estimates the geographic differences at varying pay levels. Pay differences are usually expressed as a percentage above or below the national average pay. For example, the data might indicate that, for employees in a job where the national average salary is $50,000, the salary is generally 20 percent higher in San Francisco, or $60,000, and 10 percent lower in Jackson, Mississippi, or $45,000.
Cost of Living Data
A geographic salary differential represents the difference in the cost of labor between cities or states. While most companies use this approach, some companies calculate equivalent salaries using cost-of-living differences published by the government. However, cost-of-living differences are not as relevant as salary differentials because cost of living represents the price of goods and services, while cost of labor represents the differences in how much people are paid.
How Companies Apply Differentials
An employee who works in San Francisco doesn't automatically earn 20 percent more than an employee in a city such as Atlanta, which is close to the national average. Companies typically build geographic differences into the salary ranges they publish for jobs. Where an employee is paid within a salary range is usually determined by an employee's supervisor or manager, and the decision about what to pay an employee takes other factors, such as prior experience performing similar duties for new employees or job performance for existing employees, into consideration.
Separating Differentials from Base Pay
Some companies separate the geographic premium from an employee's base salary so the premium can be removed from the employee's pay if he returns to a city with a lower cost of labor. However, companies don't reduce an employee's base pay when he transfers to a city with a lower pay scale. Occasionally, the combination of higher pay and a lower cost of living enables employees to have such a high standard of living that it's difficult to convince them to return to a higher-cost location at the same or a similar pay rate.
Steve McDonnell's experience running businesses and launching companies complements his technical expertise in information, technology and human resources. He earned a degree in computer science from Dartmouth College, served on the WorldatWork editorial board, blogged for the Spotfire Business Intelligence blog and has published books and book chapters for International Human Resource Information Management and Westlaw.
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