Should where employees live, determine what they are paid?

There’s no better time than now to question location-based salaries. Historically, terms like ‘Wall Street pay’ or ‘Silicon Valley pay’ exist because there also exists specific tech and financial hubs where jobs are considered to be more sought-after and the cost of living higher. Factors determining one’s pay have been limited to educational qualifications, specialization, years of experience, job title, and location of work. This was at a time when companies were restricted by geography, and if employees wanted to be part of a particular company, to fulfil a particular role or team, they needed to relocate.

Two years ago, at the onset of the COVID-19 pandemic, organizations saw a trend of employees choosing to move back to their hometowns or live in less crowded and comparatively less expensive areas. A preferred work location is desired by several employees; Many of them chose to be closer to friends and family and for some who were curious about living and working in new places, it was an ideal time to seek out interesting places to make an office out of.

Is Location-Based Pay Fair?

Dissecting Location-Based Pay Vs. Value-Based Pay

In the current employment market, whether location-based compensation is fair or not is a controversial question. Incorporating locations in your compensation map communicates your values and affects the kind of workers you can recruit and keep. In contrast, if your employees believe they are being penalized for residing in a less expensive area, it may result in high employee turnover or a disjointed workplace atmosphere. Given that many firms are struggling financially or are already barely breaking even, it would be challenging for employers to provide workers with more wages simply for working closer to home or having more flexible schedules in the current economic climate. However, it would be fair for both parties if this was included in an employee’s salary package along with other perks like health care or paid time off.

Whereas, value-based employee compensation is being embraced by many companies. In an interview with WSJ, Reddit Inc. and Zillow Group Inc. stated about recruiting and retaining talent to gain a hiring edge. They acknowledge that in today’s workforce landscape, finding good talent is fundamental to success, and offering value-based salaries irrespective of location could be a great way to attract and retain employees. And they are not wrong. While the cost of living is a factor to consider in deciding what an employee is paid, the need of the hour is to attract and retain talent because while companies now have access to talent who are not bound by geographical constraints, the same applies to talent – they have access to companies across geographies. 

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 it on a case-by-case basis.

 CEO of Facebook, Mark Zuckerberg stated that Facebook employees who choose to relocate from Silicon Valley may see a difference in their earnings. On a similar note, Google and Alphabet CEO Sundar Pichai, while highlighting the company’s plan for a hybrid working model, said that whether employees chose to transfer to a different office or opt for a completely remote working structure, compensation would be adjusted according to this new location.

The Problem With Inequity

Location-based pay may not be the best solution for businesses wanting to increase inclusion and diversity in the workplace as pay inequity arises in the location-based pay model. It might result from a problem with salary disparity for women and people of color. Employers do not pay equally to them for working an equal number of hours at different work locations. This can result in an even bigger pay gap between males, women, and persons of different ethnicities when location-based pay is taken into account. Employers will need to consider both sides of inequality and discrimination in the workplace.

How Location-Based Pay Affects Your Bottom Line

Businesses of all sizes and in all industries are struggling to find and keep outstanding personnel. In 2022, the workforce prefers locations that are convenient to their homes, productive, and comfortable. According to a study on employee commutes, a daily travel time increase of 20 minutes had the same impact on job satisfaction as a pay decrease of 19%. If you want to be a competitive employer, your location must meet certain demands for both your present labor profile and the workers you are attempting to recruit.

Whether your company wants to grow into a new market, hire 100 more employees, or just enhance efficiency, your space needs to support these objectives. To design a working model for your business, consider needs like size, utilization, flexibility, and timeliness of your existing or projected site. You risk investing in a space that won’t meet your long-term needs if you don’t use this crucial forward-thinking strategy.

Therefore, the question is not whether you are saving money, but if you are willing to lose exceptional talent because in many cases, employee retention could depend on where the employee resides. Although the plan can appear reasonable to an employer, the employee won’t feel the same way. However, the rivalry brought about by location-based remuneration might be advantageous to you. It’s up to you to strike a balance between picking out a location-based pay strategy and a value-based pay strategy that feels right and doesn’t prevent you from reaching out to excellent candidates. You can’t always measure everything in monetary terms.

Location-Based Salaries: How Companies Factor in Geography 

Location-based pay is a form of compensation that takes a worker’s location into account. The idea is to pay workers based on where they live, rather than on where they work. 

 Factors to Consider

Employers usually implement location-based pay through compensation packages that include benefits such as relocation assistance or extra vacation time while relocating. Some companies also offer reimbursements for certain expenses related to moving or living in a new area (such as temporary housing) and it may increase productivity by allowing employees to spend more time with their families.

