Table of Contents
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Table of Contents
What Are Pay Differentials?
Pay differentials are extra compensation employees receive (in addition to their base pay) for taking on special assignments or working less-than-desirable shifts. Some pay differentials can be temporary, while others are more permanent.
Why Are Pay Differentials Important for Employers?
Pay differentials improve employer branding, increase return on investments, reduce labor shortages, and attract top talent.
- Employer branding. Employees who feel valued and justly compensated share their experiences with their professional communities, which amplifies the employer’s brand.
- Return on investment for recruiting. Compensation and culture are top factors that turn job seekers into candidates. When organizations implement various types of pay differentials, they establish a culture that promotes fairness. Pay differentials are also excellent recruiting and retention strategies because they increase applicants’ cash compensation. When pay differentials are used to retain employees, organizations receive a considerable return on investment for their recruiting expenses.
- Reduce labor shortage. Posting pay differential information in job postings can increase the number of applicants and decrease the number of vacancies. Job listings that include a salary range get 75% more clicks than job listings that don’t, according to G2. With decreased vacancies, labor shortages are reduced within organizations.
- Boost productivity. A significant increase in retention results in less vacant positions within the organization. With high retention leaders can focus on aligning strategy with organizational goals because they have the talent and time to do so. Focusing on organizational goals is a fundamental way to increase productivity.
- Improve compensation strategy. Having a structured pay differential system shows that leaders have a thorough understanding of the importance of compensation. Intentional compensation strategy helps organizations stay competitive. Companies need to hire or train compensation experts to effectively manage pay differentials offered to employees. Investing numerous resources toward organizations’ compensation structures improves compensation strategy.
How to Calculate Pay Differentials
Calculating pay differentials accurately to meet employee expectations is one of the fundamental steps to success. Here are some recommendations to calculate pay differentials.
Determine whether to use a percentage or a specific dollar amount in calculating a pay differential. For example, will employees receive $3.00 per hour for shift differentials or 2% per day for hazard pay?
- Separate employees’ regular hours worked and then add pay differential. For example, Alex’s hourly rate is $15.00 per hour and the shift differential rate is $2.00 per hour for the night shift. If Alex worked 20 hours for the week and 7 of those hours were night shifts, then the calculation is 20 x 15 (regular hours) + 7 x 2 (shift differential hours).
- Remember to calculate overtime hours when applicable. The Fair Labor Standards Act (FSLA) requires that employees be paid a time and a half of their regular rate for every hour worked in a 40-hour work week. Pay differentials aren’t exempt from overtime.
- Create a policy that outlines what pay differentials are offered and how calculated, and communicate it clearly in the employee handbook. If there is more than one type of pay differential being used in the organization, leaders may become confused and start to calculate employees’ pay incorrectly.
Examples of Pay Differentials
There are various types of pay differentials, and organizations may use multiple types. Some are more specific to a particular industry. Let’s look at examples of common pay differentials.
Additional pay per hour helps motivate employees to work evening or overnight shifts. Businesses that operate during later hours are usually busy outside of corporate hours. They need enough employees present to provide services to customers or meet project deadlines. Shift differential is often seen in manufacturing, restaurant, and construction industries. Weekend and holiday pay are other examples of shift differentials.
On-call pay occurs often in medical and emergency response fields. A nurse or a firefighter will often be “on call” and available to work if needed because they are essential workers. Emergencies can happen any time throughout the day, and essential workers must be ready to respond quickly. Most employers use on-call pay to compensate essential workers.
When employees are assigned more dangerous positions or jobs, an employer may provide hazard pay to employees as an acknowledgment of the risks they undergo. Hazard pay is common in the healthcare and manufacturing industries because employees work with hazardous chemicals or use heavy machinery that can be dangerous to their health unless safety procedures are followed.
Call-back pay should not be confused with on-call pay. Call-back pay occurs when an employee has already completed their shift and left work but is asked to return due to someone else’s unscheduled absence. On-call pay means the employee didn’t work a shift prior to being called in for work. Essential workers like nurses and law enforcement officers are familiar with call-back pay.
Holiday or Weekend Pay
Holidays and weekends are a staffing nightmare for many employers, especially in the retail industry. To eliminate staffing shortage on these days, some employers offer employees holiday or weekend pay. Employees are generally paid twice their hourly rate for weekends and holidays. For example, if Quinn’s hourly rate is $15.50 per hour during weekdays, on weekends or holidays their rate is $31.00 per hour.
Geographic Pay Differential
National or international organizations may have employees living in rural areas with a low cost of living and others in metropolitan areas with a very high cost of living. They may elect to give a pay differential for those with the burden of a high cost of living so they end up taking home the same buying power as their rural colleagues. The pay differential is based on the benchmark salaries in their respective cities or states.
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Remone Robinson is a high-achieving Human Resources professional with extensive experience and success in talent management, strategic communication, and regulatory compliance across several industries. He is a motivated self-starter who draws on strategic planning and change management skills to enhance HR policies and operations. He has an extensive background in performance management, training & development, and diversity, equity, inclusion & belonging. Remone earned a Master of Science (MS) degree in Management and Leadership from Western Governors University. His passion and vision for HR led him to become a SHRM Certified Professional (SHRM-CP) from SHRM and a Certified Professional in Human Resources® (PHR®) from HRCI.