COVID-19 made remote work more accepted, many engineers moved to lower cost, less populated areas during the pandemic. The question looming for many as offices return to hybrid and on-site schedules : will remaining remote in a lower cost area impact compensation. Some organizations are openly talking about adjusting salaries for employees who want to permanently work remotely to align with cost of living in those locations.
Should Comp for Remote Employees Be Adjusted?
For people living in the same area that they lived before working remotely, there should not be any difference to compensation. There’s no change to cost of living working remotely, or to the local hiring market. Studies show that eliminating commuting time makes many remote employees more productive and effective. Paying people more who live in NYC vs the suburbs for instance would create many problems.
What about people who permanently moved from the NY Metro region to lower cost areas like the Southeast, or even Upstate NY? The answer depends on how a company determines their compensation strategy.
Determining Comp Strategy
There are three primary approaches to compensation:
- By employer location
- According to skill set
- By employee location
If a firm pays according to employer location, there’s no need to adjust employee’s salaries if they move as the employer location hasn’t changed and where employees live doesn’t matter if they’re allowed to work remotely. Some organizations do this to attract the best talent wherever they live.
If paying by employee location, there must be a policy and process for adjusting compensation if employees move. To be fair and consistent, an employer should apply the same logic whether an employee moves to a less expensive or a more expensive area. This approach will require constant monitoring and tweaking in an ever changing real estate market.
A challenge with this approach will be lowering pay when employees move to lower cost areas. This will certainly cause turnover, even if the strategy is fair and consistently applied. Rarely will people accept a pay cut, especially when they know the company had already budgeted for, and were actually paying their higher salary. Adjusting for region is more practical for new hires.
If an employer lowers salaries for employees who move to an area with a lower cost of living, employees who move to a more expensive area will expect more pay. Rarely will an employer want to pay someone more unless they are requesting the employee relocate.
In either case, companies should transparently communicate their strategy so that everyone understands the potential impact to salary if they choose to move. If the strategy is consistent, and based on verified, up-to-date market data, theoretically employees should be ok with it.
When employees express that it is unfair to pay workers who are doing the same job and providing the same value differently depending on where they live, employers can respond that basing pay according to the competitiveness of the labor market in a given area is based on market data and technically a more accurate way to pay employees fair and competitive wages. Expect employees will start looking for alternative employment immediately.
In the tech sector it’s best to pay engineers competitively based on their skill set since most engineers can work anywhere. If the market rate for a software engineer is 150k in one city, it should be the same in any city. It doesn’t matter where they are coding, either way they’re sitting at a computer screen adding the same value to the organization.
What’s the Best Approach?
First, determine what a person contributes to the success of the organization. Some skills are always competitive regardless of location, like engineers.
In a post-COVID world where remote work has become more accepted, organizations may use varied compensation strategies aligned to different talent groups. For example, engineers will be paid highly competitive wages regardless of location. For customer-service positions where there’s likely a larger pool of candidates, companies might choose to pay by location and target areas with a lower cost of living.
A one-size-fits-all approach doesn’t work functionally. Companies must create tailored compensation strategies based on what’s needed to attract and retain employees.
Forward looking companies are embracing remote workers. Paying higher wages to remote employees for hard to find skill sets like engineers when other firms are paying local rates might enable you to attract the best talent and keep them for the long term. At the same time there are considerable cost savings in paying local market rates in low cost regions for commodity skill sets like call centers.
What matters is a well thought out approach to compensation with enough flexibility to attract and retain the people who will propel your business forward.
