The remote work compensation crisis

How to incorporate Work From Anywhere into your USA salary structures

The ability to work from anywhere (WFA) presents many opportunities for organizations and employees. But with opportunities come challenges. Questions about whether to allow all or some roles to be remote, in which jurisdictions to allow remote work, and for how many days are all fundamental questions still being worked out by companies.

However, one of the hardest pieces of the WFA puzzle is compensation. And for two main reasons:

• First, in the short term, what should be done when an employee requests to work remotely and the pay in their new location is lower, or higher? WFA is causing us to ask questions about our current pay philosophy and compensation approach.
• Second, in the longer term, WFA is raising bigger questions about pay philosophy. Most notably, what role does location play in determining compensation.

Location will still have a bearing on roles that must be performed in person in specific locations and for these roles we will still need location-specific salary structures.

But we now have a set of roles that are “national”. These are roles that can be sourced and performed anywhere in the country (they can also be global as well, but I will address that in another post).

Some companies have always had national structures with no differentiation by location. Others have salary structures that are differentiated by geography. And some are now wondering if they need geographic differentials in this WFA environment.

There are pros and cons to each approach. And it takes data to help understand the full picture.

A national salary structure is a very transparent approach. It allows you to pay for the role regardless of location allowing for portability of pay anywhere in the USA.

However, in paying a national rate of pay you must select what level to pay. Set it at a national average and you risk not being able to hire people into or from the higher cost locations.   Set it too high and you overpay individuals in lower cost locations.  

Another consideration is the value of pay. With a national rate of pay you may pay individuals in similar roles the same dollar amount but that pay conveys completely different standards of living.   Looking at four areas in decreasing order of cost – Mountain View CA, Boston MA, Houston TX, and Tallahassee FL – we can see that a salary of USD 100,000 delivers a very different standard of living.

To have an equivalent standard of living to the national average, the Santa Clara County resident would need to earn $175,800. Whereas the employee in Tallahassee needs only $85,900 to enjoy an equivalent standard of living.

This illustrates that a national average salary while “equal” in absolute terms can be problematic if you need to recruit and retain talent in higher cost locations. It also raises complex questions around pay equity.

On the other hand, if you have salary structures which are differentiated by geography, you have the flexibility to apply a higher salary structure in high-cost locations and lower salary structures in other locations.   Often this addresses some, but not all the standard-of-living issues.  

Geographically differentiated salary structures are often based on the cost of labor, which loosely follows cost of living but not exactly. Looking at the chart below where salaries are geo differentiated, there is still a mix of living standards delivered.

The con of this approach is that it makes it very difficult to move people out of the higher salary structure locations to the lower ones.   Given this difficulty, most companies will not decrease pay for relocating individuals, introducing inequality and inconsistency within their pay structures.   At the same time, keeping these higher salaries causes organizations to organically harmonize their pay to a national structure accidentally, and in a very expensive way.

Given that neither the national nor the geo differentiated approaches are perfect, what is a company to do? The answer is complex, and it depends on your talent and compensation strategy. Here are just a few considerations/options for organizations to consider:

Clearly National: If your organization does not operate in or recruit heavily from high-cost locations, a national salary structure might be right for you.

Talent Crunch: If you do recruit and maintain talent all over the country and you are in an industry with a skills shortage, you could pick a higher than national average structure and offer it in any location.

Transparent National WFA: Set a national structure and pay that as a baseline to everyone. Publish a WFA calculator that shows the value of that salary in different locations and let the employee choose where they want to work with the understanding that their living standard will be different depending on choice.

Transparent Geo Diff WFA: Be clear about how you will change pay when moving between geographic differential zones. Publish a WFA calculator that allows the employee to understand how their standard of living will be impacted.

Design for Movement: Set a national salary structure and if the employee works in or moves to a high-cost location provide a separate non-benefit bearing salary adjuster based on cost of living. Be clear it applies only in specific locations. If the employee subsequently moves to a lower cost location remove the adjuster.

Given that remote work and WFA is here to stay and will likely continue to grow, now is the time to start planning your compensation approach.

Contact AIRINC if you would like to learn more about remote worker compensation or WFA calculators.