Why Companies Must Take a Regional Approach to Compensation Benchmarking in Germany

Published: November 2019

 

As Germany becomes a bigger destination for technology talent, it has become more important for compensation professionals to take a nuanced look at fast-moving pay trends in the country.

Germany is in the midst of transitioning from a traditional manufacturing giant to a premier destination for technology companies but doing so requires companies to develop competitive rewards that are attractive to technology workers. It’s important for HR and compensation professionals in Germany to understand what pay premiums look like across the country to gain important insights on fast-changing rewards benchmarks.
 
As a country develops regional technology hubs, it’s essential to analyze compensation on more micro level. These economically successful geographic areas tend to have higher costs of living and competition for talent, causing salaries to move faster than the national salary average. Once a country has many successful economic zones, the usefulness of country-wide data diminishes, and regional pay data becomes more important.
 
Benchmarking pay to understand the competitive landscape in countries with especially powerful economic or industrial hubs, such as Munich, requires thoughtful consideration in terms of selecting the right companies to go in your market comparator group.

To better understand how the technology market in Germany is causing changes to salaries for hot jobs on a regional basis, we examined data from the Radford Global Technology Survey across the country.  We found that employees in the technology sector located in Munich receive salaries that are, on average, 8% higher than the overall country average.

When we looked at how pay for Munich compares with other regions in the country, rather than the national average, regional disparities become even more pronounced as seen in Figure 1 below.

Geographic differentials in pay can range from relatively minor rounding errors to data points with significant potential to drive pay and business strategy. Taking a comprehensive view of regional pay differences across an entire country provides perspective on which data points should influence program design. In our opinion, differentials in pay approaching +/- 10% of the national average serve as a useful dividing line for when to seriously consider regionally targeted approaches to compensation. Similarly, it is also important to consider how the regional differentials relate to one another (e.g. there are 16 basis points between Munich and Berlin). With this perspective in mind, managing technology talent in Germany requires a nuanced strategy.

Another approach for considering regional differences in pay is to examine the hypothetical "discount" achieved by transplanting talent from expensive to inexpensive regions. We use the term hypothetical because moves of this nature are often easier said than done. Looking at discount rates makes a lot of sense when opening a new office, assuming the right talent pool is available in your desired location, but it’s quite another endeavor to pick up an existing office and move it.

Examining discount rates can reveal meaningful opportunities for labor costs, especially when some locations outside of Munich carry technology wage discounts in excess of 10%. However, business leaders should use these differential figures with additional data points, such as voluntary employee turnover rates, to provide a more complete picture of the talent landscape in a given region. Voluntary turnover above 7% annually could suggest companies need to take more proactive steps to attract and retain talent, particularly for certain in-demand jobs or positions where turnover has been highest.

We compared Radford’s software development engineer data in different regions to that of software development engineers nationwide and found that these jobs in Munich receive salaries that are, on average, 8% higher than the overall German market. However, when we look at Berlin, the pay has swung from an 8% discount to a 1% premium compared to the national average, indicating a premium for software development engineers in the Berlin market.



Despite competing with existing and developing tech hubs around the world, investments are being made to bolster Germany’s tech scene, no doubt as a result of the Digital Hub Initiative that was implemented in 2016. This enables the 12 centres of excellence across Germany to connect medium-sized businesses and larger corporations with new innovation partners from the scientific and start-up communities.
 
There are a number of economic developments that are making certain regions in Germany rising tech hubs. Munich ranks among the top 10 ecosystems in advanced manufacturing and robotics, which is the fastest growing sub-sector globally. The NW/Rhineland region features manufacturing, robotics and B-to-B enterprise solutions, and is home to many multinational corporations. Meanwhile, some of the largest technology and manufacturing companies call Hamburg home, including Airbus, Philips and Siemens. The city has also become Europe’s leader in free-to-play and browser game development.

Next Steps

As regions within Germany compete to attract technology companies and workers with in-demand skills, HR and compensation professionals in the country need to look at geographic differentials and get a holistic picture of the labor market and what will be needed to attract and retain top tech talent both now and in the future.

To learn more about our survey data or to speak with a member of our rewards consulting group, please write to rewards-solutions@aon.com


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