Location-Based Pay Heats Up as Workforces Remain Remote

Published: October 2020


As companies develop a comprehensive approach to managing their talent remotely, they need to examine many areas, including adjusting rewards for location, redefining the employee value proposition and delivering on inclusion and diversity through different hiring opportunities.

An increasing number of employees across the globe are working remotely, a trend accelerated by the COVID-19 pandemic, and many firms are considering or implementing policies to allow some jobs to continue remotely long term. Nearly three quarters of organizations in North America say they are identifying functions and roles that can best operate remotely to determine a go-forward virtual working strategy, according to our fifth COVID-19 pulse survey conducted in late August (click here to access full results).

To address this shift in the workforce, organizations need to develop a location strategy for their remote workforce to include the following elements:

  • Develop a long-term remote working policy, including evaluating what types of jobs can be done on a remote basis;
  • Assess your employees to determine if they have the skills, experience and orientation to be able to work successfully from home;
  • Implement geographic-based pay for employees that move to a remote status or remote new hires;
  • Rethink your talent strategy for a virtual workforce, including your employee value proposition and how inclusion and diversity goals can be better achieved.

This paper outlines our recommendations for how organizations approach key elements of their remote workforce strategy.

Develop a Long-Term Remote Working Policy

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 today and will need to work in the future to succeed in an increasingly digitalized world. Organizations should consider streamlining and agreeing internally to the definitions around the types of future working arrangements. We recommend using these terms to streamline the thinking about different ways of working:

  • Flexible worker — Talent that could and perhaps better-served to work both remotely and from the office
  • Office worker — Talent that is required to be on-site in order to perform their job
  • Remote worker — Talent that could work remotely all the time

As companies accelerate plans to allow certain employees to continue working from home, some industries have lower rates of remote working due to the types of jobs prevalent in the industry (see Figure 1).

Assess Readiness for Remote Working

Many business leaders have been hesitant to fully embrace virtual working, even for job roles where it is feasible. Old ways of thinking are persistent in the workplace, including the belief that it is harder to manage someone remotely and that teams and individuals are more productive in the workplace environment. Now, business leaders have large sample sizes of data from virtual working due to the pandemic to assess how effective and productive (or not) it has been within their organization.

What many organizations are finding is that certain employees are highly effective in working remotely if they have the tools and skills for doing so. Data from our five COVID-19 pulse surveys finds that a greater percentage of employees said they were more productive working remotely. Our latest survey finds nearly three quarters of respondents across the globe say they are planning to put greater emphasis next year on continuous feedback and manager communication as they consider a workforce with more employees working virtually.

In our blog post What if... Working from Home Is the 'New Normal'?, we outlined how important it is to be able to identify the employees who are have the skills and traits to work remotely and the leaders who are prepared to manage virtual teams. Capturing this information and combining it with outputs from our return-to-work analysis, allows us to align different worker types with different working environments.

A Brief History of Location-Based Pay

When evaluating a pay strategy based on a remote workforce, both cost of labor and cost of living should be considered. Cost of living and cost of labor are directionally aligned but not the same. For example, the cost of living in Honolulu is high — more than 50% higher than the national average. However, the cost of labor, while above the national average, is more modest at 5% to 10% above the national labor market. This pattern is common in high cost of living locations, which contributes to the economic squeeze lower-paid employees struggle with, particularly when it comes to affordable housing.

Some companies have taken cost of living into consideration when establishing a living wage for hourly employees or intentionally setting wage scales above the cost of labor in higher cost of living locations. However, the prevalent practice is to focus on cost of labor when implementing location-specific pay.

To accomplish this, companies develop and apply geographic pay differentials that reflect the local cost of labor for the locations they operate in. That’s why we see higher base salaries for similar job levels and positions in the San Francisco Bay Area compared to other locations with lower labor and cost of living, such as Houston and Tampa.

Implement Geographic-Based Pay for Remote Employees

While geographic pay differentials are common, fewer companies have policies that define what happens to pay when an employee relocates from a high to a low cost of labor location or begins working remotely away from any company location. However, as this situation is increasingly common today due to COVID-19, companies would be well-served to develop a more comprehensive policy around these situations.

