Geographic Pay Differentials

What geographic pay differentials are

Geographic pay differentials are differences in the pay set for the same job according to the location where the job is performed. The job keeps one description and one grade, and its pay range changes from one city to another under a published rule.

A geographic pay differential is not an allowance added on top of pay. It is an adjustment to the range itself within the salary structure. The difference is practical. An allowance is a separate line item, listed apart from the salary, whereas the adjustment is part of the salary, and whatever is calculated on the salary is calculated on the adjusted figure.

Geographic pay differentials follow the labour market, not the cost of living

One error in this area is to base the differential on the cost of living in each city. The sounder basis is what the labour market in that city pays for this skill. The two are different quantities, and they move for different reasons.

The cost of living describes what a resident spends. The price of labour describes what the buyer of a skill pays for it. The price of labour can be higher in a city where the skill is scarce, even though living there costs less, and lower in an expensive city where the skill is plentiful.

A differential built on spending leads to a position that cannot be defended: telling an employee that their pay is lower because their housing is cheaper. That ties pay to the employee’s personal circumstances rather than to their work, and it raises a question about every other circumstance of the employee, a question that has no answer. Saying that the range follows what the market pays in that location, on the other hand, is a statement that a pay survey can support.

Working through a zone structure

A zone structure can take this form: one zone is made the base, with an index of 100, and every other zone is set relative to it. Take a job whose range midpoint in the base zone is SAR 16,000:

• The base zone, index 100: midpoint SAR 16,000.
• Zone B, index 92: midpoint SAR 14,720.
• Zone C, index 86: midpoint SAR 13,760.

Zone C is therefore 14% below the base, which means the base is 16.28% above zone C. Between zones B and C the gap in the index is six points, and in pay it is 6.98%.

The last two figures are given together because they can be confused. Six points on the index are not 6% of pay, and the percentage is calculated on the zone being compared with, not on the base.

The figures in this example are hypothetical and are there to show the structure. We have no published reference for the Saudi market on which to base an index for any city. The three zones are hypothetical as well: the number of zones should rest on what the organisation’s own data shows, not on an administrative division of the country.

Where the zone index comes from

An index is derived, not adopted. Three methods are in use, and they can be ranked by quality:

• Pay data for the same jobs in the same locations. Of the three, this is the soundest, on condition that the sample in each location is large enough to yield an average. A location with three data points cannot carry an index.
• The organisation’s own data. Drawn from the offers accepted and declined in each location, such data is weaker statistically and closer to the organisation’s reality, and it serves as supporting evidence rather than as a basis on its own.
• A general city index. A borrowed index comes from a source that was not built for this purpose. It is the easiest of the three, and it produces indices that nobody can explain a year later.

As a working rule, an index recorded without its source and date becomes an inherited number after two cycles. The number is copied from one table to the next, nobody knows what it was built on, and nobody dares change it because changing it affects existing salaries.

One geographic differential shows up in several places

An adjusted range is not only a figure in a table, because everything built on the range follows it:

• Where an individual sits within the range. An employee paid SAR 14,000 in the base zone is below the midpoint, and in zone C the same salary is above it. The salary is the same and its position in the range differs, which is what the compa ratio measures.
• Placement on hiring. The offer is built on the range for the location, not on a single range. That decision is grade placement, a separate step from job classification, which sets the level of the job itself.
• Comparisons between units. A higher average salary in one unit may reflect its location rather than the mix of jobs in it. Comparing averages without adjusting for location compares geography while appearing to compare structure.

For this reason the index should be made known to everyone who reads these figures, not only to the people who build the tables. A reader who sees two averages without knowing that fourteen percentage points of intended difference lie between them will build an explanation on that gap that has no basis.

When a zone structure is worth its cost

A zone structure has a cost. An organisation with 12 job families manages 12 sets of ranges. If it adds 3 zones, it manages 36 sets, each of which has to be priced, reviewed every year, and answered for in every case that falls on the boundary between two zones.

The decision therefore comes down to one comparison: is the largest gap between zones worth managing three times as many tables? If the largest gap is within a few percentage points, the cost of administration and of disputes may exceed it, and one wider range that absorbs the variation within it is the way out. This comparison is a method of making the decision, not a threshold drawn from a source, and the definition sets no level below which a gap does not justify a structure.

A middle option is also available: one zone for every location except the outlier, and a separate zone for the outlier alone. That resolves the case that raised the question without building a full structure.

A structure also commits whoever adopts it to what comes after. An index announced once becomes a question every year; holding it fixed without review strips it of its basis, and moving it affects existing salaries. The decision is therefore not whether to adjust today but whether to commit to an annual cycle of reviewing three indices and 36 tables. An organisation without someone to carry out that work may be better placed to keep a single range and handle outlier cases as written exceptions.