Mark Zuckerberg, the CEO of Facebook, declared that the organization would actively recruit remote workers in May 2020. He predicted that during the next five to ten years, 50% of Facebook’s personnel would work remotely. As part of this plan, Facebook began adjusting remote workers’ salaries in 2021 based on their location for tax and accounting reasons.

Location-based pay is the idea that workers are paid differently based on where they live. The theory behind location-based pay is that workers who live in high-cost-of-living areas should be paid more because their cost of living is higher.

Value-Based Salaries: How Companies Set Performance-Based Pay

Value-based pay is a compensation strategy that rewards employees for the value they add to the company. The idea is that you can’t always measure the value an employee adds with a strict, one-size-fits-all formula. Instead, you have to look at each employee’s unique contributions and determine how much they’re worth based on their performance. A value-based compensation model also allows room for a flexible work location model which is an attractive proposition to the current employees. If you’re looking for a way to set pay based on merit alone with more accuracy and objectivity than traditional compensation models, then value-based pay for performance could be the answer. But it’s not without its challenges.

Managers have a great deal of discretion over why, how, and what kind of performance is rewarded under the merit pay model. Promotions, wage increases, and bonuses are all examples of merit pay that businesses can give to employees that go above and beyond expectations.

Factors To Consider

Some businesses set remote salaries completely based on the worth of the labor, i.e value-based compensation, meaning that workers performing the same work are paid equally regardless of where they live. Thus, a value-based strategy eliminates the need to compensate the employees based on location. With a location-based pay strategy, employees receive more financial freedom which makes determining salary easier and presents a competitive salary to the employees in the labor market. Value-based compensation strategy, however, might make it challenging for businesses to compete in high-priced labor markets.

Adapt Competitive Market Rates — By Region and By Role

The desired work location of a job is important to candidates and employers alike. But how an organization sets the pay levels can make or break their ability to attract and retain the right talent in major areas. As an employer, you need to know what others are paying for similar roles in your area. The best way to do this is by benchmarking against similar organizations.

For positions that can be handled remotely, hire employees from locations where you know there are many talented people and competitive pay is within your hiring budget. Fix remuneration based on market rates in that particular area for that particular role. 

Establish experience-based strategic compensation scales that increase as employees advance. No matter where they live, pay everyone the same amount for their function and level.

Employees want to know that their salary reflects their value in the marketplace and that they are not being underpaid for their skillset. This helps them feel valued and motivated, which in turn results in greater productivity from employees. It also helps with recruitment as it gives them more confidence about moving jobs if necessary.

How To Start the Process

1. Communicate With Your Employees

When establishing any new policy or procedure at work, communication is essential. Spend some time explaining to your staff what you are doing, why you are doing it, and how it will impact them. They will be able to better comprehend how their pay will be affected, and any concerns they may have about the upcoming changes will be reduced as a result. They will be able to decide the flexibility of work location and act accordingly. You might even want to put a page on your company website where staff members can go to get additional details on this subject.

2. Give Employees the Option

If your company is going to provide alternative arrangements for employees who don’t want to be paid according to where they work, make sure they are aware of it so they can decide which option suits them the best. In a recent report published by McKinsey & Company titled “Rethinking Rewards: How Companies Can Design Compensation Programs in an Evolving Economy,” more than 4,000 businesses assessed by the consulting firm, found that the organizations that provided flexible work arrangements had higher employee satisfaction and lower turnover rates than those that did not. An option to negotiate work location for the employees should be open.

3. Consider Alternatives

Alternatives such as remote working or hybrid working models must be explored to gather data on employees’ productivity and efficiency and thereby, adding benefits and compensation to the work done. Additionally, if the option is limited to just location-based work then the employer should decide how much time an employee will spend at their primary worksite, and consider whether other factors might play a role in determining how much time is spent there (such as carpooling or commuting). If so, give these factors equal weight when setting up your policy and calculating pay adjustments, or else compensate employees accordingly if they don’t spend enough time at their primary worksite.

4. Consult With The HR And Legal Teams

Before implementing any changes, it’s crucial to review with HR and legal to avoid any potential legal liabilities, such as discrimination lawsuits or other claims against your business from unhappy current or former workers who believe they are being treated unfairly as a result of the step taken by the organization. Discuss the factors of location-based, remote, or hybrid work models and their effects on the company altogether and implement the policy in the firm.

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