Remote working will permanently transform the workforce culture. In the short term, however, rewards professionals need to consider changes to compensation plan design, including whether, when and how to implement geographic differentials to wages.
While countless technology companies prepare to open offices and bring workers back to work, many other organisations are continuing with remote working either for an indefinite amount of time or a more permanent policy. The decision on whether or not to bring workers back to the workplace has triggered a long-term debate about a move toward a more virtual workforce.
Some large technology firms have recently announced plans to have many of their employees permanently work from home, such as Facebook, Twitter, Shopify and Square. It was not only the tech giants that led the permanent shift towards remote working; Walmart followed suit for technology employees.
A recent move by Siemens is one of the early examples in Europe of the movement toward permanent remote working models. “The New Normal Working Model fits seamlessly into our concept for the future of work. We’re using this model to pursue the goal of developing new ways of working together on a mobile, digital basis. The new normal will also strengthen our ability to recruit and retain the best talent for Siemens and to increase diversity on our teams,” said Jochen Wallisch, head of Industrial Relations & Employment Conditions at Siemens AG, in a press release.
But other prominent technology executives have reservations about a virtual workforce. Microsoft’s Satya Nadella recently argued in an interview with The New York Times that a widespread move toward virtual working could burn the social capital of the workplace. Well-known investor and entrepreneur Peter Thiel shared that belief in his book Zero to One.
Yet, it’s hard to ignore the widespread market forces at play. Eighty-six percent of European technology firms who responded to the fourth edition of our COVID-19 pulse survey: Setting the Stage for the Future of Rewards and Work, conducted in June, said they plan to increase their full-time remote workers. Another 61% said they are conducting a location analysis to reconsider the labor market and real estate costs.
The shift toward a virtual workplace is also welcomed by a significant number of the general population in the U.K. A recent poll by Piplsay found that about 70% of Britons are comfortable with a permanent work-from-home culture and 50% believe that it is fair to adjust pay.
We believe there are two important fundamental questions technology firms must answer — and soon:
- What proportion of their workforce should be permitted to work remotely and for how long? Developing a comprehensive policy on this is essential, as employees are looking for clarity amid such widespread uncertainty created by the COVID-19 pandemic. Some employees may be waiting for answers to their remote working status due to personal reasons (e.g., a desire to move or childcare and schooling demands).
- If employees transition to a permanent remote working status, should their compensation change as a result? Geographic pay differentials are not uncommon when employees are hired to a physical office, but they are less common in the context of an employee being hired or transitioning into a remote working status.
Let’s dive into the considerations around these policy decisions.
Incorporating Remote Working into Existing Rewards Structure
Before thinking about how to realign rewards programs, companies must first define and articulate the future of their workforce. There have been plenty of terms coined to identify changes in the way people work (e.g., agile worker, virtual worker, mobile worker, hybrid worker, remote worker, flexible worker, office worker). Organisations should consider streamlining and agreeing internally to the definitions around the types of future working arrangements. We recommend the following terms as a streamlined way of thinking about different ways of working:
- Flexible worker — Talent that could and perhaps ought to work both remotely and from the office
- Office worker — Talent that is required to be on-site in order to perform her/his job
- Remote worker — Talent that could work remotely all the time
While the COVID-19 pandemic presents enormous humanitarian and business challenges, we also believe it grants an opportunity for leading technology firms to rethink their future of work strategies as an extension of the return-to-workplace process. Indeed, that work is being conducted today, with 84% of our pulse survey respondents indicating they are exploring different working models including four-day work weeks. “They are doing this from a point of necessity – possibly with a need to reduce costs and investor pressure, but certainly with a strong degree of creativity,” says Pete Bentley, chief commercial officer at the Human Capital Solutions practice at Aon. (Learn more in our article: What if... Working from Home Is the 'New Normal'?.)
Traditional rewards structures are typically built on two dimensions: vertically on job levels and horizontally on job architecture, such as skills and functions. Importantly, a virtual working model is emerging as a new layer on top of these two dimensions. Therefore, HR professionals need to be mindful of the additional complexity it can bring and how this new working model will interplay with the existing differentiation of pay by level, skill and function. Adding salary differentials by geography in isolation of other variables can quickly lead to unintended consequences like pay inequities, so it’s important to carefully consider how to accommodate changes to pay structures.
Start Simple by Adjusting Pay
In Europe, remote working across borders is initially difficult due to an uneven labour market (unlike the talent mobility within the United States). However, we also believe there is nothing holding European companies back in adopting new working models. Our advice is to start simple. Providing flexibility in the future will be a game changer both for companies and their workforce by allowing employees to choose between Barcelona and London, whilst giving the opportunity for technology companies to further extend their talent into lower-cost, emerging markets like Poland, Romania and Turkey.
