3 Compensation Strategies for Your Remote Workforce
January 14, 2021
When the pandemic hit and much of the workforce shifted to working remotely, many employees realized that they no longer needed to live in the most expensive urban areas to hold high-paying jobs. United Van Lines, the largest moving company in the U.S., reported that move requests out of San Francisco were up 23% over the previous year, with people headed to destinations such as Seattle and Austin. And in New York, those requests were up 45%, as people migrated to places like Los Angeles, Chicago, and Atlanta.
But as employees hired moving trucks, companies started to confront a difficult decision: Should they pay workers who moved to more affordable locations the same as those who remained in expensive talent hubs? In this quickly evolving environment, it’s a question that affects not only the existing workforce, but also the companies that continue to recruit and hire new talent.
Getting pay right for remote workers requires a thoughtful, well-considered strategy, something many companies are grappling with now. According to a survey of North American companies by the global advisory firm Willis Towers Watson, six in 10 employers say they intend to pay remote workers the same as in-office employees no matter where they live, while 18% intend to set pay levels by looking first at the market value of an employee’s skills and then factoring in their location. Let’s take a look at several approaches:
Tie the pay of your remote workers to their location
In May, Facebook CEO Mark Zuckerberg announced that his company expected nearly half its employees to work remotely in the future. While the announcement was met with enthusiasm, employees needed to read the fine print: Those who moved to more affordable locations might see their salaries drop.
Starting this month, Facebook will adjust its compensation based on the cost of living in the area in which an employee lives. The company will also keep everyone honest by monitoring the location from which an employee logs in to Facebook’s internal system.
The pay platform Stripe upped the ante by offering its employees a $20,000 bonus to leave San Francisco, New York, and Seattle — with the caveat that they could see a 10% cut in their base pay after landing in a less expensive location.
Compensation packages based on geography aren’t new. According to Catherine Hartmann, North American rewards practice leader at Willis Towers Watson, companies have historically factored in a region or city’s cost of labor when determining pay. It makes sense that a company would offer an employee a lower salary if the employee lives in Boise rather than the Bay Area. The cost of housing and services is usually lower outside major metropolitan areas.
“But the pandemic threw everything into upheaval,” Catherine says. “The companies I’ve worked with are trying to take a little more of a measured or nuanced approach because in their minds, and especially for certain jobs like artificial intelligence developers or cloud computing, jobs are going to be competitive regardless of where they’re sitting.”
MURAL, a San Francisco–based visual collaboration platform, has taken a thoughtful approach. Prior to the pandemic, MURAL was a hybrid company, with a mix of remote and in-person workers. Now, all 350-plus employees work remotely. The company has roughly three compensation zones within the U.S., based on the cost of living and the cost of talent in each area. Its highest salaries go to workers in the Bay Area and the greater New York City area, followed by those who live in California or New York and its surrounding states, but too far from the metro talent hubs to commute. Below that, there’s a rung for employees in cities such as Atlanta and Nashville.
“We’re closely reviewing the current data to see what the differential should be as it tends to change,” says Adriana Roche, MURAL’s head of people.
The company revisits its compensation strategy about every six months to stay current with the market. “Our recruiting team is another great source of info about where candidates are coming in or over for a certain role,” Adriana says. “This is an indication we need to revisit our compensation structure for that zone.”
Keep pay the same for all employees, based on the location of your company
While a newly remote workforce is a dream for recruiters in many ways — you can pick from the best candidates no matter where they live, which should be a boost to corporate diversity efforts — setting pay based on location can be thorny.
Remote employees who receive a lower salary because they live in Philadelphia may feel resentful that they’re paid less for doing the same job as their more highly compensated colleagues in New York. When companies pay employees different rates based on location, Catherine says, it can also have an adverse effect on a company’s culture and employee experience. It was for all these reasons that the San Francisco–based Reddit announced earlier this year that it was ditching its geographic compensation zones in the U.S. and paying everyone Bay Area–level salaries.
Reddit announced: “[O]ur U.S. compensation will be tied to pay ranges of the high-cost areas such as SF and NY, regardless of where employees live. We believe this is the right balance of flexibility and support for employees, recognizing the varied tradeoffs people consider when deciding where to live.”
But what if you’re a company, rather than a remote employee, based in Philadelphia? You may choose to set your compensation based on local standards. In this way, your headquarters staff isn’t fuming over the higher pay remote employees are getting in New York City.
Move toward a national pay scale
A final approach to paying your distributed workforce may be to develop a compensation plan that allows you to compete for talent anywhere, no matter where you’re headquartered. So, unlike Reddit, you may be based in Omaha or Phoenix but still have to compete with Reddit and other Silicon Valley– and New York City–based businesses.
An attractive national compensation strategy is crucial when you’re recruiting for competitive, hard-to-fill remote positions. “By the very nature of those jobs and their skill sets, they’re going to be at a premium,” Catherine says. So, if you’re looking to hire, say, a top-of-the-field cybersecurity expert, you’ll need to offer the most competitive pay regardless of where a candidate eventually lives, whether it’s Manhattan, Atlanta, or down a dirt road in rural Texas.
“What I see happening more for the future,” Catherine says, “is this movement towards a national approach to pay with a few areas, such as Manhattan and the Bay Area, receiving a premium.”
She believes that companies that are competing for hard-to-find talent will set salaries based on national medians of pay, independent of location, and then consider additional premiums relative to skills and prime cities. When companies factor in “range of pay” for positions, they still have plenty of flexibility. If, for example, a position normally pays between $80,000 to $100,000 in San Francisco and $70,000 to $90,000 in Philadelphia, there’s ample room to hit the sweet spot within that range. And while it means that companies may continue to offer a 15% to 20% premium to workers in New York and San Francisco, it also means that salaries in more rural areas might rise closer to the national average.
For companies worried that a more expensive compensation policy might be too costly, consider the tradeoffs. The expense of a remote workforce will most likely be offset by cost savings on office space, catered meals, and commuter benefits. MURAL, for example, was able to reduce its footprint in San Francisco, saving money on real estate.
Interestingly, research conducted by PayScale, a compensation software company, found that remote workers are actually paid more than in-office workers. Traditionally, that wasn’t because they worked remotely, however. More often, they were star performers who had earned the trust to work from home.
As the remote workforce continues to evolve, the approach to compensation will evolve too. In this environment, companies need to pay attention, stay flexible, and be creative in order to attract the best talent.
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