Should Remote Workers Who Relocate Be Paid Less?

Roy Maurer By Roy Maurer November 17, 2020
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​New complexities have arisen from the evolving shift to remote work, and one of the most contentious centers around pay. As more organizations embrace a work-from-anywhere model, some employees are deciding to relocate from expensive cities like San Francisco and New York to more affordable parts of the country. Some employers are considering paying them less.

"With [full-time] remote work projected to rise up to 30 percent by 2021, some organizations are openly talking about adjusting salaries for employees who want to work remotely to align with the cost of labor at their location," said Shelly Holt, chief people officer at compensation software provider PayScale.

Many on the management side of the debate say that this policy just makes sense. Employees who move out of expensive cities or regions to less-expensive areas are not likely to find a local job that pays their previous salary.   

Sources at software company VMware told Bloomberg that an employee who moves from the Palo Alto, Calif., headquarters to Denver, for example, will see an 18 percent reduction in pay, and even moving within the state to Los Angeles or San Diego would result in a pay cut of 8 percent.

Adjusting pay based on local costs is also the policy at software provider GitLab, a leading example of an all-remote workforce. Facebook and Twitter have said that they will cut the pay of workers who choose to relocate away from their headquarters offices in the San Francisco Bay area, while Reddit announced that it will not cut the pay of its relocating staff. Other companies plan to provide an initial relocation stipend and then cut pay.

"Whether people think it's right or not, it's something that will be market-driven," said Tim Sackett, SHRM-SCP, president of HRU Technical Resources, an engineering and design staffing firm based in Lansing, Mich. "In a profit-making business, you can't overpay people when you don't have to. People have to understand that they are not just hired to do a job, they're hired to do a job in a certain market. Even if companies don't initially drop anyone's salary, eventually the market dynamics will play out and the salaries will come down."

Cost of Labor Model Predominates

Most employers pay local rates of compensation based on the cost of labor. "Cost of labor is determined by the supply and demand of labor across all industries and occupations by geographic location," said Linda Cox, a global total rewards expert and compensation project manager at the Economic Research Institute, based in Irvine, Calif. "It represents the cost to hire and retain people in that location." U.S. merit increases are also based on the cost of labor and commonly reflect the external labor market based on what other companies plan for their annual pay increases, she said.

Holt pointed out that paying workers by location doesn't mean that all employees who work remotely will be paid less than those who don't. The job itself is key, and software developers in Omaha, Neb., will still be highly compensated and be among the highest-paid workers in the area, whether they're remote or not.

In addition, a significant share of workers may view a pay cut as worth it to live wherever they want to and with an improved work/life balance. A September survey by Blind, an anonymous platform for employees, found that 44 percent of 5,500 workers would be open to a pay cut if moving to a city with a lower cost of living. Another Blind survey found that 70 percent of tech workers said they can't afford to buy a house in the San Francisco Bay area.

Simran Oberoi, a compensation and rewards consultant based in Bangalore, India, said other surveys show the opposite sentiment—that workers "are not keen to take pay cuts" since they believe their performance has not been compromised due to working remotely. "For the past year, most tech companies have been working remotely and performing better than usual," she said. "Having demonstrated increased productivity, workers are now questioning the validity and fairness of having to undergo a pay cut for not living in the same city as headquarters."

Oberoi cited arguments she's heard from workers who say that the traditional method for calculating compensation is becoming obsolete as more workers take on distributed, remote roles and that an employee's labor provides the same value regardless of working location.

"A big emerging issue is the possibility of internal inequity across the same role—a pay differential for the same responsibilities because of an employee's location," she said.

For those employers that decide to pay by employee location, the process for adjusting compensation for relocating workers needs to be fair and consistent, Holt said.

Another challenge is communicating this approach. "Lowering pay is a hard conversation that can lead to turnover, even if your strategy is fair and consistently applied," she said. "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."

It's more common to freeze pay than cut it, Holt said, telling employees they are no longer eligible for raises because they are at the top of their pay range for their location.

Sackett said if employers do decide to reduce salaries, the decision-making should be transparent. "If the decision is based on solely finding cheaper talent, that's going to be a hard message to deliver," he said. "But if there's real financial concerns driving the decision, that may be better received."

Determining Compensation Strategy

Holt said that, when deciding on the right approach, employers should consider whether some skills are always competitive regardless of location. "People with hard-to-find, business-critical skills may be able to demand compensation that aligns to the most competitive markets regardless of where that person resides," she said. "In a post-COVID world where remote work becomes ubiquitous, we might see organizations adopt multiple compensation strategies aligned to different talent groups that require a different approach. For specialized talent that is hard to find, such as engineers or data scientists, you might pay a high, competitive wage regardless of location. For customer-service positions for which there might be lots of diverse talent in different markets, you might choose to pay by location and target areas with a lower cost of living."

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