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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.            

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