Should Remote Workers Living in Lower-Cost Locations Be Paid Less?

​With the ongoing coronavirus pandemic and a growing number of companies allowing employees to continue to work from home indefinitely, a provocative new question has emerged: Should employees working from home in areas where the cost of living is lower be paid less than those working onsite?

The idea was recently explored in a story in the Star, which quoted Richard Leblanc, a governance professor at York University in Toronto, as saying he wouldn't be surprised if employees who relocate to work from home in lower-cost areas would see a pay change. Why? Because an employee who lived and worked in New York City but moved to and worked from upstate New York, for example, would see a significant drop in housing and other costs.

Should that matter? Not surprisingly, opinions vary widely. But there's support for the idea of variable pay based on geographic location.

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Potential Drivers of Variable Pay

"My opinion, as a business owner, is that clearly a company should adjust wages based on the worker's location," said Ken Lewis, managing partner with Client Expander, a marketing agency in Palm Beach Gardens, Fla.

His reason is practical: "Salaries are paid based on market factors, just like prices on everything else." Employers know, he said, that locations have their own built-in expenses, including housing, transportation, parking and dress.

Terry B. McDougall, a career coach and author of Winning the Game of Work: Career Happiness and Success on Your Own Time (New Degree Press, 2020), said she believes employees should be paid based on their contributions to the organization, but that doesn't always happen.

"Regardless of what we may think is right, salaries will be impacted by supply and demand," she said. "Whether someone makes more or less salary will probably depend on a number of factors, such as their geographic marketplace."

Employers hiring from a local market may need to pay a higher prevailing wage rate, but employers hiring nationally, or even internationally, will find a higher supply of potential employees, which will moderate any upward pressure on salary, McDougall said.

"I could envision scenarios where a company could pay an employee in a lower-cost market a great wage for that market, fly the person to the headquarters a few times a year for meetings, and still come out ahead compared to what it would cost them to hire an employee in a place like Silicon Valley or New York City."

What Compensation and Benefits Experts Say

The concept of varying wage rates based on an employee's location is really nothing new. Companies with locations around the country or globe already vary their salary structures based on local cost-of-living considerations.

Mary Ann Sardone is partner and U.S. talent leader at Mercer, based in the Atlanta area. "We've heard, 'Now you don't have a commute. Now you have more time. Perhaps I should pay you less,' " she said. "I don't think that's going to happen."

Lowering pay for remote workers is especially unlikely when those employees hold specialized positions that traditionally have been hard to fill. Companies looking for a top-notch cybersecurity expert, for example, aren't likely to balk at paying the Silicon Valley rate to an employee operating remotely from northern Wyoming.

Instead, Sardone said, national rates will likely emerge. Pay decisions should start with an overall strategy involving remote work, and employees should be in involved in formulating it, she said.

Catherine A. Hartmann, North America rewards practice leader with Willis Towers Watson in Los Angeles, said she suspects the short-term responses to pay considerations for remote workers during the pandemic will give way to different long-term solutions. "The entire dynamic in terms of how companies are thinking about geographic differences is changing," she said.

Hartmann said employers are unlikely to adjust salaries for existing employees, whether they're working remotely or from the office. But they may change their overall strategy to address geographic differences as remote work becomes more common.

"One of my clients pre-pandemic was managing a high number of teams that were mobile across the U.S.," she said. "They shifted their compensation program design to a national structure, identified geographic premiums for certain locations, and called them out as a separate line item."

When an employee moves from the Bay Area to a lower-cost location, for example, the premium is removed. If employees move to a higher-cost metro location from somewhere less expensive, the premium is added.

As the impact of the pandemic continues to be felt and more companies decide to allow long-term remote work, this approach may become more common.

Lin Grensing-Pophal is a freelance writer in Chippewa Falls, Wis.