Should an in-demand artificial-intelligence engineer working remotely from the San Francisco Bay area get the same size paycheck as a similar colleague who lives in a rural town in Iowa?
And should all of a company’s digital marketers be paid the same, no matter what region they serve? Is it a good idea to keep a local pay strategy when national companies are muscling in on your regional labor force?
These are the types of questions that business and human-resource leaders are asking themselves more than a year into the global shift to remote work. However, there may not be a clear answers.
What is clear is that remote work is forcing organizations to re-evaluate their geographic-pay policies as more employees abandon — either permanently or temporarily — such expensive metropolises as New York and Chicago for more reasonably priced locales, where taxes and living expenses are considerably lower.
Given the tremendous rise in corporate support for diversity, equity and inclusion (DEI), as well as the need to remain competitive to attract top talent, pre-pandemic pay policies are aging fast, and businesses are seeing a pressing need to ensure that their policies are fair, transparent and attractive.
‘Thinking more strategically about remote-worker pay’
Currently, about 62 percent of organizations have location-based pay policies and 44 percent of them are considering modifying or have recently modified their policies due to the increase of full-time remote work, according to WorldatWork’s Geographic Pay Policies Study.
“Where work gets performed and where talent resides has broadened significantly, and it’s increasingly in locations where organizations did not previously have operations or employees,” said Alicia Scott-Wears, director of total rewards content for WorldAtWork, a Scottsdale, Arizona-based organization for HR professionals. “The other side of that same coin is a potential advantage for employers who can now access talent in new locations.”
Catherine Hartmann, the North American rewards practice leader at consulting firm Willis Towers Watson, said the pandemic “shifted people’s mindsets to think more strategically about paying remote workers.”
She adds that organizations must focus on guaranteeing internal equity when creating or expanding a pay policy that includes remote workers.
Forging fairness and transparency
“There’s been such a huge focus on DEI in the last year, particularly with the social movements, so it’s a question of [whether adjusting] pay strategy now could cause an internal equity issue,” Hartmann said.
As a result, company boardrooms are addressing a number of questions in their decision-making as they weigh pay policy against their environmental, social and corporate governance (ESG) goals.
These questions include: If a company adopts a solely location-based pay policy, would it create or exacerbate pay inequity if diverse employees and candidates are working in lower-paying markets? Could the pay policy send a message that is unintentionally different from the company’s vision of what it wants to be?
Hartmann, who herself works remotely from Newport Beach, Calif., says adjusting pay according to worker location allows companies to retain talent in higher-income markets. Conversely, companies avoid unnecessary salary expenses in lower-paying markets.
They also could opt for one approach for most of the organization and create different policies for more select segments, such as IT, digital marketing or cybersecurity, she suggests. Payment for some jobs could be based on the value assigned to the job and payment for others could be based on geographic location.
‘A big education piece for managers’
Some companies offer employees simple modeling tools to calculate how a change in location would affect them, says Tauseef Rahman, a partner at consulting firm Mercer and who is located in San Francisco.
However, when it comes to variations between national and local pay rates, things can get complicated. Such differentials up or down are based on the regional cost of labor — rather than the cost of living, which is what most employees think their pay is based on, Rahman says.
“Limited supply and the general ability to work anywhere might result in smaller geographic differences in pay,” he added, noting that certain in-demand or highly competitive roles, including rare types of computer programming or software engineering, may have a very small or no differential applied at all.
Hartmann at Willis Towers Watson says that companies communicate different information about pay rates. Some will share the going market rate for the job in a particular region and others will provide pay-grade ranges.
It’s critical to educate managers about remote-work pay policies, she adds.
“You’re asking managers to take on something fundamentally new and different for them, where they have to understand how [the policy] works before they can communicate with others,” said Hartmann. “It’s a big education piece for managers, so they don’t misinterpret it and help dispel employee myths.”
Remote vs. hybrid workers
Rahman of Mercer notes that remote work has added extra complexity to attracting talent.
“If companies headquartered all across the U.S. are saying, ‘We don’t have offices there but you can still work for us,’ then, all of a sudden, what was a slightly more captive, smaller labor market [of job candidates] now has a wider access to a wider set of potential employers. It’s no longer just their local employer anymore,” he said.
As a result, Rahman said, “the local company with their local talent now has to worry about national companies.”
He advises that companies also should think about the long-term implication of remote work beyond pay, such as promotion-rate differences between in-office and remote staff.
“Organizations need to be very smart at thinking about what is the employee experience for those who are fully remote versus hybrid office workers,” he said.
Aligning company culture and payment policy
Pay policies require financial and legal compliance and ongoing monitoring, adds Scott-Wears of WorldAtWork.
“Establishing a legal entity takes time, money and resources to create and maintain,” she said. “There are establishment filings, payroll setup, taxes, unique state laws and disclosures and workers’ compensation to name a few of the organization’s considerations.”
The final perspective involves how to align the organization’s culture with its compensation philosophy, Scott-Wears says.
That will depend on the industry, the range of job types (skilled work, technical, professional, etc.) and the company culture — old school versus progressive, working collaboratively in-person or independently, she adds.
“These factors and more lead the logic for assessing the need for a geographic pay policy and the manner and level of communication/transparency,” she said. “There’s so much to consider, and the approach is unique to each organization.”
Crafting a fair, transparent geographic pay policy illustrates a company’s core philosophy about the new world of remote work, says Rahman of Mercer.
“There are two types of companies,” he said. “There is a company that sees a request to move from X state to Y state as a registration requirement and fees that might be [required]. And then there are organizations that say, ‘Wow, we know this has been working out, we can hire employees across all 50 states. Let’s make that happen.’”