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Just like all parts of the employee value proposition, the dialogue around compensation continues to evolve. We’ve seen a push for greater pay transparency and pay equity to support Diversity, Equity, and Inclusion (DEI). Organizations are either grappling with managing pay in a work from anywhere world or figuring out how to encourage a return to the office to foster a culture of collaboration.
In addition, concerns over rising inflation are driving up pay expectations. With incredibly high turnover, job vacancies, and quit rates, employees feel empowered to ask their employers for more.
We know that cost of labor remains the prevailing determining factor when it comes to setting base pay. However, organizations may need to consider innovative ways to create flexibility in pay in response to this incredibly dynamic labor market and economy. Could it be time for North American organizations to consider mirroring the already entrenched practices of using allowances in addition to base pay?
Allowances are not new in North America, they are just not common. In other countries, employee pay takes into account more than just pay for the particular job, where base salary is one of several guaranteed pay items. For example, in Mexico, it is common to see a food coupon allowances on a compensation statement. In the Philippines, you might see a medical allowance or meal allowance. Transportation allowances are common in Brazil. These allowances target specific needs, transparently, and are not tied to the cost of labor in a given location like base pay.
If we view the examples above as inspiration for change in North America, here are some examples of allowances employers might consider:
Commuting Allowance – For organizations that are encouraging a return to office, transportation allowances, which includes public transportation vouchers, can offset a significant cost for employees. Organizations can cover or further offset the cost of the public transportation pass, provide a monthly allowance to offset the cost of gas, or provide shuttles/buses to employees. Oftentimes, this type of allowance can be delivered on a pre-tax basis. Around 22% of organizations provide subsidized public transportation.
Meal Allowance – Meal allowances for in-office days can be a valuable perk for employees. Certain industries in North America provide a variation of this benefit – e.g., tech companies that have an on-site chef. However, it may not be feasible for most organizations due to cost or access to kitchen facilities, but a meal allowance as a component of pay can serve a similar purpose. Around 20% of organizations provide subsidized meals to their employees.
Remote Work Allowance – Remote work for all or part of the workweek is now common in many organizations. In fact, around 3 of 4 organizations are considering or offering the ability to work from home to better engage Generation Z and millennial employees.1 To better support these employees, some organizations are providing a remote work allowance or home office set-up allowance to cover or offset the cost of a work station set-up, internet fees, and general office supplies.
Cost of Living Allowance – For organizations trying to find the balance in hybrid working in high-cost areas, is it time to consider an allowance for cost of living? Employers who want to foster an in-office environment for collaboration and culture must pay employees accordingly. To protect equity for employees regardless of whether they work remotely or in-office, the base pay amount would continue to be determined by cost of labor for a given role. Then, for employees who are required or encouraged to live in a high-cost area for in-office work, an allowance can be provided to offset the high cost of living. This could be either a one-time allowance or a regular allowance updated annually to account for inflation or even cost efficiencies (i.e., cost of housing decreases). The allowance would not cover the full cost of living, but rather offset the amount of additional cost of living compared to a baseline, such as the US average.
As the world of work continues to evolve, it’s important for organizations to remain competitive, agile, and purposeful in their approach to compensation philosophy. What are some things that your organization is doing or considering?
Ann Marie Trepkowski is a Workforce Mobility Consultant within Mercer’s North American Career Practice.
MinJi Suh is a Rewards, Talent Strategy, and DE&I Consultant, based out of Mercer’s Career Practice in Chicago. In addition to her consulting experience, she served on a 14-month secondment with the World Economic Forum through Mercer, working on an initiative related to gender equity.