Remote work and assigning employees to zones

The whole structure rests on an unstated question: where is this employee located? The answer was obvious when there was one place of work, and that is no longer the case. Three answers are in use, and each carries its own consequences:

• The location of the office the employee reports to. Office location is the simplest answer to administer, but it produces cases in which two employees living in the same city are paid differently because their offices differ.
• The employee’s place of residence. Residence comes closest to the logic of the market but is the hardest to apply: it turns a move of house into a pay question, and it obliges the organisation to track where each employee lives and keep that record up to date.
• The location where the employee was hired. The hiring location is the most stable answer, but it goes out of date: after three years of moves the table describes history rather than geography.

None of the three answers comes without a cost. What is required is to choose one, announce it and hold to it, rather than leave it to be decided case by case. An unannounced rule at this point will be taken as favouritism, and this is the point at which two employees come closest to comparing themselves with each other, which is the concern of internal pay equity. The definition does not decide which of the three answers is correct: each has its cost, and the choice belongs to the organisation and the nature of its work.

Transfers between zones

The case that tests the structure is an employee who moves from a higher zone to a lower one. Two policies are available:

• Holding the salary: the employee keeps their current salary, which is frozen until the range of the new zone catches up with it. Holding is kinder to the employee, but it creates salaries above the maximum of the lower zone, the situation described by red circled pay.
• Reassigning the salary: the employee’s salary is moved into the range of the new zone. Reassignment keeps the table tidier, but the employee will take it as a pay cut caused by a move that the organisation may have requested.

Whichever policy is chosen, the condition is that it is written down before the first case. A policy decided at the first transfer is decided with a particular person in front of whoever decides it, and that is the worst moment to make a rule.

How geographic pay differentials differ from allowances and wage differentials

• Housing and transport allowances are items with their own description and their own rules, covered in our guide to housing and transport allowances in the employment contract. A geographic differential, by contrast, is an adjustment to the range. An organisation that handles differences between locations by raising an allowance has changed the composition of pay, not its position in the market.
• A remote site allowance is paid in return for hardship or distance to whoever accepts the posting, and it rises as the location becomes harder. A geographic differential follows the market price and may fall at that same location, so the two can apply together and pull in opposite directions.
• Wage differentials describe differences in pay for reasons that concern the work and its description. A geographic differential concerns only the place where the work is performed.

Geographic pay differentials and the Saudi Labor Law

The Saudi Labor Law (نظام العمل) defines two wages in Article 2. The basic wage (الأجر الأساسي) is everything given to the worker in return for their work under a written or unwritten contract, whatever the kind of wage or the method of payment, plus periodic increments. The actual wage (الأجر الفعلي) is the basic wage plus all other due increases established for the worker in return for effort expended in the work, for risks incurred in performing it, or for the work under the employment contract or the work regulation. Article 2 of the Labor Law also provides that the word “wage”, where the Law uses it without a qualifier, means the actual wage.

A salary set within a location’s range is paid in return for the work, so it falls within the basic wage as Article 2 of the Labor Law defines it. A separate allowance paid because of a location is a different case. Among the items that make up the actual wage, Article 2 of the Labor Law lists allowances due to the worker for effort expended or risks incurred in performing the work, and increases that may be granted according to the standard of living or to meet family burdens. We found no ministerial decision, authoritative interpretation or settled labour court practice in our sources that settles where an allowance paid for a location falls, whether within the basic wage or under either item, and the definition does not place it.

The one provision we found in the Labor Law that refers to the place of work in setting a wage is Article 95, and it applies only where neither the employment contract nor the work regulation states the wage. In that case the pay set for work of the same kind in the establishment applies, if there is one; failing that, the pay is assessed by the custom of the profession in the place where the work is performed; failing that, the labour court assesses it according to the requirements of justice. The same order also determines the kind and extent of the service the worker owes. We found no provision in the Labor Law addressing whether an employer may set different ranges for the same job in different locations, so the definition states neither a permission nor a prohibition. Comparing pay for the same work is the subject of pay equity, which has its own sources.

The provisions relied on are those of the Saudi Labor Law as published by the Ministry of Human Resources and Social Development: Article 2 (the definitions of the basic wage and the actual wage, and the reading of an unqualified wage as the actual wage) and Article 95 (the wage that applies where the contract and the work regulation do not state one). Royal Decree M/44 of 1446H, in force since 19 February 2025, added other definitions to Article 2 of the Labor Law and left the two wage definitions worded as before, and it did not amend Article 95 of the Labor Law.

Before zones are adopted

Four questions come first. What is the largest gap between two locations in the organisation’s own data, and is it worth three times as many tables? Which quantity is the differential built on: the price of labour or the cost of living? How is an employee assigned to a zone when they have no single place of work? And what happens to an employee who transfers, and is the answer written down before the first case?

Anyone who answers the second question with the cost of living should know that they have chosen a basis that is hard to defend in front of an employee, and that the question will be put to them at the first review. An employee does not compare their city with another city. They compare themselves with a colleague who does the same work, and the only answer that holds up against that comparison is one that speaks about the market, not about household spending.

This is an explanation of the concept and of the statutory provisions cited, not legal advice.

Related terms

• Job Classification
• Wage Drift
• Commission Pay
• End-of-Service Benefits (EOSB)