WORKSPAN DAILY |
Determining Compensation for a Distributed Workforce
In the past 20-plus months, we’ve been
collectively experiencing tectonic shifts in the workplace. One shift that
seems like it is here to stay is remote work.
We have long had the technology to support
remote work, but the remote culture lagged. Now, with both the “cultural and
technological barriers'' broken down over the last couple of years, remote work is a possibility for more people than ever before. According to a
recent McKinsey study, “more than 20% of the workforce could work remotely three to
five days a week as effectively as they could if working from an office. If
remote work took hold at that level, that would mean
three to four times as many people working from home than before
the pandemic.”
With the number of remote
workers rising, new issues emerge. One question that keeps popping up in the HR
suite: How do you pay remote workers?
This singular question leads to
other questions for employers, including:
- Which pay strategy should you use with
remote workers?
- Is pay tied to work location?
- Is pay tied to output?
Choose a Compensation Strategy
For employers adopting remote work practices,
they’ll need to determine how to pay remote workers. And one question looms
large: should remote employees be paid the same as on-site workers no matter
where they live?
According to a recent Willis Towers Watson study,
“six in 10 employers say they intend to pay remote employees the same as in-office workers 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 look at some options of setting a remote
workforce’s compensation strategy:
- Set pay rates by the location of the corporate
headquarters or regional office. Remote employees’ pay structure is
determined by the office to which they are the closest.
- Set pay rates based on the remote-work
location of the worker, such as their home address.
- Set pay rate based on the U.S. national
level, adjusting upward for the remote-work location if in a more
expensive geographic area.
- Set all employee pay at the same level, irrespective of
location.
Although you could structure your remote worker compensation
as mentioned above, or perhaps a different way particular to your industry, be
mindful that the approach you take is consistent and fair across all
employees. After deciding your philosophy, let’s explore five best
practices when determining how to pay remote workers.
Define the Remote-Eligible Roles
Before you establish your compensation strategy,
you first need to identify the roles that can be done remotely. Unfortunately,
not all jobs are eligible for remote work. As reported by McKinsey,
more than half of the workforce do not have jobs fit for working
remotely.
Where jobs in the professional services,
management, financial, and information sectors have the highest probability of remote work options, food services, construction, transportation,
warehousing, and manufacturing have little to no options for remote work.
However, it’s not as simple as lumping all
management jobs, for instance, into one remote pay strategy. You’ll need to
consider work-related issues, such as employment and corporate taxes, legal and
regulatory issues, time zones, benefits offerings, and overall costs, perhaps
requiring you to offer multiple compensation strategies for your remote
workers.
Decouple the Employee’s Location from Job’s Pay
Many organizations tied pay to location and if
you worked in New York or San Francisco — two cities known for high cost of labor — you received New York or San Francisco pay
rates. On the other hand, if you lived in Kalamazoo, Michigan, the most affordable city in the U.S., your pay would be based on Kalamazoo rates.
However, now that employers and employees have
experienced the benefits of working remotely, businesses face challenging
decisions on pay and location.
Employees may argue that they should be paid for
the value they bring to the organization, irrespective of where they work
from. Employers will make the case that they have a fiduciary
responsibility to pay competitive wages, but not in excess. Both are
correct.
One solution is to apply the same approach we
have used (without controversy) for years. Shift differentials in pay for
employees doing the same job for different wages based on when they work. Practically
speaking, this is accomplished through a line-item on the paycheck. Applying
this same approach to geographic differentials satisfies both the employees’
and employers’ concerns.
A line-item for geographic differentials
effectively decouples the work being done from the location it is being done
in. When an employee relocates, their rate of pay for the job remains the same,
but the geographic differential may adjust accordingly.
Providing Transparency About Pay
Most employers aren’t strangers to pay
transparency policies, regulations or statutes. The push for pay equity nationally and statewide has taken front and center in employee
compensation best practices — from prohibiting pay discrimination to
affirmatively disclosing pay differentials to job applicants and employees
alike.
Transparency may play a key role in managing
remote work. As discussed in the previous section, decoupling the geographic
differential from the employee’s pay can be an effective policy. And, if the geographic differentials are
published, employees will have a
clear understanding about how their total take-home pay may change based on
their location. This level of pay transparency will result in a greater
understanding of the compensation philosophy and employees will be equipped to
make informed decisions about their compensation.
Determine the Geographic Differentials
As of April 2021, more than half of organizations either did not have a policy, or were updating
their policy. How the geographic differentials are developed and applied
can vary dramatically across companies though. Most compensation professionals
understand the importance of basing the geographic differentials on cost of
labor, rather than cost of living. However, there is not a one-size-fits-all
approach to determine the amount of the differential.
For corporate roles, our recommendation is to
create cost of labor “zones” and to group locations in similarly
compensated labor markets. Differentiating by less than 5% may add
significant complexity while providing minimal value.
For non-corporate roles, the degree of variation
will depend on the organization and employees. Large retail organizations
with hundreds or thousands of locations may create differentials as low as
$0.05 an hour for their retail staff. Though highly granular, the volume
of these workers in an organization may result in millions of dollars of annual
expenses.
There are many resources that can be used to
determine the overall geographic differential for a location. However, applying
a singular differential to all of your salary surveys to determine the market
value of a role may be more complex than simply adding a premium or
discount.
As we discuss in the article, “Your Geographic Differentials are Probably
Wrong,” the salary survey participants can greatly
influence the geographic differential of the data. Each salary survey
should be evaluated to determine the amount of the geographic differential
built into the cohort.
Flexible but Accountable
Flexibility has always been a highly desirable
perk for employees, but it has become a cornerstone of most post-COVID
workplaces trying to remain competitive. While there are huge benefits for
employees and employers alike, flexible work schedules (and locations) do not
mean it’s a free-for-all for off-site employees.
Enter accountability. Accountability is what
makes remote work, well, work. Employers can give employees the flexibility
they desire while holding them accountable through setting expectations, scheduling weekly meetings,
encouraging communication and prioritizing outcomes over activity.
“Work is no longer a place,” as WorldatWork CEO
Scott Cawood has pointed out. “With remote working requests continuing to
emerge and surprise leaders, companies are reevaluating how to create cohesive, consistent and fair geographic pay policies as employees push to straddle multiple
geographies. What used to only be an occasional issue is now a frequent
request, and savvy employers will need to respond with fair, transparent and
attractive geographic pay policies for distributed workforces if they wish to
remain competitive.”
About the Author
Justin Hampton is founder and CEO of Compensation Tool, a compensation benchmarking web application.