Remote Work is Here to Stay – How Do We Pay Our People?

Historically, compensation has been typically tied to where a job is based, meaning the company location, through the use of geographic differentials. In recent years, trends show that remote work has been increasing, and forecasts show that it will continue to do so.

In fact, Mark Zuckerberg said he believes that about half of Facebook’s workforce will be remote by 2030. The rapid and sudden increase in remote work due to the COVID-19 pandemic has more companies considering remote workforces as part of their long-term strategy sooner than planned. This will force companies to evaluate their compensation strategies on geographic differentials.

Tech companies such as Facebook and Box Inc. have plans to tie compensation for remote employees to their home locations, and some are actively encouraging employees to leave the Silicon Valley with one-time relocation payments. The philosophy is that the companies can pay lower salaries if their employees migrate to areas where the cost of labor is lower. Compensation experts are concerned that this will cause a lot of issues. If a job can be done from any location, will companies be able to maintain a policy of compensating employees differently for the same work based on location?

How should companies pay remote employees if employees get to choose where they live? Companies will be able to select employees from a national pool of candidates, so there will be a larger supply of potential employees, which will temper upward pressure on compensation.

Compensation Approaches to Consider

There is no one-size-fits all solution. We have compiled some considerations for how to deal with this emerging issue based on various compensation experts’ research and opinions.

1. Location-based Market Level Compensation
Companies may elect to pay location-based market level compensation based on the market in which the remote worker lives. This approach is closest to current prevalent practice of geographic based structures based on company locations. This approach can get very complex to administer, as remote workers can live anywhere, so determining market-based pay for each area is time consuming and expensive. We may see companies continue to assign remote workers to existing geographic-based structures based on the closest company location or on a regional basis.

Until now, many companies have been able to deal with remote workers — employees working from home was not an issue. Workers just started working from home near the company locations where they reported to work, so the default became the Company’s geographic differential for that location, if it was utilized. As time evolves and remote employees begin moving away from company locations, we may see companies assign employees to geographic-based structures based on the remote employee’s home location or on a regionally appropriate differential.

2. National Pay Structure
Companies may move to national pay structure based on national averages and do away with multiple structures based on geographic differentials. Companies may also decide to use a structure based on the company headquarters location. The philosophy for this approach is that a role has a certain value to the organization, regardless of where the role is located.

Geographic premiums as a separate compensation line item could be used for high cost of labor locations, in lieu of a geography-based pay structure for employees who work in a corporate location, or are required to live in a geographic region with a higher cost of labor and cost of living. Such geographic premiums could be more easily removed if the employee later moves from the high cost area vs. reducing base salary.

3. Remote Employee Geo-Differential
Another option is to create a designated remote geo-differential for all remote employees, regardless of location similar to premiums applied for off-work hours. The remote geo-differential could be based on national average market data, or it could be tied to a company’s home office pay structure. Employees working in Company offices would continue to be tied to the appropriate location based differential. The remote geo-differential could also be aligned to the company’s remote workforce strategy.

For example:
– If a company wants to encourage employees to work remotely, the remote geo-differential could be set to 5 to 10% ABOVE the corporate pay structure.
– If a company prefers for employees to work in the corporate office, but does want to allow employees to elect to work remotely, the remote geo-differential could be set to 5 to 10% BELOW the corporate structure.

4. Cost of Living Based Pay
Compensation market data is based on the cost of labor. Cost of labor is the prevalent pay for a job in a specific location. It is a supply and demand based approach that has been used in the compensation arena for years.

A newer concept that is emerging is cost of living based pay for remote workers. With the emergence of increased remote work, the supply and demand for jobs has been overturned because it has been historically based on a particular location. Now, companies are able to seek talent nationally, or even internationally, creating a global labor market. We do not currently have a mechanism to determine the cost of labor based on a global market.

Companies are turning to using a cost of living approach for remote employees. Companies are assessing the market level pay for their headquarters or for the national market and applying a cost of living differential based on where a remote worker lives. This approach is similar to location-based compensation (#1) above, but is based on a cost of living data vs. market based pay is much easier to obtain and easier for employees to understand.

Conclusion

Most companies will undoubtedly face the issue of re-assessing their approach to pay for remote workers as the number of remote workers increases. Companies will determine their selected approach on many factors. BCR can help you assess the best options for your company as you navigate this significant change based on an assessment of the Company’s business as well as other factors such as cost, ability to administer, staffing issues, etc.

BCR Consultants have many years of experience in helping companies assess their current compensation programs and make recommendations to retool their programs. Reach out to us if you would like our help in reviewing your benefit programs and navigating the sudden increase in remote workers. http://www.benefitsandcompensation resources.com. 1-847-236-1208 (phone); 1-847-236-1209 (fax)

Sources:
“Re-evaluating Total Rewards Strategies for the Growing Remote Workforce” by Stephen Brink Workspan July 16, 2020
“Managing Pay in the World of Remote Working” by Lori Wisper Workspan September 24, 2020
“The New Remote GEO Differential” by Dan Walter Compensation Café July 23, 2020
“Why Facebook’s Plan to Tie Remote Pay to Location Will Probably Fail” by Josh Barro NY Magazine May 23, 2020
“American Tech Workers Face Pay Cuts For Relocating During Covid” by Anders Melin and Nico Grant Bloomberg.com October 5, 2020

Written by: Jill Rea, BCR Consultant

BCR is a local, minority-owned firm with more than 25 years experience in serving non-profit, public, and privately held entities in the key areas of Benefits and Compensation Consulting, Performance Management, Human Resource Organization Development, and Human Resource Information Systems and Processes.

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