In the years leading up to the COVID-19 pandemic, the U.S. job market saw a steady increase in hybrid and remote work opportunities. The mass adoption, however, of a more “flexible workplace” — and the teleconferencing technologies necessary to make it a widespread option — was not yet commonplace. And in many industries, the idea of offering employees the ability to work from home several days a week — or more — brought up concerns over loss of productivity and loss of control.
Although the tech industry was more open to the idea of hybrid and remote work (and offered the option to a growing number of employees) — it wasn’t until pandemic lockdowns sent millions of workers home in early 2020, that the landscape of the American workplace, as a whole, changed forever.
For those workers whose positions allowed them to work from home, there were challenges related to balancing remote work with remote learning and overcoming Wi-Fi and teleconferencing glitches.
To minimize the time necessary to adapt to a whole new way of doing business, tech companies stepped in — utilizing their innovation to power hybrid work spaces and provide applications and other means to facilitate virtual collaboration and solve network connectivity and security concerns.
As employees — in tech and other industries — adapted to the “new normal,” a few things became clear:
- Productivity — in many cases — increased
- Hybrid and remote work option are viable for the long term
- Employees value flexibility (in many cases, they value it over a higher salary)
- Remote work offered up a whole new world of opportunities — no matter where you live or where your business is located
For employees and employers alike, hybrid/remote work broke down geographic barriers — allowing tech companies to hire qualified talent anywhere in the world and providing employees with the ability to relocate to hometowns that offer lower living expenses, a better quality of life, or the opportunity to be closer to family in other cities or states.
This new geographic freedom also brought up a very important question — especially for tech companies based in regions with a high cost of living:
As we open job opportunities up to remote workers across the country, do we pay employees based on their location (cost of living) or the job description?
According to an April 2022 article in Fast Company, “Several large tech companies, including Meta and Google, announced that employees moving to cities with a lower cost of living would be taking a pay cut. For instance, Google employees moving to cheaper cities or outside of the office hub could see a cut—as high as 25 percent —in their compensation.”
While Reuters’ “Pay cut: Google employees who work from home could lose money,” by Danielle Kaye noted that “…smaller companies including Reddit and Zillow have shifted to location-agnostic pay models, citing advantages when it comes to hiring, retention and diversity.”
We have clients on both sides of this equation, but it is important to note that asking an employee to take a pay cut might be risky in a competitive labor market. Making a decision on location-based pay versus job-based pay should consider all factors involved to help determine what's best for your workforce and your business.We outlined a few pros and cons for each pay model. As you make decisions for your own organization, it’s a good idea to consider the following:
Pros and cons of location-based pay
- PRO: Workers are paid wages commensurate with where they live and can expect to cover state and local taxes, housing, and other expenses associated with that location.
- PRO: A company can save on wage costs, mainly if remote workers live in more affordable markets.
- CON: Employees who live in less expensive housing markets make less for the same work done by co-workers in locations with a higher cost of living.
- CON: Companies may experience higher turnover rates if they impose a pay cut policy that penalizes employees who move to smaller, more rural locations.
Pros and cons of job-based pay
- PRO: Employees who live in a lower-cost area can opt for a larger home and more expensive "extras" and save more than if they choose to live in a city with a higher cost-of-living.
- PRO: A job-based compensation structure can be more straightforward to administer because it focuses on allocating pay systematically and not on where employees live, which may shift over time.
- CON: Employees with specialized skills and expertise who live in more expensive geographic markets may not be compensated as generously as those who work for competitors with location-based pay policies. This can diminish a company's recruiting competitive edge.
- CON: Employees who move to locations with increased legislative and regulatory requirements can create increased operational costs for employers as they comply with new laws in the new location.
- CON: Job-based pay structures can increase a company's wage (operating) costs.
Lisa Bauer is director of compliance services at G&A Partners.