Should People Working Remotely, Where The Cost of Living is Lower, Be Paid Less?

When someone says they earn ‘Wall street pay’ or a ‘Silicon valley salary,’ you likely surmise they make good money. Why? Because New York and the San Francisco Bay area have generally been expensive places to live with prestigious jobs and higher pay.

But widespread remote working has prompted an intriguing question for organizations to consider. Should people working remotely, where the cost of living is lower, be paid less?

“The answer isn’t a simple yes or no,” says Mark Melanson, an HR executive who spent over 30 years working for GE.

“There are many factors that companies consider when determining pay brackets. While geography is a factor, creating fair, equitable and consistent pay policies is what’s important. Right now, with remote work and the return to the office happening as we speak, organizations should be looking very closely at evaluating all the market factors.”

To that end, the following are some key factors to weigh to help companies develop smart pay strategies in this new world of work.

Cost of living considerations

The amount a person pays for a house, transportation, food, clothing and the various costs of living varies substantially depending on where they live. Likewise, there is a broad spectrum in real estate, food and other expenses for companies based on their location. For these reasons, organizations have traditionally paid a premium for roles based in more expensive cities.

A few months after the initial lockdown in 2020, Facebook CEO Mark Zuckerberg alluded to this logic when he told North American employees via videoconference, “if you live in a location where the cost of living is dramatically lower, or the cost of labor is lower, then salaries tend to be lower…”

However, there are contexts where the cost of living argument doesn’t hold as much water. Let’s say a director of cybersecurity lived in San Jose pre-pandemic and headed back to their hometown of Memphis for the lockdown. After more than a year in Memphis, they have tangibly proven they can do their job, which requires specialized skills, just as well at home. If they’re allowed to stay in Memphis, where the cost of living is lower than San Jose, there is an argument for them to still be paid the ‘Silicon valley rate’ they made pre-pandemic.

While there is variation across industries and roles, a recent study by executive compensation consultancy Pearl Meyer, shows a slight majority of companies agree with the aforementioned argument.

“The Pearl Meyer Work From Home Policies and Practices survey showed 57% of companies would not adjust pay if employees move to lower cost areas, while only 4% would reduce people’s pay. The remaining 40% or so say they’re still looking at it or would evaluate on a case-by-case basis,” Melanson revealed.

“While cost of living is a market factor as is cost of labor, companies must think about retention and the fact employees want to be paid similarly for the same work. Whatever companies decide, they need to be as clear as they can be about their pay practices in terms of how they develop and apply market ranges and ensure their employees, and especially their managers, understand that.”

A national compensation program

Some companies have set remote worker salary ranges based on their headquarter offices. Others have chosen regional pay rates that are in line with where employees live. A third model, that is becoming increasingly common, is paying distributed employees a national average salary, with some leg room built in for geographic premiums.

“Pay based on office location has been the historical approach, but right now, with so many remote workers, a national compensation program, with a premium for certain locations, seems to be what some companies are considering,” Melanson said.

Times are changing, so be flexible

When Melanson was asked to answer the headline question, he didn’t provide a yes or no response. Compensation experts would likely give the same answer because times are changing so rapidly.

So what should organizations do?

“All of this is iterative,” Melanson said. “We don’t yet know how many people will stay remote or feel comfortable returning to the office. Companies are reluctant to lay down a firm compensation program today, because the entire context will be different even six months from now.”

Further to that point, the hundreds of millions of people around the world who switched to remote work have become accustomed to flexibility overall, so there is an expectation that salaries and compensation strategies also have a certain degree of flexibility.

“Companies are trying to figure out their compensation strategy in real time,” Melanson said.

That still means looking at skillsets, experience, education, cost of living, cost of labor, pay equity, career pathing, performance incentives and the like. But it also means consulting with your employees as you develop your compensation program and ensuring it reflects your culture and values.

“We do know that the genie is out of the bottle – the change we went through when we all left the office on a dime in March of 2020 has forever changed the workforce,” Melanson said.

“That’s why being flexible and listening to employees is important. As people return, their opinions will change and the market will change. Companies that closely analyze these shifts, examine their pay practices closely, perhaps with the help of an expert firm, and then develop a compensation strategy, will be in a better position than ones who mandate a rigid policy right now.”

And remember, by having a holistic strategy, you are more likely to attract employees, have lower turnover, as well as higher employee morale and engagement. This in turn will motivate workers to achieve their very best.

When someone says they earn ‘Wall street pay’ or a ‘Silicon valley salary,’ you likely surmise they make good money. Why? Because New York and the San Francisco Bay area have generally been expensive places to live with prestigious jobs and higher pay.

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