To start, we recommend developing three to five geographically-adjusted structures (also referred to as market reference points) to cover U.S. locations grouped together by the cost of labor relative to the national average. This may vary based on industry — for example, Seattle and Austin have a high premium in the technology sector but may not in other industries. Here is an example of what the geographic-based ranges may look like for your firm:

  • One or two levels above the national average for high-cost labor locations (e.g., the San Francisco Bay Area and New York City), with a geographic differential of 110% to 120% of the national average
  • National average locations, such as Chicago, Atlanta, Denver, Minneapolis, Reno and Dallas, grouped together with pay set at the national average
  • One or two levels of below-national average, such as Tallahassee and Des Moines, grouped together at around 80-90% of the national average

Once national cost of living tiers are established, we recommend taking the following steps:

  1. Explore the introduction of a living wage in high cost of living locations. This could take the form of higher than state or federally mandated minimum wages or introducing a wage scale that exceeds the geographic cost of labor for lower paid jobs/employees where cost of living has a greater impact;
  2. Identify roles you recruit for nationally. For some jobs and employees, location is not a factor, particularly if you compete for this talent on a national basis and the role does not have to performed in a specific location. If a company is in this situation, setting pay below a national standard could open the door to retention risk and easy poaching of your talent by other employers who recruit nationally;
  3. Evaluate the use of a wage scale set above the national average for pivotal and high-demand jobs. The rate of pay for these jobs would be above the national average but not at the highest level—except for jobs located in the highest cost locations like the San Francisco Bay Area. Companies need a consistent pay practice for key talent, and even if these employees live in a lower cost of labor market, they are typically recruited at premium pay levels regardless of their location. 
  4. Define a transition strategy for adjusting pay as employees move to a remote status and/or relocate to lower or higher cost of labor locations. It may make sense to phase in a reduction or increase in pay over a multi-year period, making it more palatable to employees facing a pay cut or give companies time to budget for pay increases. For example, pay reductions could be phased in over three years by temporarily pausing merit increases if that plan is clearly communicated to the affected employees. Some companies are already experimenting with transition plans because of the work-from-home mandates today. For example, Stripe announced it would pay employees a $20,000 bonus to relocate to outside of Seattle, New York and San Francisco if they also accept a 10% base salary reduction.
  5. Expand your geographic approach to consider equity. Most organizations implementing geographic pay differentials focus on setting base pay ranges by location. Short-term incentive targets are typically set on a national basis and are directly impacted by base pay that often align with location, so bonus targets are rarely adjusted geographically. But market data suggests that long-term incentives differ by geography, particularly for non-executive employees. For sectors like technology and life sciences, where equity grants are common across all levels of employees, we find that eligibility and award values vary considerably for new-hire and ongoing grants by location. Figure 2 shows how widely pay differentials can be when viewed by base salary compared to equity.  

Rethink Your Talent Strategy for a Virtual Workforce

The shift to remote work has created new opportunities for companies to cut costs; improve diversity, equity and inclusion goals; and reconsider their employee value proposition.

A flexible workforce means that companies will compete with many non-traditional peers for talent. On one hand, jobs with in-demand, finite skills will be easier to recruit from a wider geographic talent pool. On the other hand, companies that are in a high-density area for key talent won’t have the clear advantage of location they once had. Their competitors will be better positioned to attract key talent without requiring relocation. Our work in this area finds that talent is mobile, the paradigm of talent availability across locations is ever changing and deep-rooted assumptions on talent pools may not hold true anymore. For instance, our study finds that traditionally untapped locations, such as Columbus, Ohio, have above average availability of female software developers.

To achieve success in the current environment, firms must assess their location strategy from a holistic standpoint and consider the impact to rewards and hiring plans. Developing a compelling employee value proposition is a key differentiator for remote employees, and it goes far beyond a simple branding exercise. Companies need to focus on a culture that transcends physical workplaces. For example, we’re seeing our clients focus on their investment in technology infrastructure in addition to employee wellbeing that encompasses physical, mental and financial aspects.

Next Steps

The COVID-19 pandemic presents a unique opportunity for companies to assess their location strategy in light of a more remote workforce. What has been working and what has not? Lay the groundwork for a more comprehensive policy long term through taking key actions around assessing the readiness of certain job roles and individuals to work remotely. How should pay be adjusted going forward? And, finally, what opportunity does your remote workforce strategy present for diversity, pay equity and inclusion goals? 

While the COVID-19 pandemic presents enormous challenges, we also believe it extends a valuable opportunity for organizations to rethink their remote work strategy, including how total rewards, talent assessment and hiring all fit into a more virtual and agile workforce

If you have questions about your location strategy or would like to speak with one of our experts, please contact the authors 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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General Disclaimer
The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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