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For many of the employers and employees in the US and Canada, remote work is in some way a permanent part of the new shape of work.
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. Google, for example will be reducing employee pay to the local market rate based on their home location. Spotify and Reddit are moving to a location agnostic approach and implementing a single pay structure that is based on their high-cost areas such as San Francisco and New York.
Outside of tech, organizations have been slow to adjust their pay strategy, though climbing inflation, as seen in the consumer price index, is reinvigorating the conversation. However, simply adjusting pay can have a variety of impacts beyond labor cost and should be looked at in a broader context. For employees, base salary is increasingly less of a determining factor in the value proposition when they consider job offers. Though, between you and me, it's only not important until it's too low — paying competitively will always be important.
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 cost of living vs cost of labor? Though remote work has become part of the norm, the reasoning still remains the same.
Let's 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.
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.
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.
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:
Answering these questions for each job will help you determine whether you have a national or regional/local labor market.
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.
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.
While employees are quick to point to the need for employers to align pay increases with the current inflation rate and cost of living, employers recognize the difficulty that would pose. Further, this request highlights the need for increased transparency and communication around pay. Employees need to better understand how pay is determined and the importance the role of supply and demand of labor plays.
Today’s market does require employers to react to the pressure on their recruitment and retention strategies. Aside from increasing communication and education for managers and employees alike, other possible steps could include:
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.
Mercer is here to help. Contact us via email or by calling 855-286-5302.
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.
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 strategies.