Prior to the current pandemic, a 2018 study by GlobalWorkplaceAnalytics.com highlighted that just 3.6% of the United States labor force worked remotely 50% or more of the time.
The same report tells us that 56% of employees have jobs that could be accomplished remotely. As quarantine/social distancing have been implemented, we have seen most of the workforce perform their tasks from home with the exception of certain sectors (e.g., service, manufacturing, etc.).
The remote work experiment forced upon us by COVID-19 has been viewed by most as a success. But this has raised HR policy questions about WFH (Work-From-Home) and, taking a step further, working where you want to live versus living close to the work office. The value of on-premise/co-location working has come into question in recent years and this experience has brought those questions to the forefront.
If proximity and ease of commute are no longer issues, what factors drive our preferred work/live location? Is it being close to family members, or a location that aligns with your hobbies and passions? Whatever the answer, what we’re really discussing here is the role of location in the total rewards matrix.
Reevaluating the Total Rewards Equation
Total rewards has typically focused on compensation, benefits and, more recently, career development and recognition. With the recent demonstrated success of remote work, organizations are realizing that work location is also an important consideration, possibly on par with these other elements of the total rewards matrix. This is an important evolution, as it means companies have another powerful new lever to use in driving their talent strategy. Companies that recognize this and thoughtfully invoke work location in their employee value proposition could significantly benefit by:
- Attracting Talent: Many times, the available talent we need/want cannot be sourced in the location in which we operate. Consequently, we either settle for candidates in our current market or we employ mobility to move talent to the job location. Both are costly solutions. As organizations are able to facilitate effective remote work, they will be able to attract new types of talent that prefer their current location or prefer a remote work environment. In other words, that key software developer who didn’t want to leave Austin, Texas is now in reach.
- Retaining Talent: Every organization has lost talent due to personal needs. Maybe a key employee’s spouse gets a new job across the country or they need to move to take care of an aging relative. The amount of institutional knowledge these employees take with them is staggering and companies spend significant time and monies replacing that staff and training new workers. By investing in distributed work, companies may save that talent and organizational knowledge, thus minimizing disruptions and saving on costs and time. One would also think that if an employee is able to live where they want, they will be happier and want to stay with an organization that facilitates that lifestyle.
- Enhancing Talent: By now, we all know the benefit of diverse and inclusive teams. Diversity means a lot of things and one definition could include work location. People who live in San Antonio see the world quite differently than people in San Francisco — and that’s a good thing. Diversity provides a unique blend of ideas and different perspectives that fuel creativity and performance in our business. By no means does location replace other diversity- and inclusion-related efforts, but it can play a role in enhancing an organization’s D&I strategy.
Companies that hit the mark here will provide additional benefits to their employees, including:
- Less time spent commuting,
- Reduced transportation expenses,
- Lower day-to-day costs (such as wardrobe costs and restaurant meals),
- Increased productivity,
- Improved quality of life,
- Ease of family care arrangements,
- Enhanced flexibility to work in their preferred style/hours/etc.
Work From Anywhere
We call this phenomenon Work From Anywhere or WFA for short. There are many, many resources discussing the tools and technology needed to facilitate this remote work, but thus far there has been little conversation around the compensation-related aspects of this WFA strategy.
COVID-19 has skyrocketed WFA to a top-of-mind priority for leaders in the mobility industry. Over the past few months, conversations and articles on the topic have increased exponentially. Facebook made a big announcement that they expect 50% of their workforce of 48,000 will work remotely in five to ten years. Facebook sees remote working as a way to retain talent that wants to leave the Bay Area and to attract talent that might already be remote and prefer not to move. This is a major shift of philosophy for Facebook. In the recent past, Facebook provided a $10,000 bonus if you lived within 10 miles of the office. While not as public, many other companies (both within and outside of the tech industry) have announced similar plans on increasing their remote worker mix.
There’s an important caveat to this strategy. Facebook has agreed to this WFA approach but has indicated that salaries will be adjusted based on the cost of living in the location that the employee resides. There are myriad ways to accomplish this salary localization, and this article provides a view on different strategies we might employ to set pay for those working from anywhere.
Understanding Cost of Living and Cost of Labor
First, as a reminder, there is a difference between cost of labor and cost of living.
Cost of living is the cost to live in a specific location and is based on the price of goods and services, housing and tax rates. Cost of labor is typically the predominant pay for a particular role in a specific location given criteria such as industry, years of experience, and/or seniority/responsibility. It’s a supply/demand-based approach, which has been used to set pay for years.
But with the rise of WFA, that supply-demand equation is being turned on it’s head. From a cost of labor perspective, the supply and demand of labor has been historically contained within a particular market. But now that we are able to acquire and employ talent across the world, our labor market is now global, which makes for a very different supply-demand equation.
In a perfect world we would create a new mechanism to determine cost of labor (i.e. international pay scales based on global supply/demand or skills-based pay). But those capabilities do not exist (yet).
In the midterm, some companies are looking to cost of living as a way to take their current compensation approach and weave it into this WFA world.
In the above cost of living example, we consider a position in Atlanta that earns $100,000. The graphic illustrates an equivalent salary for a sample of locations across the U.S., given differences in cost of goods & services, housing, and tax rates. At these pay levels, a person would have similar purchasing power to that which they enjoyed in Atlanta. You can see that variations in the cost of living may warrant a significant difference in the required salary to maintain this purchasing power.
