How Will Companies Going Remote Affect Salaries?
The Covid-19 pandemic has seen the majority of those that previously worked in offices working remotely. This has led to the realization that employees can do their jobs just as well, if not better from home. This in turn has led to many businesses deciding to have employees work from home permanently.
This move to a remote work model has opened up a discussion about how companies going remote will affect salaries.
Working from home allows employees to work from anywhere in the country. In doing this, employees may benefit from a lower cost of living and lower income tax rates while making a salary that was intended for employees living in areas with a higher cost of living. Due to this, some companies believe salaries should be adjusted as employees move around the country to live and work.
However, this type of pay structure brings challenges as well as benefits for all those involved.
Continue reading to learn how companies going remote will affect salaries and the pro and cons that could be faced by employers looking to use location-based salaries.
The Current State of Remote Work and Salaries
The pandemic has accelerated the trend of working from home with the majority of office employees shifting to work remotely. For many, this has been a positive experience and has started a conversation about whether the move to remote will be permanent.
Tech firms are leading the way in making remote work permanent for all employees. Many of these companies offered remote options and flexible schedules before the pandemic. This move to full-time remote working has been accelerated by the pandemic.
The permanent move to remote working by tech companies has led to a discussion about salaries and if they should be adjusted according to where remote workers are based. Facebook, Twitter, and Slack, among others, have said they will decrease pay for those working in areas with a lower cost of living than in their pricey Silicon Valley head office location.
On the other hand, Reddit is one company that has said they’ll not alter salary no matter where employees choose to work from.
Only time will tell how companies going remote will affect salaries. However, estimates suggest that salaries could be lowered by up to 20%. An average of a 10% reduction in salary being forecast.
Many companies may also see a move to flexible schedules where employees work part-time in-office and part-time at home. This model is unlikely to allow for relocation, eliminating the discussion of adjusting salaries.
A move to remote work could see salaries drop by up to 20%.
What Determines a Salary?
Many factors determine an employee’s final salary, including:
Skill level and experience
The difficulty level of the job
Talent demand vs. supply
Industry averages
Location
The location element of salary has historically been based on the job’s office location and the need for employees to live within commuting distance of that.
Cost of Living and Cost of Living Adjustments
Salaries are often set and increased based on the cost of living and cost of living adjustments. As living expenses, inflation, and income tax levels rise in the area an office is located, employees get raises to help keep up with these increased expenses.
With employees moving to a fully remote work setup, this element of salary and salary adjustments has moved into a grey area.
Should these adjustments remain based on the cost of living in the area that the company is headquartered? Or, should they be made based on where employees work from? And if that’s the case, could employees move to an area with a higher cost of living and see their salary increase?
Will Companies Going Remote Affect Salaries?
As discussed, some companies are already moving to the use of location-based salaries. Whether more companies move to this salary model depends on many factors.
The following are some reasons for changing salaries based on where employees work and challenges that may come with doing so.
Reasons for Using Location Based Salaries
The following are reasons why some companies may wish to move to location-based salaries.
To Level the Playing Field
Using location-based salaries is a good idea for companies that had offices in multiple locations but now allow everyone to work remotely. In this case, those that had been working at the offices in cities with a high cost of living will have likely been making more than their counterparts in less expensive areas.
Now that everyone can work from anywhere, why should location-based differences be present?
To avoid legal issues, companies could fix this by increasing the salaries of those in the lower cost of living areas to meet the salaries of their counterparts from more expensive cities.
Employee Savings
One way to justify lowering employee salaries when they work remotely is that employees have significant savings when working from home.
Employees save on the cost of commuting. For some, this is a significant monthly expense. However, some spend very little or nothing on commuting. Those employees could be resentful at being told they are getting paid less because of savings they are not realizing.
Of course, you’ll have to also think about at-home expenses like the cost of utilities and updating spaces for working from home. If the company does not cover these expenses, then savings from working at home will be minimal.
The ability to relocate may see savings from lower income tax rates and cost of living. These savings will also not be consistent across all employees, so a detailed plan will be needed in relation to adjusting salaries based on the cost of living and tax savings.
One way to justify lowering employee salaries is by highlighting the savings achieved when working remotely.
Challenges with Using Location-Based Salaries
On paper, the idea of adjusting salaries based on where employees live and work seems to make sense. But this approach is not as simple as it may seem.
