Geographic pay policies that set and adjust pay for far-flung workers based on local compensation factors, such as cost of labor and cost of living rates, are becoming more common among employers, new research shows.
With 67 percent of employees expecting their compensation to reflect their location, geographic pay has become a pressing issue for employers, according to WorldatWork's Geographic Pay Policies Study, based on a February survey with responses from 1,063 organizations and 503 employees.
"Work is no longer a place," said Scott Cawood, CEO of WorldatWork, an association of total rewards professionals. "With remote working requests continuing to emerge and surprise leaders, companies are re-evaluating how to create cohesive, consistent and fair geographic pay policies."
Of the 62 percent of organizations with existing geographic pay policies, 44 percent are considering modifying or have recently modified their policies due to the increase of full-time remote work, the survey found. Among other results:
- The top two considerations for organizations addressing localized compensation are expanding (38 percent) or consolidating (20 percent) pay differentials by geographic area.
- The more locations an organization has, the more likely it is to consider creating a U.S. geographic pay policy, especially as full-time remote work rises.
- 41 percent of organizations apply pay differentials as a premium/discount to either a jobs-based pay structure or to individual pay, and 33 percent create separate base pay structures for each different geographic location where employees are working.
Localized Pay Factors
Over half (55 percent) of organizations use city/metro areas for setting geographical pay differences. Cost of labor is overwhelmingly a greater influence than cost of living for determining the pay policy approach, employers said.
Almost all organizations are somewhat or moderately flexible regarding voluntary relocations for full-time remote workers. As for their employees, 50 percent say that a pay adjustment—either higher or lower—would be very or extremely influential in their decision to voluntarily relocate.
A determining factor for many employers will be if pay localization policies affect retention. Remote work, which "used to only be an occasional issue is now a frequent request, and savvy employers will need to respond with fair, transparent and attractive geographic pay policies for distributed workforces if they wish to remain competitive," Cawood said.
Location-Based Pay: Another View
Executive compensation advisory firm Pearl Meyer's Work from Home Policies and Practices survey, conducted in February and March 2021 with participation from 349 companies, showed that:
- 33 percent of responding companies' total U.S.-based workforces will work remote post-pandemic.
- More than 80 percent of companies noted their organization's shift to remote work during the pandemic had been successful.
- Nearly 40 percent reported an increase in productivity with a remote workforce.
Perhaps recognizing an opportunity for cost savings, 36 percent of surveyed organizations have made the decision to reduce the number or size of their offices or facilities.
"One of the more interesting HR questions behind the mass move to working remotely has been whether or not companies would change geographic-based salary structures," said Bill Dixon, managing director at Pearl Meyer and lead for the survey. "We know there's been some level of worker migration from high cost-of-living areas to lower-cost markets, yet it appears that the number of companies that are considering changes to an individual's salary as a result is fairly small."
One third of survey respondents currently apply "geographic differentials" to their salary structure and of those, 20 percent are considering modifications to their current approach.
When asked about reducing an individual's cash compensation if they move to a lower-cost geographic area and work from home, just 4.3 percent said they would do so, while 56.5 percent said they would not, and the balance were uncertain or would decide on a case-by-case basis.
"At this juncture, when companies are allowing—or encouraging—remote work and it is going well, it appears there is some hesitancy to disrupt the talent pool," said Dixon.
Limits on Adjustments
While more companies are adopting geographical pay policies, the extent to which pay rates will vary by location is unclear.
Silicon Valley tech firms that adjust pay for those who moved out of the San Francisco Bay Area, for instance, make smaller downward adjustments than might be expected, Tauseef Rahman, a partner at HR consultancy Mercer in San Francisco, observed last year.
"National data would suggest that a job paid $100,000 in San Francisco would be paid about 13 percent less in Puget Sound" in Washington state, he noted. "However, our research indicates that the current pay differential is smaller—closer to 6 percent less. So instead of expecting a $13,000 pay cut, the hypothetical reduction would be closer to $6,000."
Rahman concluded, "The tech job market will soon be national, and 'local market rates' will be replaced by some variant of 'Silicon Valley tech rates less 10 percent.' " In the end, "candidate pools and pay will be less about city address and more about availability and capability."
Much less certain, however, is whether the trend among big tech companies toward a national labor market, give or take 10 percent of pay, will be repeated by industries where competition for talent is less severe.
The desire to keep pay policies simple could be a factor here. "Multinational companies are already well-versed in the practice of differential pay policies at a global scale," wrote Brett Christie, managing editor of WorldatWork's Workspan Daily. However, for companies with offices exclusively in the U.S., "the prospect of overhauling pay structures to account for geographic differences might seem daunting."
Employees Don't Want a Pay Cut When Relocating
(with an Exception)
Craftjet, a company that connects local home service professionals with homeowners, recently asked if employers should adjust salaries down—making a locality adjustment—when an employee moves from a more expensive area to a less expensive one.
The answer from workers was a resounding no—87 percent believe they should be paid the same amount they're currently being paid, no matter where they move.
However, when people were asked what pay cut they would take to relocate to their ideal spot, most Americans (83 percent) would take a 10 to 20 percent pay cut to make that move, with 60 percent saying 10 percent would be the maximum they would tolerate.
The survey was conducted March 29 to April 9, with 2,888 respondents, including 50 to 150 residents in each of 24 major American cities. Respondents' average age was 38 years old.
Among other survey responses:
- When asked if they would move if given the opportunity to work permanently remote, most Americans living in cities (61 percent) said yes. Many of the most expensive and densely populated cities contained the highest percentages of people looking for a change.
- Of those who would leave their current city, when asked what reasons would most compel a move, desire for a bigger, better home and lower cost of living were the top reasons cited, followed by desire for more access to nature and being closer to family and friends.
Related SHRM Articles:
Rethinking Employee Benefits for Permanently Remote Workers, SHRM Online, May 2021
Employees Working Out-of-State Often Fail to Let HR Know, SHRM Online, February 2021
Should Remote Workers Living in Lower-Cost Locations Be Paid Less?, SHRM Online, July 2020