A new chapter begins
The geo-pay remix: Navigating compensation in a borderless world
The rules of work have changed, and so must your approach to pay.
Today's borderless workforce has upended traditional compensation models. For leaders, this requires a fundamental shift in rethinking how pay is structured, delivered, and perceived, as geographic boundaries are no longer fixed but rather blurred by remote work and volatile talent markets. Relying on outdated compensation assumptions poses a strategic risk to both your talent retention and your bottom line.
At Mercer, we're seeing firsthand how organizations are grappling with the seismic shifts in where, how, and for what employees get paid. Our latest insights, drawn from extensive data and employer surveys, reveal a landscape that is far more nuanced than a simple cost-of-living adjustment. This isn't about New York City versus Omaha; it's about a dynamic interplay of factors that demand a strategic, not reactive, approach.
Rethinking pay in the era of anywhere work
It's a question compensation leaders are asking more than ever: Has remote work rendered geographic pay differentials obsolete?
We may answer this as not completely true, but with caveats. While just 8% of job postings explicitly permit hybrid or remote work, many organizations are now adjusting compensation based on employees' home locations. Still, geographic differentials are far from disappearing. In fact, in some markets, they're intensifying.
Case in point: San Francisco. Its pay differential rose from 19% to 26% above national averages in just four years. The increase is especially pronounced at the lower end of the pay scale, reaching as high as 35% for a salary of $30,000 per year. That means using an average differential risks underpaying the very talent segments you can least afford to lose.
Meanwhile, cities like Austin, once viewed as a lower-cost alternative, are rapidly catching up with national pay averages. An influx of tech companies and high-earning professionals is driving up housing costs and wage expectations, eroding the once-reliable cost advantage that the area had.
The takeaway? Geographic pay strategy isn't dead, it's evolving. And to remain competitive, organizations need precision, not generalizations. Nuance, backed by real-time data, is essential to navigating today's complex and dynamic compensation landscape.
Unpacking the drivers behind location-based pay
Cost of living is merely one piece of a much larger puzzle. To truly understand what influences geographic pay, we must dissect the intricate market dynamics at play. Key factors include:
- Local market competition: The simple truth is that where talent is scarce, wages rise. Supply and demand remain foundational.
- Employment dynamics: The dominant industries in a location dramatically shape its wage landscape. Hospitality-heavy Miami, for example, typically sees lower hourly wages than a manufacturing hub like St. Louis, despite the former's higher cost of living.
- Legal and regulatory pressures: Ever-increasing state and local minimum wage laws are directly impacting the lower end of the pay scale, pushing up wages for frontline workers, often irrespective of broader market forces.
- Quality of living and desirability: Where people want to live impacts the equation. Desirability can offset some pay expectations, but only to a point.
Today, effective geographic pay requires an understanding of the full economic, regulatory, and human context of each market in which you hire.
Why pay below cost of living backfires
A critical shift is underway in the wage landscape, one that's reversing decades of historical precedent. Real wage growth (wage increases after inflation) has been strongest at the bottom of the pay scale over the last five years, marking a stark contrast to the past 40 years. Our data shows that the median internal minimum wage across organizations has now reached $17.50 per hour. Nationally, the fight for $15 has evolved into a push for $20 or more.
But even as baseline wages rise, they're still falling short in many major metro areas. In these markets, entry-level pay often lags behind the local cost of living. This isn't just a cost issue; it's a risk to workforce stability. Predictive analytics point to a sharp "cliff effect" in turnover: when pay falls below approximately 120% of the local cost of living, hourly worker attrition spikes dramatically.
As an employer, it's not about being the highest payer. It's about paying enough to keep employees. Or as one Total Rewards leader put it, "Money can't buy happiness, but it can put food on the table."
Managing geographic pay: Precision over policy
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Map talent to defined markets:Forget rigid, historical pay zones as your true hiring market is where your talent lives and works. For frontline roles, this might be hyper-local (consider how far employees are willing to commute, or even the impact of public transportation routes). For specialized or remote roles, it could be regional or national. Plot your current workforce on a map, and the insights might surprise you.
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Segment pay with sensitivity:
Not all jobs are created equal. Consider, for example:
- High geographic sensitivity: Hourly, facility-based, or roles with highly fungible skills (such as a cashier) are acutely sensitive to local market competition and the cost of living. Here, hyper-local wage scales or larger differentials are often necessary.
- Low geographic sensitivity: Truly location-agnostic roles might fit into a broader national or remote agnostic pay zone. Highly specialized roles might also fit into this zone. For executives or highly paid roles, where the talent pool is often national, differentials might be less impactful.
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Address relocation with clarity:When an employee relocates from a high-cost to a lower-cost area, establish clear and consistent policies. Inconsistent application (e.g., one HR partner cuts pay, another doesn't) can lead to significant employee dissatisfaction. Consider the intent: if the company initiates the move to a high-cost area, temporary allowances or sign-on bonuses can bridge the gap while local market wages catch up, preventing over-indexing base pay for potentially temporary market fluctuations.
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Invest in dynamic data:The market moves fast. Relying on historical, traditional job-based benchmark data alone won't suffice. Utilize real-time tools that track labor market insights, such as job posting data or allow more dynamic insights on local markets based on broader job types or skills. This will enable you to price labor pools, not just individual jobs, especially for roles that require transferable skills.
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Re-evaluate minimums:Your internal minimum wage is a powerful tool for employee retention. As real wages climb at the lower end, ensure internal minimums remain competitive with the living wage in local markets. Failing to address this can trigger a costly cycle of high turnover.