How to determine pay for your remote workers

April 19, 2021

In response to the onset of the global health crisis in the beginning of 2020, employers scrambled to implement impromptu remote working arrangements.

Now, a return to “normalcy” is on the horizon — but that doesn’t mean the world of remote work will be going away. Many organizations are now adopting the trend on a long-term basis.

What does this mean for HR professionals?

You probably heard several tech companies make bold statements early on, indicating they would be cutting base pay for employees no longer commuting to offices located in high-cost of living cities. In reality, only a relatively small number of companies have followed through.

This is likely because simply adjusting pay can have negative consequences and should be looked at in a broader context. Beyond base pay, you’ll need to consider the impact of remote work on the total rewards package and the overall employee value proposition.

A few questions come to mind:

  • Without a connection to a “workplace,” what is the employer offering its remote workers?
  • Do they need to replace some of the perks and conveniences that came from being in an office?
  • Does the convenience and flexibility of working from home make up for any value lost?

Depending on the organization, many of these questions likely will have different answers.

In order to think through different circumstances that could impact base pay and total rewards in your company, let’s start by examining the connection between pay and cost of labor.

Pay is based on cost of labor and salary surveys

We’ve said it before and we’ll say it again — pay is based on cost of labor, not cost of living. Any compensation professional will tell you that this discussion takes place several times a year with hiring managers, recruiters, and leaders of the company.

Why is it so important to understand? Consider the case of two employees.

Sue is a software engineer for XYZ company, headquartered on the Lower East Side of Manhattan in New York City. She lives in a one-room apartment two blocks from work and enjoys her daily walk to the office. She’s a high-performer and has been working with the company for 10 years.

Another high-performing software engineer, Linda, has been with the company for 15 years and decided several years ago that she wanted to live outside of the city. She moved two hours outside of Manhattan and commutes in on the train each day. Although it takes a lot of time out of her day, the spacious home and land she has in upstate New York that she enjoys on the weekends more than makes up for it.

Should Sue and Linda be paid differently?

If performance and contribution are equal, should one be paid a significantly different salary based on where they choose to live (and the commute that they find acceptable)? Historically, we would say no, they should not be paid differently. This is because the cost of labor is based on the work location they are both frequenting, Manhattan, versus where they choose to live.

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When using a national cut of salary survey data and adjusting for location, a geographic differential based on cost of labor is used to “localize” the data.

What happens if there’s no more “office”?

Which locale or geographic location should companies use to assess the cost of labor and determine pay for remote workers?

Think about Sue, who used to live in Manhattan. Her official “office” location is still tagged to Manhattan, but she has now moved to Indianapolis. There are a range of options for determining her pay moving forward.

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Determining whether a fully-remote job is best for your organization — or just for the individual employee — and understanding the related labor market are key to determining the approach you should take.

Ask yourself these questions:

  1. Going forward, do I need this job to be performed in a specific location or can the employee perform the job virtually from any location?
  2. If the job becomes virtual, will there be times when they are required to be in a particular location or office? How often would this occur and who should bear the cost? Will I require that employee to report to a particular office regularly (e.g., once a week)?
  3. If the current employee were to leave, would I want to hire someone closer to where I have an office or location?
  4. For this job, would I be better off conducting a nationwide search to improve my chances of finding the employee I need from a more diversified candidate pool?

Answering these questions for each job will help you determine whether you have a national or regional/local labor market.

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After identifying which jobs have a national or local/regional labor market, you would then proceed to establish your pay ranges using national salary surveys, local/regional salary surveys, and typically some source of geographic differential to adjust national data when local data are not available.

Of course, it’s best to have salary surveys that reflect both general industry and your particular industry.

Depending on how your workforce and locations are distributed throughout the nation, you may simply be able to reassign someone to a new location.

For example, if an employee used to work in the San Francisco office, but now lives in Miami, they could simply be assigned to the Miami office (assuming you have one). The employee will occasionally be expected to be in the office and will be paid using the same structure applied to everyone else in the Miami office.

Of course, this makes sense if they have some location-specific responsibilities — without those, you’d still need to consider whether the job should truly be considered a “national” role.

After you have identified which jobs are able to be fully-remote and which jobs require the employee to be in the office, it is also important that you review your policies to ensure they have been applied consistently across the organization. Are your policies based on the jobs themselves or on manager preferences?

Who pays for the remote office?

If you have agreed that an employee can successfully work remotely, as their employer, who would typically provide a work location, desk, internet, office supplies, etc., what are you now obligated to pay for or reimburse?

The answer is, as little or as much as you would like to provide.

In the COVID-19 surveys conducted by Mercer in 2020, we found that as of June, only about half said they assisted with working expenses.

However, as it became clear that the pandemic and working from home would be a longer term thing, when asked the same question in September 2020, two-thirds of respondents indicated they had provided either equipment or reimbursement for equipment, office furniture, and even internet expenses.

Is it necessary to do so?

With the offset in reduced expenses people have experienced — no more commuting, reduced childcare costs, etc. — maybe not. But some companies have chosen to do so in order to ease the transition for employees and minimize barriers that would impact productivity.

Is this something that would make sense for your organization’s culture and the employee value proposition you have in place?

It’s something to consider.

And to make sure you have a full picture of the impact on both your company and your employees, that decision would, of course, need to be weighed against any changes you are making to your base pay strategy.

There’s no “right” answer

Every organization is different, but with these considerations, you will be able to start assessing your jobs and determining the right path forward. In the current landscape, getting pay right is as critical as ever. When you need us, Mercer is here to help.

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About the Authors

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Tauseef Rahman, Partner
Tauseef is a partner at Mercer and is based in San Francisco. He consults organizations on a range of workforce strategy and analytics issues, and on the business impact of the changing nature of work.

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Molly Leeds, Principal
Molly is a principal with Mercer’s career business in Los Angeles. While at Mercer, Molly has worked on a variety of projects in the rewards and talent management space with a specialization in career frameworks and rewards strateg