Is Location-Based Pay Right for Your Company?Guides Future of Work Careers
Most companies set salaries to compete with other jobs in the area, but remote work raises the question: What, exactly, is “the area”?
Enter location-based salaries: scaling pay for remote workers based on where they live. Employees in areas with a high cost of living (COL) like New York City are paid a New York City living wage, while employees in rural Montana are paid a rural Montana living wage. Location-based salaries for remote workers are becoming more popular—but are they always a good idea? Let’s weigh some of the advantages and disadvantages as you determine whether location-based salaries are right for you and your company.
Why Go Location-Based?
This is not an easy question to answer, because not all remote employees are the same. Theoretically, remote work means employees can work from anywhere, be it a cruise ship in the Caribbean or an Antarctic research station. In reality, access to amenities can make or break a remote employee’s performance.
For example: Do your employees require access to fast, reliable, secure Wi-Fi? Do you need employees to live in a particular US time zone, to make calls, meetings, or customer service easier? Are many of your employees hybrid, mixing remote with on-site work? If you answer “yes” to these questions, you likely need salaries that match the COL where you need your employees to live.
But Aren’t Remote Workers Fleeing the Cities?
In a word, no. Many news outlets are running stories about US workers “fleeing the cities” and how remote work accelerates this trend. It’s true that salaries often go farther in rural and suburban areas with lower costs of living. And people enjoy suburban or rural life for many reasons, including more space (in houses and around them), more quiet, and more bang for their buck.
But don’t count the cities out just yet.
After all, where would America be without the bright lights of Broadway, the monuments and museums of Washington, DC, deep-dish Chicago pizza, and the Hollywood glam of Los Angeles? Worse for the loss, that’s for sure. And according to data from the Harvard University Joint Center for Housing Studies, people aged 25 to 44 still prefer city living.
This is where location-based salaries come in, providing a great incentive for the workers you’re trying to attract and keep who like urban life and want to enjoy its amenities at a comfortable salary.
Benefits of Hiring Employees in Lower COL Areas
Depending on your business, hiring employees from areas with lower costs of living might be part of your strategy. Will a location-based salary system unfairly disadvantage those who prefer to live in a more remote, low-COL area? Not exactly. In fact, if location-based salaries allow you to recruit from a geographically diverse pool in addition to managing your own costs, you may provide a great benefit to low-COL areas by investing in their communities.
Ever heard of “brain drain” in small towns, in regions like Southern Illinois, or even, historically, in entire countries that are struggling economically? Even highly qualified people find it challenging to secure full-time employment in towns or regions with long-term economic depression, so the next step is brain drain: Bright, highly motivated people decamp because “there are no jobs here.” Even though “no jobs” may be a hyperbole, it’s true enough to make great potential hires think that the only way to find good work is to look anywhere but here.
Many of these people don’t want to leave the area where they grew up, are heartbroken over having to live far away from their family and friends. Through a location-based salary system, employers who recruit from these areas provide a vital service—good jobs that allow people to stay in the places they love. Perhaps they’ll even become more popular living spots someday! Southern Illinois pink cookies, anyone?
The Downside(s) of Going Location-Based
There’s more than one downside. Location-based salaries can lead to your employees resenting their coworkers who earn higher salaries, not because their work is any better, but simply because of where they live. If your company thrives on teamwork and collaboration, that’s bad news. And if you have any employees who take advantage of geoarbitrage, you’re in danger of losing them if you make any changes to the salary system.
There are the two Ls at play here: logistics and legality. Before you jump on the location-based bandwagon, make sure the money you save doesn’t get eaten up by the costs associated with people working in multiple cities, states, or countries. In the United States, for example, health insurance, unemployment/workers’ compensation, and taxation vary by the state in which the employee lives.
Given that remote workers are free to move whenever they like, location-based compensation means you may have to grapple with not only readjusting employees’ salaries as they move, but also keeping up with the changing regulations for each location. The complexity is real here—so much so that entire companies (for instance, Remote.com, Workday, and Pilot) now operate to help you navigate payroll, benefits, compliance, and taxation issues across states and countries.
Are Location-Based Salaries the Right Idea for Your Business?
Some companies, like Google, would answer “yes.” Others, like Help Scout, would say “no thanks.” For Google, location-based salaries make better financial sense for its large, diversely located team of employees, but Help Scout found that rejecting location-based salaries fosters an internal culture of equality.
Your answer will depend on a variety of factors, including: Will location-based salaries allow you to recruit and retain more desirable employees, expand your talent pool outside your physical office location, and grow your company? How large is your company, and how likely are employees to resent working on a team with people who have the same responsibilities but a very different salary? Do you want to encourage a hybrid model for your employees, rather than 100 percent remote? Is it feasible for you to have a widely distributed workforce? Will the cost savings of location-based salaries exceed the legal and administrative costs of implementing them?
As you decide whether location-based salaries are right for your company, be sure to consider all your options and be aware of trends among others in your field. Weighing the pros and cons of this salary system will help you make the choice that’s right for you and your employees.