The Impact of Remote Work on Compensation

The COVID-19 pandemic has surfaced a handful of new lessons and trends, especially as it relates to the workplace and labor market. Five months ago, of all the changes brought on by the pandemic, few have been more far-reaching than the work-from-home (WFH) trend. With widespread lockdown measures, as many as half of all U.S. employees are now operating with remote-work statuses.  

The stigma previously associated with working from home has disappeared. Instead, remote work is expected to continue (for some companies) and increase as the economy eventually recovers from the pandemic. In many white-collar industries where remote work is viable, if this becomes a permanent trend, it may stand to give companies a significant financial edge.

While saving money, without reducing productivity, has always been a goal of most organizations, the remote-work option has opened the idea for many business leaders that employees do not have to be in the same location to perform well or collaborate with team members. This thinking has provoked some employers to explore other markets to find top talent. As a result, employers in larger metros may consider hiring talent from locations with a more affordable cost of living, which can result in salary cost-savings (as well as improve diversity).

For example, a recruiter searching for a business-development manager with a bachelor’s degree and four to six years of experience would command a salary of $112,359 in Austin, Tex., yet the same role and qualifications would yield a salary of $72,378 in Phoenix. If the role can be performed remotely and a Phoenix candidate is equally qualified to the local one, the employer may choose to hire the Phoenix-based candidate and save $39,981 annually on this role’s salary.

Indeed, large companies like Twitter and Facebook have already expressed interest in hiring in-demand tech and business talent in areas of the country that have lower recommended salaries than in the tech hubs of California, Washington, and New York. Based on an employee’s location, employers may be able to justify paying employees differently based on the employee’s cost of living for their location. 

However, as these roles increasingly become a necessity to organizational success, the demand for higher salaries may increase. For instance, computer and mathematical occupations are projected to experience cumulative wage growth of 11.2% at the national level from 2021 to 2025. Employers can mitigate such costs through remote hiring.

One issue that may arise is what to do if existing employees decide to permanently relocate to an area that has a lower salary range for their position because of a lower cost of living. Obviously, this is a delicate situation. Companies must consider the ease of refilling the position if the employee resigns, how the market value of the employee’s salary compares in the new location, and how valuable the specific employee is to the company. They must also decide if salaries will be based on the location of the company’s headquarters or the employee’s location. 

On the one hand, it might be more economical to keep a top performer’s salary the same, especially if it’s a hard-to-fill role. Though if the employee moves to an area without many available positions and needs the flexibility of remote work, the employee may be more willing to accept a lower salary, which may still be above average in the employee’s new location.  

While remote work does allow employers to save on overhead costs and opens up a broader talent pool, the consideration remains on whether spending more on talent costs gets you better talent. This may be especially true in locations with a smaller talent supply. Intelligence around market-based pay for specific job titles allows recruiters to offer more competitive salary offers without blowing an employer’s budget. 

Meanwhile, employers looking to hire remote workers in less expensive locales can invest in other perks that will help attract top talent, such as professional development, tuition reimbursement, wellness incentive programs, continuing education credits, and childcare assistance.

Permanent remote work may raise other questions. Employees may wonder why salary ranges differ for similar roles in different locations. As mentioned earlier, employers will need to decide if their salary range is based on an employee’s location or that of company headquarters. Once they figure out their compensation philosophy, employers can create a salary structure based on market value for the employee’s location and other requirements and can then offer an informed explanation when employers inquire about it. This will also help recruiters as they discuss salary with potential candidates. 

Knowing market-value salary ranges will also alleviate issues of pay disparities related to race and gender, as recruiters will be able to assist with accurate pay structures based on talent supply and demand in the market.

Ultimately, with the likelihood that remote work will gain traction even when the pandemic subsides, employers would behoove themselves to start refining their pay philosophy. This will help ensure greater success both in the short and long-term. 

Jay Denton serves as senior vice president of business intelligence and chief innovation officer at ThinkWhy. In addition to leading the company's business intelligence unit and product innovations, his expertise in market analytics and media engagement is a cornerstone for the organization. Prior to joining ThinkWhy, Denton was senior vice president of business intelligence at one of the largest U.S. multifamily investment and management firms. He led the company's market research efforts, as well as the creation of the company's next-gen BI platform, which was described as a key differentiator during subsequent fundraising initiatives. Denton brings more than 15 years of leadership experience in SaaS organizations.

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