March 30, 2021

Should Remote Compensation Be Based On Where Employees Live?

Companies are dealing with a unique set of circumstances due to the proliferation of remote work necessitated by the pandemic.

As more employees are allowed or even required to work remotely instead of reporting to the office, many are taking advantage of the opportunity to relocate to areas with lower costs of living. Also because of the growth of remote work, companies are recruiting remote employees from geographic locations outside of their immediate area, which may be less expensive places to live.

This has inevitably led organizations to question their pay scales; specifically, whether or not employee compensation should be based on the living expenses in the employees’ physical location.

“To adjust pay, or not to adjust pay? That is the question employers are asking as they rethink their compensation strategies in response to the new era of remote work,” writes Karen Gilchrist, CNBC International’s Make It reporter for Asia Pacific

There is no simple or universal answer to this question. “Different companies differ on whether to change the pay of employees who transition to remote work,” says technology writer Mike Elgan.

How companies approach the issue depends on their needs, resources, and ethics. That’s why, before adopting a location-based compensation strategy, organizational leaders must look closely at the HR and moral implications of such an approach to employee pay, especially on the heels of a pandemic that has wreaked financial havoc on the personal finances of so many.

Human Resources Considerations of a Pay Localization Policy

You cannot make such a big decision without closely examining the HR implications of a geography-based compensation policy. It brings up a whole host of issues that need to be dealt with and parallel questions that must be answered.

The Potential Costs of this Type of Remote Pay Structure

So let’s say you decide to implement a pay-localization policy that cuts the pay for remote employees in certain locations. While some workers may accept that policy, there will be others that will not.

In fact, according to a survey conducted by Hired, nearly one-half of tech workers said they would probably relocate to a city with a lower cost of living if given the option to work remotely on a permanent basis. However, only about one-third would be willing to accept a reduced salary when doing so. So, if their salary is cut, they would probably be open to other job offers from companies with more acceptable pay structures.

If they do decide to quit, you now have an opening you have to fill and all of the recruiting, hiring, and onboarding costs of filling that vacancy. That’s not all. You also have to factor in lost productivity, training costs, and cultural impacts to the costs of turnover. All told, according to data presented by organizational psychologists Shane McFeely and Ben Wigert, the cost to replace an employee can range from one-half to two times that employee’s annual salary.

This could also be a problem for talent acquisition.

Will workers avoid your company because of such a policy? In a tight talent market when you are trying to stand out, how will a compensation system based on geographic location be perceived by high-quality candidates, especially those living in areas likely affected by that policy?

These are considerations you must address before deciding to pay employees differently based on where they live.

Specific HR Issues that Need to be Addressed

There are also specific questions that HR teams need to ask and answer as the organization contemplates this approach to employee pay. Ian White, CEO and CTO of organizational management platform ChartHop, says HR must start with examining these data points in employee geographic areas:

  • Market pay rates.
  • Employee experience, including education and skills.
  • Income tax rates.
  • Cost-of-living data, including housing, utilities, and transportation.

These are certainly the most immediate issues to research, but there are other issues that are important to cover as well. These include:

  • Rolling out a new pay structure.
  • Deciding if any employees are grandfathered in at their current pay.
  • Determining if you will pay remote employees to commute to the office when necessary and what the cutoff for those costs would be.
  • Analyzing other financial factors such as student loans and healthcare costs.

The answers to these questions and the insights you gain from analyzing these different data points will, in part, help drive your decision about whether to adopt a geographic-based pay structure. The other part of that equation is the ethical considerations for such a policy.

woman with tablet and laptop works from kitchen table; remote compensation, localization, remote pay concept

Ethical Considerations of a Location-Based Remote Compensation Strategy

Organizations must also consider the ethical implications of implementing a pay scale based on workers’ geographic location. The biggest moral questions around this type of pay scale are:

  • Shouldn’t all workers get paid the same for the same amount of work?
  • Shouldn’t the value an employee brings to the organization hold more weight than where they choose to live?

If your company answers ‘no’ to either of these questions, it must be ready to defend itself ethically to employees who are likely to view that stance as a moral transgression on the company’s part. This is especially true for companies that are making a profit while considering pay cuts.

And what if employees move to places with higher costs of living? Will you pay them more based on that increase in living expenses? If you are cutting the costs for those moving to cheaper locales, it stands to reason, ethically at least, that you would increase the salary of those moving to more expensive locations.

The ethical behavior of companies is becoming more important than ever to employees. “People want the workplace to support them and how they view life,” says Jon Richter, vice president of sustainability/CSR for MetLife. When those values become misaligned, employees begin to question the motivations of their employers.

Employee morale is especially impacted when pay is cut for any reason, says Jake Rosenfeld, a sociology professor at Washington University in St. Louis. But when it is tied to where they choose to live instead of performance, it can be particularly damaging to the relationship they may have formed with the company. “Employers really have to do a bit of a dance to justify it to workers,” he says.

If that’s the case, is it really the course of action your company should be taking? It’s an important question to answer before making a decision about this type of pay scale.

man with laptop and stacks of charts work from kitchen counter; remote compensation, localization, remote pay concept

How Some Companies are Approaching the Issue of Remote Pay Localization

So how are companies responding to this growing question of how to pay remote workers in other countries or in zip codes with different costs of living? Here’s how some of the biggest organizations have addressed the issue.

  • Stripe instituted a pay cut with a bonus. As an incentive to relocate workers from the big cities of San Francisco, New York, or Seattle to less-expensive locales, Stripe offered employees a one-time payment of $20,000, reports Anders Melin at Bloomberg. But, notes Merlin, employees also had to accept a reduction of up to 10 percent of their base salary.
  • VMware cut pay. Employees at VMware who chose to become permanent remote workers and leave the company’s locations in more expensive cities for those with lower costs of living were hit with salary cuts that depended on where they relocated. For example, relocating from Palo Alto, California to Denver, Colorado would result in an 18 percent salary reduction while moving from Silicon Valley to Los Angeles or San Diego would equate to an 8 percent reduction in pay, as reported by Bloomberg’s Nico Grant, Sophie Alexander, and Kurt Wagner.
  • Reddit eliminated its geographic compensation zones in the U.S. In October 2020, the company announced that employee compensation would be tied to places with high costs of living such as San Francisco and New York, regardless of where an employee might live. The reason given for this strategy they say is that it’s “the right balance of flexibility and support for employees, recognizing the varied tradeoffs people consider when deciding where to live.”

What these examples illustrate is that there is a broad spectrum approach to this issue and companies have to decide the course of action that best fits their needs, mission, and morals. A painstaking examination of the pros and cons of the issue will help you make that decision.

It’s a Big Decision. Don’t Rush It. 

Should you implement a compensation policy based on the geographic location of employees?

This isn’t an easy question to answer because there is no defined set of rules for such an approach to compensation. The key to making the right decision about how to compensate remote employees is to take as much time as necessary to dissect and analyze all possible options and impacts to not only the organization but also the employees.

To that end, because of that impact on employees, employers should be including workers in those conversations, says Mercer’s Mary Ann Sardone. In doing so, you ensure employees have a voice in policies that will have a significant impact on them. Not only that, but their input could help shape a compensation policy into one that is advantageous to everyone.

In the end, it’s about making responsible decisions because “the decisions you make here not only impact your company but individuals, the kinds of lives they lead, the kinds of houses they live in,” says Tim Burgess, director at global employment organization Shield. As a company, you have to decide what kind of impact you want that to be.

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