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How to Pay Remote Employees

Jen Dewar
Oct 15, 2020 11:07:54 AM

Remote work is becoming a permanent fixture at many companies in the wake of COVID-19, leaving many wondering how to pay remote employees. And the sooner they can figure it out, the better—many workers are already considering relocating to areas with lower costs of living. If your company might reduce pay in those circumstances, you should let employees know before they make those decisions.

Common approaches to remote pay

It’s important to be clear and consistent around how you pay employees, and a formal compensation strategy with pay ranges can help. But what market will dictate the upper and lower end of those pay ranges? Begin by considering these basic approaches to remote compensation:

  1. Global rate: Remote pay is based on a single market, which may be your headquarter location or another market of your choosing.
  2. Zones: Remote pay is grouped into a small number of zones, and employees are assigned to the zone that most closely aligns with their local cost of market.
  3. Local rate: Remote pay is based on the cost of market where each employee is located.

Deciding which approach to take

There are pros and cons to each remote compensation strategy. Here are some things to consider as you make the choice for your company:

  • Current compensation strategy: If you already have employees working in different geographic areas, which approach are you taking? Is that approach working for you now, and will it work with your future growth plans?
  • Current relocation policy: Does your company already have a relocation policy? Again, is it working for you now, and will it be sustainable if you have a significant increase in relocations?
  • Team sentiment: How might a change in remote compensation affect your company? What do employees think about remote work as it relates to compensation?
  • Competition for talent: Do you face high competition for talent? Would you face high competition for talent if you could hire people from anywhere? What approach are your competitors taking?
  • Budget: How will your remote compensation strategy affect your budget long-term?
  • Administration: What approach can you realistically administer? What additional resources would you need for the approach you’d like to take?

This is a pivotal time in remote work, making it the ideal opportunity to set your long-term remote compensation strategy. While you can certainly change your strategy in the future, it will likely be more challenging than doing it at this current turning point.

Local market compensation is the norm

Some companies have good reasons for choosing a global rate or zones, but most companies have used local market compensation to manage multiple locations even before the shift to remote. Those companies are typically expanding that approach as more employees shift to remote work. Local market compensation is the most precise way to pay employees, and ensures that you’re using your compensation budget strategically.

Local market compensation was relatively straightforward to do when employees were associated with an office location, but it becomes more complex to manage as employees transition to remote work.

There are two main ways companies approach local-market compensation:

  1. Look up every permutation: Use 2-3 credible data sources and input the required information for each employee. Multi-sourcing your compensation data can help validate your data.
  2. Use a formula: A formula can help make local market compensation more scalable. Rather than looking up each permutation, you would look up a single market as a benchmark and multiply it by a location factor. For instance, if a job pays $100,000 in San Francisco, and the employee is in Peoria with a location factor of 0.633, that employee would earn $63,300.

See how GitLab uses a formula to manage remote compensation at scale.

Mitigating the downsides of switching to local market compensation

Compensation is highly personal, and there are a lot of opinions about potential pay cuts employees would face if they relocated somewhere with a lower cost of living. Understandably, employers are worried about losing the teams they’ve worked so hard to build.

But one study showed that 32 percent of working professionals would consider relocating with a paycut, if given the opportunity to work remotely as much as they would like. Another study showed that 24 percent of US employees would take a pay cut of up to 10 percent to work remotely. Many employees would have no problem with a pay adjustment related to relocation, and many others simply wouldn’t relocate if a change in salary were on the table. Still, there are some ways you could mitigate other downsides to switching to local market compensation:

  1. Communicate early, and often: Commit to local market compensation, and give your employees plenty of notice about what will change, and when. For instance, Facebook gave employees about six months notice when they announced that employees who relocate would be subject to local market compensation. This gives employees more complete information before they make major life decisions. Offer to speak with each employee individually so they can get a better understanding of how their salary might change if they relocate.
  2. Offer promotions where they are due: Some employees may be eligible to relocate with their current salary if a promotion bumps them up into a higher salary range for their new market. Discuss this option with eligible employees so they’re aware of their options.
  3. Make pay equity adjustments as people relocate: Similarly, you may find that some employees are underpaid for their current market. You may find it best to forego a salary change if they relocate to an area with a lower cost of living, due to a pay equity adjustment.
  4. Stock refreshers: If your company offers stock options as part of your compensation package, a well-timed stock refresher could reward your long-term employees and incentivize them to stay—even with a lower salary.
  5. Relocation bonus: Some companies are offering a one-time relocation bonus to employees. For instance, Stripe is offering $20,000 to employees who relocate to less expensive cities. This can help offset the change in salary for the first year, and cover relocation expenses.

Managing the complexities of remote compensation

Compensation in itself is complex, but remote compensation can bring added challenges. You may have to set up new tax IDs and become familiar with new state and local laws, among other things. You can better manage the complexities of remote compensation by:

  • Partnering with a PEO: A Professional Employer Organization can assume the role of employer for your remote employees, handling your human resources tasks—including payroll. This can be a great option for small and medium sized businesses.
  • Increasing HR headcount: Larger companies often have a dedicated compensation specialist—if not a team of specialists—to set and regularly reevaluate employee compensation.
  • Utilizing compensation management software: Spreadsheets can only get you so far. Sophisticated compensation management software can help you better manage and communicate the complexities of compensation for your distributed workforce.
  • Transitioning remote employees to contractors: You may consider converting employees to contractors if you don’t have the structure to support employees in a given location. GitLab does this, applying a “contract factor” of 1.17 to their market benchmark to help cover things like health insurance costs and social security taxes. So an employee earning $100,000 would earn $117,000 as a contractor.

Final thoughts on how to pay remote employees

There has been some negative press around companies adjusting to local market pay as employees relocate—but that’s the way things have always been done. Companies don’t pay the same for an employee at the San Francisco office as they do for an employee in the Atlanta office—even if they have the same role. When employees relocate to another office, their pay is adjusted to the local cost of market. Now we’re applying that concept to remote employees.

It’s ultimately up to you to decide how to pay remote employees, and it should be left to the employee to decide if they want to relocate. But make sure they have the facts they need to make an informed decision. Communication is key to any compensation strategy.

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