Choose the Right Approach for Setting Remote Workers' Pay

The remote work revolution has left many employers scrambling to rethink long-held policies and practices. Among the most important is how to pay remote workers.

"Over the past five or 10 years, employers have grown more comfortable hiring remote talent, but how to pay those people has not kept up," said Jason Adwin, senior vice president with consulting firm Segal in New York City.

Historically, employers had clear compensation policies with pay levels tied to the labor market. But "people are no longer tied to labor markets," he said.

Adjusting to this new reality is taking time. Some employers are paying employees based on where each employee lives, while others are adopting pay levels tied to the national average. Still others are managing pay the same way they always have—tying pay to the company's operating locations.

Each of these approaches has its own pros and cons, and which one to choose will depend on each employer and its specific circumstances.

Deciding What's 'Fair'

Which approach an employer chooses "will depend on why you have a remote workforce and how you define 'fair,' " said Adriana Roche, chief people officer for technology firm MURAL, based in San Francisco. Her firm evaluated three approaches to setting and managing pay for its more than 850 employees in 24 countries: pay the same regardless of location, pay by location or use broad pay zones.

The company dismissed both "pay the same" and "pay by location" as too costly and administratively cumbersome. "We chose [to use pay zones] because it allows for some variability and fairness, but it's not so operationally complex that a start-up can't handle it," Roche said. "Once you set the zones, it's fairly straightforward to determine remote employee compensation."

For example, employers that use pay zones and have locations in several major metropolitan areas can set pay for remote employees using the closest zone.

Roche noted some downsides to using pay zones for remote workers. "This approach isn't as precise as local-market compensation and could result in compensation being over or under market value," she said. In addition, "there may be times when you need to pay in the highest range to win and retain high-value talent."

In these cases, she suggested that employers track pay decisions for these high-value employees, including the reasons for these pay decisions.

Florence Healthcare has chosen to be location-agnostic when it comes to employee pay and uses national data to set pay levels for its jobs. As an employer that still has a workforce primarily based in the Atlanta area, which has a cost of living that is roughly in line with the national average, the company has not yet had to make significant pay adjustments for its 200 employees as a result of this change.

Overall, the company considers moving to national pay levels to be a long-term positive step. "We can hire from anywhere so we will be able to reach more people," said Gia Ganesh, the company's vice president of people and culture. "We have not had job candidates who live in other areas rejecting our offers because we are not paying enough."

Other employers have rejected geography-based pay completely. "We looked into changing compensation based on geography back in 2020 and decided not to move forward," said Cassandra Pratt, senior vice president of people at fertility benefits provider Progyny Inc., based in New York City.

The company had historically pegged pay levels to the metropolitan New York labor market. As a result, Pratt found that switching to geography-based pay typically lowered salaries by 6 percent to 8 percent.

"For a larger company with thousands of employees, this reduction can be meaningful, but for a company of Progyny's size with around 300 employees, we determined that the financial savings was not worth the psychological impact on employees," she said.

Instead, Progyny developed a compensation matrix comprising 10 pay levels to accommodate an employee's growth within and outside of a band and to recognize the employee's level of experience and skills.

"There are a lot of things the company and employees can control that can impact their salary, but geography isn't one of those," Pratt said.

Consider 'Carve-Outs'

Employers that are recruiting for certain jobs with high-demand talent could carve out those jobs when setting pay levels by clearly defining which jobs are critical to the mission of the organization, rather than focusing on which skills are "hot" in the talent market.

For instance, an employer might adopt a national pay scale for most employees but pay employees in the carved-out group based on other factors to ensure that pay for those jobs remains competitive.

"A company may pay a premium for data scientists that also factors in where they live because they are so important to the organization," said Lori Wisper, managing director with consulting firm WTW (formerly Willis Towers Watson), who added that she's "comfortable with that approach because it's job-based."

Need for Transparency

No matter what approach an employer uses, it must commit to communicating any resulting changes.

"People fear loss," Ganesh said. Florence Healthcare made sure that it clearly communicated its pay-structure change to employees. Fortunately, the necessary changes to employee pay were in the single digits and could be mitigated through offers such as one-time bonuses in lieu of salary increases.

These transitions may not be as straightforward for other employers. "It's new territory for companies to navigate pay differentials based on where individual employees are located," said Emily Killham, director of research and insights for analytics firm Perceptyx Inc., based in Temecula, Calif. "Most companies don't have the data to support why they're creating pay disparities for the same role."

Yet, in a world of growing pay transparency, employers must be able to explain what they are doing with compensation and why. "Ultimately, it's an employee's market right now and employees want to understand the company's reasons for salary decisions," Killham said.

Communication can also force employers to make the strongest case possible for pay changes. "There are potential liability concerns in offering disparate pay," said Frank A. Custode, chair of the employment practice at law firm Curcio Mirzaian Sirot LLC in Roseland, N.J. "Employers considering changes to employee compensation due to remote work need to be cognizant of applicable anti-discrimination and anti-retaliation laws."

For example, remote employees who are in protected categories based on age, gender, national origin and so on or who have requested religious or disability-based accommodations could see any negative change to their pay as an adverse employment action.

Will It Last?

The trend toward remote work peaked quickly during the pandemic, but it is unclear whether current levels will continue. As a result, Adwin advised employers not to make long-term policy changes in the current talent market.

"Focus on how to handle pay in the near term," he said. "We don't know about the future, and remote work is new for many organizations." 

With many employers pushing employees to return to the office, current pay levels and policies may have to adjust once again.

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Articles:

Remote Workers Raise Wage and Hour Concerns, SHRM Online, June 2022

Lawsuits Put Spotlight on Paying Remote Workers' Expenses, SHRM Online, June 2022

Google's Salary Cuts for Remote Workers Renew Location-Based Pay Debate, SHRM Online, August 2021