The pros and cons of paying employees for what they do, rather than where they are based. 

As we’ve discovered over the past two years, you can do a range of knowledge worker roles effectively and efficiently from nearly anywhere with a decent Internet connection. This raises the question of what the fairest, most competitive and transparent way is for a company to compensate employees who live in cities and countries with yawning differences in their cost of living.

As many companies have already discovered, there are no easy answers to that question. On the one hand, the opportunity to reduce operating costs is part of the appeal of a remote working model for many companies. Along with downsizing offices in expensive locations, some organisations see benefit in reducing their payroll costs via pay cuts for people living in cheaper towns and cities—a move that is seldom popular with the affected employees.

Others are using pay cuts to gently discourage employees from leaving expensive cities and working remotely from a more peaceful, lower cost location. Take Google and Facebook, for example. Last year, they were both sharply criticised for plans to adjust salaries downwards for remote employees in locations with lower costs of living.

Attracting talent 

On the other hand, there are companies who are championing a shift away from location-based pay as a fairer means of remuneration as well as a powerful tool for attracting and retaining talent. Perhaps one of the larger enterprises in this group is US online real-estate company, Zillow. In words of its Chief People Officer, Dan Spaulding:

“When you work for Zillow, your long-term earning potential is determined by how you perform, and will not be limited by where you live.”

Apart from Zillow, many of the companies that have embraced this philosophy tend to be smaller startups that are hungry for the best technical talent they can find—examples are Basecamp, Daily and Gumroad. Yet advocates like Spaulding believe that the practice of paying people the same for an identical job spec, regardless of where they are in the world, will become commonplace.

Reducing inequalities or maybe not

There are pros and cons for both employers and employees in severing the relationship between location and employee payment.

On the upside, it could help reduce regional inequalities by bringing opportunities to people living outside of the big cities. It could improve morale in remote teams because everyone feels that they’re being paid what they’re worth. And it can tip the scales in a company’s favour when competing for the best talent.

However, there are also some minuses that need to be taken into account. Employees who have settled in more expensive locations to be near a workplace may feel aggrieved if they earn the same as colleagues who were able to move to cheaper places. Smaller local businesses could be priced out of the talent market by large companies with deep pockets. And over time, flattening salaries to a universal standard could ultimately cause salaries to drop for everyone.

The many nuances of this debate may not be settled for years. In the interim, each company needs to tailor its compensation strategy to its talent requirements and culture. Above all, the pay and rewards strategy should be fair and transparent—not just to remote knowledge workers, but also to those who cannot or do not want to work remotely.

References:

https://www.charthop.com/blog/best-practices/location-based-salaries-value-based-salaries/

https://blog.remotive.io/location-agnostic-pay-companies/