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The Rise of Remote Work and Its Impact on Compensation

The rise of remote work during the COVID-19 pandemic has been profound and many workplace experts are increasingly convinced it’s a watershed moment in how companies approach their workforce strategy.

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Silicon Valley tech companies such as Google, Facebook, Apple and Microsoft were among the first to transition their workforces to full-time remote at the onset of the pandemic. They’ve also been among the first to announce the extension of that remote work through 2020 and beyond. This has caused many in the industry to rethink the work model and wonder what it means for the future of Silicon Valley.

Silicon Valley and the San Francisco Bay Area in general are among the most expensive places to live in the United States. Thus, if an employee can perform their job at one of these tech companies from anywhere, will they still choose to reside in a place where the cost of living is so high?

These companies and their employees are already considering this scenario. Facebook founder and CEO Mark Zuckerberg said the company would adjust employee pay if they moved from the Bay Area to lower-cost locations. National pay data suggests that a move from Silicon Valley to most places, excluding New York and Boston, would result in a significant pay cut for workers. However, would these cuts be as significant as the pay data suggests?

Research and analysis by Mercer found that even before the impact of COVID-19 and the (sometimes reluctant) adoption of distributed work as a viable concept, tech companies were already paying employees outside of Silicon Valley much more than some might think. The researchers used Seattle as an example. National data would suggest that a job paid $100,000 in San Francisco would be paid about 13% less in Seattle. However, Mercer’s research indicates that the current pay differential is smaller — closer to 6% less. So, instead of expecting a $13,000 pay cut, the hypothetical reduction would be closer to $6,000.

“The reason the pay differentials aren’t as big is because of how competitive the talent market is for some of these jobs and the upward pressure that puts on wages,” said Tauseef Rahman, partner at Mercer. “It basically makes it a much more competitive market and it reduces the differences between locations.”

Rahman said it’s plausible that tech companies simplify the process of compensating a distributed workforce by grouping regions. For example, rather than making minor pay adjustments for the same job being performed in Silicon Valley, Los Angeles, San Diego or Seattle, it could all be grouped into one tier of pay.

This is a reasonable model for companies when applied to recruiting new talent into a distributed workforce. However, the other aspect of this is how will companies go about communicating potential pay decreases for existing employees?

“They’re being very thoughtful in how they do this. They’re taking the opportunity to reset the employee experience to something that isn’t just about the on-campus perks, free massages and high pay,” Rahman said. “You’re in a place where you can generally live wherever you want, there’s flexibility in the work and we pay more competitively, so pay isn’t going to be an issue. I think they will frame it less about any pay decrease or pay cut. But the story will change from ‘look at all our perks on-campus’ to it being one of many things they’re going to talk about.”

If tech companies in Silicon Valley do embrace a more widespread, distributed workforce, it could present challenges for other tech companies across the country. For instance, if Facebook is willing to compensate a technical engineer based in Kansas City, Missouri significantly above market value, how do local companies adjust their workforce strategy to compete?

“These companies that are located outside Silicon Valley will [have] a lot more competition. Because before the value proposition was, ‘we don’t pay as much as X company, but you live here in Kansas City, so it’s all good. You would have to move to California and pay those crazy taxes to go work for X company,’” Rahman said. “Now, the alternative is someone can work remotely out of Kansas City for that Silicon Valley company, so all of the sudden you took the wind out of the sails of that competitive advantage for the local company. I think these more competitive employers will apply upward pressure on local and regional employers for certain jobs.”

While the distributed workforce model could have a significant impact on compensation, it goes well beyond that, Rahman said. There are various compliance and tax considerations and HR operations could undergo a makeover.

“The HR operating model will need to change, because it’s a truly different world now. I know that gets said a lot now, but it’s true. If you’re hiring everywhere, do you recruit on campus? It kind of doesn’t matter,” Rahman said. “What does the campus have to do with recruiting anymore? You can hire everywhere. Talent acquisition will need to change, compensation will need to change — there will need to be a very different operating model and mindset that companies will need to think about.”

About the Author

Brett Christie Bio Image

Brett Christie is the managing editor of Workspan Daily.


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