Should You Adjust Pay for Remote Employees?

COVID-19 has catapulted remote work into the center of workforce planning and talent strategy, but the question looming on everyone’s mind is if it’s going to impact compensation. With remote work projected to rise to 25% to 30% by 2021, some organizations are openly talking about adjusting salaries for employees who want to work remotely to align with the cost of labor at their location.

Paying employees by location doesn’t mean that all employees who work remote will be paid less. In fact, PayScale’s recent data on remote employee pay shows that people who work remote permanently make 8.3% more than people who don’t work remotely. This is because only the most self-directed and high-performing employees have typically been allowed to work remotely full-time.

The data also shows that occupations in professional, white-collar industries pay more to employees who work remotely, while occupations in blue-collar industries are paid less. In some jobs, like sales, marketing and advertising, or technology, remote employees make significantly more than their non-remote counterparts.

This may be surprising to organizations that have been contemplating remote work as a way to save on payroll costs. For smaller, more nimble organizations or in industries with less competitive positions, there may be a bonanza of cost-savings in shifting to a remote workforce. For other organizations, however, the real value might be in offering increased work flexibility and access to a greater talent pool, while scaling down on expenses like commercial real estate.

Should You Adjust Comp for Remote Employees Who Move?

For employees living in the same general area that they lived before working remotely, you should not reduce pay. It would be problematic, and possibly discriminatory, to pay people differently based on their residential address. In other words, you probably shouldn’t pay people who live in a city more or less than people who live in the suburbs. And you definitely shouldn’t adjust pay by neighborhood or zip code.

But what if you give newly remote employees ample time to choose to live far away from the office — say a year or longer to sign a lease as some organizations are reported to be doing — and discover that a substantial percentage decide to move to a new state or region with a lower cost of living? Do you lower the salaries of these employees?

The answer to this question depends upon your compensation strategy.

Determining Your Comp Strategy

There are three primary approaches to compensation. You can pay:

By employer location
According to a national median
By employee location

If you pay according to employer location or a national median, you don’t do anything to your employees’ salaries if they move because where your employees live doesn’t matter. Indeed, some organizations do this to attract the very best talent wherever they live and box out local competition. However, this scenario is actively worrying many employers that fear that a remote work strategy will result in them having to compete against corporate giants like Amazon, Microsoft or Google, which have historically paid higher wages for this precise reason.

If you want to start paying by employee location, then you must have a policy and process for adjusting compensation if and when employees move.

This process needs to be fair and consistent, which means that you must apply the same logic whether an employee moves to a less expensive oa more expensive area. There will also be considerable upkeep with this approach.

One other challenge with this approach is that lowering pay is a hard conversation that can lead to turnover, even if your strategy is fair and consistently applied. Some employees may just not accept a pay cut, especially as they know you had already budgeted for — and were previously supporting — their higher salary.

For this reason, it is more common to freeze employee pay (i.e., communicate that they are no longer eligible for raises as a result of being at the top of their pay range for their location) rather than reduce what employees earn. However, this depends on your policy. What’s important is to be consistent. If you lower salaries for employees who move to an area with a lower cost of living, employees who move to a more expensive area will expect more pay.

Whatever you do, you should communicate your strategy with current employees, as well as with new hires so that everyone understands the potential impact to their salary if they choose to move. If your strategy is rational, consistent, and based on verified, up-to-date market data, you should be able to answer questions about your approach.

For example, if your employees express that it is unfair to pay workers who are doing the same job and providing the same value differently depending on where they live, you can respond that basing pay according to the competitiveness of the labor market in a given area is based on market data and technically a more accurate way to pay employees fair and competitive wages.

A Diverse Approach

In deciding on your strategy, you should also consider whether some skills are always competitive regardless of location. People with hard-to-find, business-critical skills may be able to demand compensation that aligns to the most competitive markets regardless of where that individual resides.

In a post-COVID world where remote work becomes ubiquitous, we might see organizations adopt multiple compensation strategies aligned to different talent groups that require a different approach. For example, for specialized talent that is hard to find, such as engineers or data scientists, you might pay a high, competitive wage regardless of location. For customer-service positions for which there might be lots of diverse talent in different markets, you might choose to pay by location and target areas with a lower cost of living.

A one-size-fits-all approach may not work in the new world. This is why it is so pivotal to first define your talent market and create your compensation strategies based on what you need to attract and retain that talent. These strategies will need to be highly connected to skills and be more forward-looking to what you need to grow over the next three to five years.

In addition, historic compensation and rewards philosophies have not really evolved to align to human brain science and motivation; we are not all motivated by the same things.it is possible that employees will be offered more choice in how they are compensated in the future. For example, you might ask candidates whether they want lower base pay and higher variable pay (i.e. bonuses) as part of your total rewards strategy.

The long-term impact of your strategy will depend on your business. Looking to remote work as an opportunity to cut compensation costs might be a really smart business strategy or a really terrible one. Paying higher wages to remote employees if everyone else is paying local rates might enable you to attract the best talent and keep them for the long term. However, there might also be considerable cost savings in paying fair wages at local market rates for positions that you used to source only from the most expensive areas.

What matters is that you have an approach to compensation that is backed by data so that you can confidently communicate your strategy and be more transparent about pay with your current and future workforce.