Setting the Pay Level
Your total rewards philosophy will determine the best way to pay remote workers. As I mentioned, in the past, salaries were typically based upon office location. As employees increasingly WFA, there is no office location by which to set salaries.
In this new environment, work follows the employee, not the other way around. Therefore, a strategically aligned rewards philosophy is important so that your pay methodology is clear for in-office and WFA workers. It is imperative to establish a process for setting pay, as it will assist in ensuring pay equity and fairness relative to others.
Below are the four major ways to set compensation levels for WFA workers. Again, the appropriate approach should be dictated by your total rewards philosophy and organizational approach to WFA.
1) Align all Compensation with Company HQ
In this approach, pay, no matter if in-office or distributed, is based upon the HQ location and each employee’s role.
If a remote worker is in a low cost of living location, they may receive a “windfall,” or an increased purchasing power, due to the difference in cost of labor at the HQ location and cost of living in their location. Conversely, if a remote employee lives in a high cost of living location, they may experience lower purchasing power.
The fundamental philosophy is that a given role has a certain value to the organization, and it does not matter where the role is located.
Companies that employ this strategy may pay a national rate for a position as opposed to location-specific market rate. This may be helpful if you have multiple offices or no major office.
2) Current Market-Level Pay for Their Location
This approach assesses the market-pay rate for the position in the location of the remote worker. This means organizations would pay for the position based upon how other organizations in the remote worker’s location pay for a similar position (i.e. market competitive pay for that role at that location).
It takes significant time and survey vendor fees to understand what the market pay rate is in a particular location. Companies will need to subscribe to a compensation survey database so they can get the best market information possible. Unfortunately, there may be some locations where market pay data does not exist or is insufficient.
3) Develop Geographic Differentials Structure
The prior two approaches provide two extremes; the first is a one-size-fits-all approach while the second applies differentiated, individualized salaries for each remote worker. This third option is a middle approach to provide some differences in pay but not by every individual/location. For larger companies with diverse work locations, this is already a popular approach.
In this approach, organizations define a salary structure that is for HQ or a specified base location. Based upon estimated competitive pay, you establish a geographically differentiated salary structure. You can have as many as you want. In the above example, we have as many geographic differences as there are remote workers, but usually a company will have three to 10 different structures depending upon how many work locations there are.
For example, you might have five different structures (A through E). Structure A is for high wage locations, while Structure E is for low wage ones. Structure C could be the structure that is the base level (100%). Structure A and B would be set higher (110% and 105%, respectively). Levels D and E would have their structures at 95% and 90%. These figures are for illustrative purposes only.
Each remote worker location would be slotted into one of these five sample salary structures. The philosophy in this approach is market-based but simplifies to a few salary structures versus each remote worker having their own salary structure. This third approach is easier than approach No. 2, as it is more manageable over time and recognizes that there are pay differences across locations versus approach No. 1.
A corollary to this approach is to use cost of living information to set geographical differences instead of assessing competitive pay based upon each marketplace. The geographic differentiated salary structures would be set in a similar way but using cost of living data to create the various salary structures (A through E in our example).
This cost of living data is much easier to access and significantly reduces the complexity of the pay approach (i.e. we don’t need to consider role, experience, or other market pay criteria). Transparency to workers is also improved, because remote workers “feel” the difference in paying for goods & services, housing, etc. When basing salaries on market pay, transparency is diminished as there are a variety of factors considered that aren’t typically communicated to employees such as peer group, selected roles, sample size, etc.
Many companies use this cost-based approach, as it is defensible, easy to communicate and easily understood by employees.
4) Pay Based on Cost of Living
This next approach is a newer concept and might be best aligned with an increasingly distributed workforce. In this approach, companies set competitive pay based on the HQ location, and then use a cost of living approach to adjust the compensation up or down based on where the employee lives/works.
This approach is similar to the cost of living option in approach No. 3, but more specific to an individual situation (as we see in approach No. 2). However, unlike approach No. 2, cost of living data is much easier to obtain than competitive pay data in each location, and it’s simpler and more straight-forward for employees to understand. Consequently, this is much easier to maintain, and also optimizes the compensation for each person based on the location that they have chosen to live. By assessing competitive compensation at HQ and translating it to remote workers using cost of living, companies ensure that everyone across the organization — no matter where you work — enjoys similar purchasing power. This is an excellent way to preserve internal equity across an organization.
There is a variation of this approach, which may be beneficial to both the employee and the company, as some organizations explore a type of “gainsharing.” In this scenario, companies split any gains between the difference in HQ salary and the cost of living-based salary in the remote worker’s location. For example, if the HQ salary is set at $100,000 and the remote worker’s cost of living adjusted salary is $90,000, the “gainsharing” salary would be $95,000 (splitting the difference of $100,000 and $90,000). The company receives an ongoing savings on pay given the $5,000 reduction, and the remote worker is getting a benefit by having more purchasing power than they would under a different approach. Win-win.
In closing, we do believe there is a continued trend toward WFA/remote work. Distributed work and location as a total rewards component continues the well-established HR trend of personalization of rewards. We have seen personalization grow through cafeteria-style benefit plans and multiple career paths. WFA is just another step in aligning individual personal preference and perceived value to create happier, more productive employees.
Work location has always been a key element of the compensation pillar. Now, WFA will allow employees to choose their own work location, which will further drive perceived value and allow for trade-offs in other areas of the total rewards matrix.
Companies should recognize this trend and develop a clear rewards philosophy and an approach to setting pay for remote workers that is consistent with their talent strategy and goals.