When discussing how going remote will affect salaries, the following are some challenges that could arise when adjusting salary based on employee location.
Legal Concerns
There are some legal issues to keep in mind before thinking about lowering certain employees’ salaries. Drops in pay always need to be justified and cannot be discriminatory.
Management and HR will need to look at contracts and the legalities around the stated salary. It's unlikely that you'll be able to lower anyone's salary just based on the fact that they relocated.
Instead, you may need to give employees living in areas with higher costs of living a raise. Or, you could decide to not adjust the salaries of current employees and move to the location-based model for new hires.
You’ll also need a very clear outline of what will happen if employees relocate. Which areas will trigger a drop in salary and by how much? Will those moving to areas with a higher cost of living see a raise, and by how much? These rules will need to be written into new contracts.
Competitors
Of course, you’ll still be competing with other companies both for new talent and to keep your current employees. Remember, that you may lose some employees and some great candidates based on your choices regarding salaries.
You also need to consider demand for your employees in the areas they’ve relocated to. Yes, the cost of living may be lower where one employee lives and works from. But there could be a high demand for their talent in that area.
This means that they could be offered a higher salary by companies in the area because supply of the talent they possess is low. If you offer less than those companies are willing to offer, the employee may decide to take another job that allows them to stay where they are with better pay.
The Element of Choice
Once full-time remote working is in place for all employees, where an employee chooses to live and work is a choice. Certain employees will decide to stay in the area they lived in when working at the office. Others will move to areas with lower costs of living.
The option each employee chooses is their choice, and every other employee could technically make the same choice. So, some will ask why those that choose to relocate to a more affordable area should be punished for that?
On the other hand, would those that move to an area with a higher cost of living be given a higher salary? Probably not.
On a similar note, if each employee can choose whether they want to work at home or in the office, why should those that choose the remote option be punished with decreased pay?
The only time this would not be the case is if certain employees are made to stay in the office (and therefore have to live nearby), while others are allowed to work from anywhere. This removes that element of choice for some, which could trigger differences in salaries between those in-office and those working remotely.
Keep competitors in mind. If you drop an employee’s salary and a competitor offers what they used to make, the employee will likely leave.
Effect on Employee Motivation and Satisfaction
Doing the same job as other employees but with a lower salary can be demoralizing. You may even find that employees living in an area with a lower cost of living offer more value than counterparts in more expensive cities. You’ll need to ensure you’re still offering value-based raises to recognize this.
Even with reasoning being offered by the employer, lowing salaries will not be taken well. Employees facing a reduced salary will likely fight this and even look for a new job as a result.
If it’s likely that they’ll be able to find a new job that matches their old salary and allows them to work in their chosen location, you’ll lose that employee.
Even if salaries stay the same but you give different raises based on location, this can cause issues if employees find out what others are making.
Changes in Cost of Living Over Time
If more and more people choose to work remotely and move out of big cities, changes to cost of living across the country will be seen.
For example, increased demand for housing and services in more rural areas will see the cost of living increase. A decreased demand for those things in cities could see the cost of the living drop in urban areas.
Therefore, if location-based salaries are being used, employers would eventually need to be increasing the salaries of those that moved to what were more affordable areas.
Lowering employee salaries or not giving raises to employees that move can be demotivating and could cause employees to quit.
Setting Up Pay Guidelines
There are four options for adjusting salaries after a move to remote working:
Set all salaries in line with the cost of living in the area that the company is headquartered in.
Set salaries based on where the employee lives and works from.
Set all salaries using national averages.
Leave salaries as they are and use current salaries as a guideline for new employees.
If using option two - location-based salaries, you’ll need clear guidelines of which areas offer what salaries. Employees need to know in advance how relocating may affect their salary.
You’ll need to think about where salary decreases begin. Will salary changes be initiated when an employee moves state? Or would a move from another city in the same state trigger the salary change too? For example, could someone moving from San Francisco to San Diego potentially see their salary decrease as a result of that move?
These guidelines will need to be written into each employee’s contract to avoid legal issues if a salary decrease is initiated.
In Conclusion
It is still unclear how companies going remote will affect salaries. However, before companies decide on this, they will need to look at a range of factors. These include considering legal issues, employee motivation, and what your competitors are doing.
Ultimately, the choice you make could result in the loss of talent, so be sure to think about the best way to adjust salaries before implementing a new pay model.