In the past, many companies used an ad hoc basis to decide whether to adjust pay when employees move to remote status. But now that firms are faced with much more of their workforce working remotely, it is time to develop a comprehensive position on the matter.
In fact, companies in Europe are quickly rethinking their approach in this environment. About a third of the technology organisations in Europe that responded to our latest pulse survey say they are in the process of changing or considering changing geographic differential policy and zones as a result of a larger virtual workforce.
In our opinion, when regional differences in compensation for similar roles approaches +/- 10%, it’s time to seriously consider introducing regionally specific pay. It is also important to consider how the regional differentials relate to one another (i.e. difference between the lowest paying and the highest paying locations).
In Germany, we found that employees in the technology sector located in Munich receive salaries that are, on average, 8% higher than the overall country average. Berlin was the lowest paying region at 8% lower than the national average, resulting in a 16% basis points between Munich and Berlin. Our analysis used data from the Radford Global Technology Survey.
In the U.K., the spread was wider. Inner London commands a premium of 15% over national average and Northern Ireland at 13% discount, suggesting a 28% basis points between Inner London and Northern Ireland. (See our article Technology Wage Growth in Other Regions of the U.K. is Catching Up to London. Why It Matters. for more specifics.)
But how many pay zones do you need? Looking at the U.K. and Germany examples, it is probably sufficient to start with two or three zones in the U.K. and two zones in Germany. Aiming for city-level differentials might be a step too far in Europe since most countries have one or two premium locations where technology talent is concentrated, with the rest of the regions being more aligned to each other. Start simple with just a few pay zones by clustering different locations into lower, average and higher paying zones. Doing so can assist with the initial adoption of more granular geographic pay policies.
It’s also important to consider all elements of pay when making adjustments based on remote location. When an employee chooses to work virtually, certain elements might become irrelevant like transportation allowance. On the other hand, some new elements of pay may come into play, such as additional cash to support employees with their remote working setting (additional cost of enhanced bandwidth, etc.). In other words, focusing solely on salary differentials won’t help, so we recommend adopting a comprehensive total rewards approach to avoid potential pitfalls.
The Role of Pay Equity in Geographic Differentials
The uneven regulatory landscape in Europe makes it more challenging for companies to administer a single approach throughout the continent. Pay equity has been in the spotlight for some time and adding a new layer of differentiation to pay creates further complexity around maintaining equity. Nevertheless, we believe implementing geographic pay differentials is possible, but it’s important to evaluate the unique regulatory environment in each country.
Evaluate Sales Employees Separately
Sales employees have complex compensation plans that require careful consideration when adding geographic pay differentials. Most of our technology clients are considering how to develop a fair policy between sales and non-sales employee groups.
“Historically, commission-based field sales roles were often excluded from geographically differentiated compensation structures,” notes Keaton Hoffman, a director in Aon’s Rewards Solutions practice in London who focuses on the technology sector. Given the work requirement to travel within a wider geographic region, and the fact that a dollar sold has the same impact on the company’s top line wherever it’s generated, technology companies often shielded commission-based field sales roles from geographic discounts based on their remote work location. “Companies would argue that if their sales people can do the job from anywhere and deliver the same results, they shouldn’t pay them differently,” Hoffman says.
With around 40% of sales employees’ income, on average, considered at-risk, any further differentiation to basic pay could easily lead to higher incentive earnings. The influence of incentive pay within the sales function could also lead to unintended gaps between sales associates.
Typical non-sales employees in the U.K. technology market generates about 90% of their income from fixed and 10% from variable pay, which is typically based on a scorecard of qualitative factors as opposed to an output metric. This is in stark contrast to sales employees for whom 40% of their income comes from sales incentives, with only 60% of cash compensation guaranteed. For sales roles, any further differentiation to basic pay could easily lead to unintended gaps between sales associates, as the variable portion is generally linked to the fixed; some may receive significantly higher or lower incentive pay despite bringing the same amount of business to the company. This gap could further exacerbate when factoring in equity compensation.
Next Steps
Remote working provides flexibility for both companies and employees and is generally seen as a trend that will continue to become more prevalent. However, each company needs to determine what proportion of their workforce will be remote and in what jobs, locations and functions. Evaluating peer group practices and trends, as well as pulsing the desires of your workforce are good places to start.
Any decision around remote working carries implications for rewards programs. The most immediate consideration is whether to apply a regional approach to wages based on cost of labour and/or cost of living factors. We recommend companies start simple when reviewing their geographic differentials policy. Be mindful of the implications on internal pay equity and the regulatory environment.
In order to guide decision making process, we provide supplementary geographic base salary differentials reports for key markets in Europe. If you would like a copy of this report or have questions about reviewing your rewards structures, please contact the author or write to rewards-solutions@aon.com.
To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.
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