Longitude, Latitude and Labor: Compensation Approaches for Your Distributed Workforce

The pandemic has made flexible work arrangements a more common reality in a shorter timeframe than most of us ever dreamed possible. In fact, almost 70% of full-time workers in the US are working from home during COVID-19, and 80% expect to work from home at least 3x per week after COVID-19. But, as we struggle to catch up with the rapid pace of change, many employers are asking, “How do I pay a distributed workforce? How should I approach my employee compensation strategy?”

Remote work provides many benefits to both employees and employers, and it’s likely here to stay. Beyond simply working from home, we have also seen a rise in employees relocating to less expensive or more desirable areas in the “work from anywhere” culture. At the same time, most formal compensation systems are based on the cost-of-wages in a particular location where the employee resides. How do you reconcile this?

There are three primary approaches to this employee compensation puzzle:

By employer location or a national rate

Determining pay by your organization’s location or at a national rate is the simplest approach to administer, as all employees are paid on a single pay structure regardless of where they live. There’s no need to change pay rates when employees move, and if it’s a higher rate, you should be able to attract the best talent regardless of location.

If you’re in a less competitive or expensive market like Indianapolis, it may be challenging to compete for talent in costlier markets. If you’re in a more competitive/expensive market like San Francisco or Chicago, you may be overpaying for talent in less costly markets. You are broadening your talent pool but competing with major corporations like Amazon, Google and Microsoft.

By employee location

Currently, determining pay by your employee’s location is the most common approach in traditional systems. It can result in lower payroll costs if you have employees living in less expensive markets. In addition, it keeps equity with local markets which can help to increase retention.

A downside to this approach is that it can be challenging to be fair and consistent, especially if someone moves to a lower cost market. Lowering pay can lead to turnover even if you are transparent, fair and consistent. Some employees may just not accept a pay cut, especially as they know you had already budgeted for — and were previously supporting — their higher salary. One alternative to this dilemma is to freeze pay for those moving to a lower priced market.

Remote work differential

Using a remote work differential to determine pay is an innovative approach that creates a differential above your “home office” rate for anyone working remotely by their own choice. This differential could be higher or lower than your typical rate. If it’s lower, it recognizes the openness to pay cuts for the benefits of a lower cost of living and lower expenses in remote work. If it’s higher, it recognizes the cost savings to the business in real estate and other on-site work expenses.

Although there isn’t one right answer, what is clear is your compensation philosophy should be consistent and aligned with your company culture, goals and strategy. As with everything else in our new world of work, planning is necessary, but flexibility and communication are key. So, commit to an approach, seek feedback, analyze the data and determine how it’s working for your employees and organization. And, be ready to change approaches if you need to.

If your organization has a dispersed workforce or employees doing remote work, it may be time to evaluate your pay structure. I’d love to learn more about your organization and how I can help create a compensation strategy that supports your organization’s goals and enables you to attract and retain talent.

Written by Megan Nail, VP of Total Rewards Practice. If you’re looking to make some adjustments to your total rewards strategies to mitigate potential talent challenges, feel free to drop her a note or reach out on LinkedIn.