- Some businesses have moved to a location-based model for employee compensation, reducing pay for workers in lower cost areas
- Surveys show that employees are often willing to accept pay cuts in order to continue working remotely, but the practice also presents the risk of lower morale and disengagement
- Employers have three broad options to choose from when deciding to set location-based pay rates
Summary by Dirk Langeveld
The persistence of remote work arrangements has created a variety of dilemmas for employers. Workers generally like the convenience and flexibility of this setup and want to retain it for at least part of the work week. Many businesses hoped to have a firmer return-to-office strategy in place after the Labor Day weekend, but the spread of the COVID-19 Delta plan disrupted these plans. And employers who put more restrictions on remote work risk losing workers to companies with more flexible arrangements – a key concern as numerous businesses struggle to attract or retain employees.
Determining the appropriate compensation for remote workers has also been a challenging issue for employers. The COVID-19 pandemic proved to be the nudge many households needed to relocate to more affordable areas, as the ability to work remotely allowed them to do so without finding a new job or taking on a longer commute.
Businesses have sometimes responded by warning that remote workers who moved farther from the physical workplace will see a corresponding decrease in their paycheck. Morgan Stanley’s chief executive bluntly told the company’s New York City workers in June, “If you want to get paid New York rates, you work in New York.” Companies like Facebook, Google, Stripe, and Twitter have also announced pay cuts for employees relocating to areas with a lower cost of living.
Some of these companies already had location-based salary models in place, paying higher salaries for workers in costly cities and metro areas and lower ones for workers in lower cost areas in an effort to pursue pay equity. Other businesses have adopted a location-agnostic model, offering the same compensation for a job regardless of where it is performed in an effort to promote diversity and be more competitive.
Acceptance of remote worker pay reductions
Employers take numerous factors into consideration when setting salaries, including the skills and education required for a position and whether to pay above market rate to better appeal to applicants. Location also plays a role, as salaries should consider the cost of living and other expenses necessary for workers to live within a reasonable commuting distance of the workplace.
As a result, employers can conceivably set a salary that fairly compensates an employee for their expertise but provides a reduced rate due to their lower living costs. It can also help ensure pay equity and reduce disagreements over employee compensation. Employees generally expect that their salary will reflect their current location, with 70 percent of respondents in a WorldatWork survey holding this view.
Employers may also consider a lower salary to be a tradeoff for allowing an employee to work remotely. Business leaders may prefer the better monitoring and collaboration of in-person work to remote work, and so require that employees need to come into the workplace at least part of the week in order to receive higher compensation.
There is also the broad expectation among employees that continued remote work may come at the price of a reduced paycheck. Several surveys have shown that about two-thirds of employees are willing to take a pay cut to continue working from home.
Why pay cuts might backfire
The disadvantage of reducing an employee’s wages based on their location is obvious: people don’t like to see their earnings shrink. Cutting pay can lead to lower morale, greater disengagement from daily tasks, and a higher likelihood that an employee will depart for another job.
Employees might also face stressful decisions as a result of a location-based pay model, such as whether it is better to give up improved flexibility and work-life balance in favor of a commute and higher salary. The location-based pay model has been criticized because businesses rarely increase an employee’s compensation in other scenarios that affect their expenses, such as the birth of a child.
Although location-based pay models aim to improve pay equity, they can also have the opposite effect. For example, a worker living in a metro area close to a company’s office might be allowed greater flexibility to work remotely since they can more easily come into the workplace when necessary. This could easily cause resentment among workers who have to travel a longer distance in order to maintain the same compensation if they face greater hurdles in doing work remotely.
While businesses may expect that a reduction in remote workers’ pay is justified because they’ll have lower expenses, these workers may actually see several costs go up. These include higher utility bills as well as home office equipment purchases. For this reason, companies also have to determine if they’ll reimburse remote workers for certain expenses or help cover costs.
Pay based on the costs of a certain area can create several complications for businesses. Due to changing market conditions, it will be necessary to regularly assess pay rates and adjust them accordingly. Companies also have to be prepared to make location-based pay adjustments be a two-way street, increasing compensation if an employee moves to a location with higher living costs.
Choosing your strategy
A recent survey by PayScale finds that most employers have not been keen to adjust salaries based on employee locations. Seven out of 10 said they were not reducing wages due to remote work arrangements, although 14 percent said they were planning to offer less pay to future hires working remotely from lower cost areas.
Advocates for remote work argue that it’s a win-win strategy, with employees enjoying more flexibility and employers having the opportunity to save money through strategies such as reducing an office footprint. In this way, employers are able to maintain wages, retain workers, and even realize higher profits.
If you adjust your pay rate for remote workers, it should be done as part of a broader strategy of remote work policies and setting compensation. This can include setting pay rates based on skill and demand, identifying which positions can be done remotely, and determining how frequently pay needs to be adjusted.
There are three general options for setting remote pay rates. One model does so based on the company’s nearest office, while another bases it on an employee’s place of residence. Pay can also be set based on national rates, with the potential to revise it upward if necessary.
Any location-based pay practices should be done consistently and transparently. Make sure they are clearly communicated to employees and managers.