Paying Remote Employees: 3 Approaches to Remote Compensation Strategy

4 min read
May 21, 2020 9:22:00 AM

A global pandemic pushed many companies into remote work for the first time, and most found it was not as bad as they thought it would be. Sixty eight percent of people said they have been successful working from home, and 70 percent of leaders said that working from home is the same or better for their team’s work performance.

As the pandemic continues, it's clear that remote work is part of the new normal for many. Companies like Twitter, Square, and Coinbase have already announced permanent remote work for their team members. And, as remote work continues to be normalized, more companies are seeing the benefits of fully distributed or hybrid teams.

With this change, companies will need to formalize remote work policies and programs—including a strategy for paying remote employees. Here are some basic options to consider as you adapt your compensation strategy for a distributed workforce:

Option 1: Remote pay is based on a single market

Some believe that the fairest way to pay distributed employees is to use a single market to determine everyone’s compensation. There are no zones, and no regional differences—everyone gets paid the same rates regardless of where they’re located. It’s common to use the company’s headquarter (HQ) location for the market base, although some companies choose to use other markets. Though this practice is often lauded on social media, it’s rarely used. Nearly all companies who have multiple office locations use some sort of differentiated compensation strategy.

An offshoot from this approach creates a second zone, where employees at HQ are paid based on local market value, and remote employees are paid a certain percentage less. If you go this route, it’s a good idea to be transparent about this pay difference between employees at the company headquarters, and remote employees. People discuss pay at work, and you could lose employee trust if unexplained pay discrepancies come to light.

This is arguably the simplest approach to remote compensation, as you only need to create job grades and salary bands for a single market. If you’re just venturing out into hiring remote employees for the first time, it’s also an easy short-term retrofit. Just beware that if you offer top of the market rates now, you may not be able to realize immediate cost-savings when you switch to another remote pay method later. A remote employee living in Florida, but earning San Francisco rates, probably wouldn’t tolerate switching to their local market rate.

Option 2: Remote pay is grouped into zones

Companies with offices in several major metropolitan areas may already determine compensation by zone. For instance, Zone 1 would include employees in San Francisco and New York. Zone 2 would include those in Seattle, Austin, and Boston. And Zone 3 would include all other US-based employees. International companies may then add additional zones by country.

Remote employees would then be grouped according to the existing zones. For instance, a remote employee based in Los Angeles would likely be grouped into Zone 2. This method isn’t as precise as local-market compensation, and could result in compensation being over or under market value—but it’s also much lower maintenance. There’s also an added benefit that compensation will be more fair across regions with similar costs of living.

Once you set the zones, it’s relatively straightforward to determine remote employee compensation. Companies often apply a flat percentage increase or decrease to the region. For instance, Buffer benchmarks each employee’s pay to the San Francisco labor market. Then they apply a multiplier based on whether the employee lives somewhere with a high, average, or low cost of living.

Option 3: Remote pay is aligned with local-market compensation

Companies that want to be really precise will use local-market compensation to differentiate pay for employees in different locations. There are two ways that organizations can tackle this:

  1. Look up every permutation in a credible data source, market by market. Data sources can lag, so it’s a best practice to cross-reference your data with additional sources—including your talent acquisition team. This method can get you closer to precise local compensation, but it’s going to be time consuming.
  2. Use location factors that algorithmically determine compensation based on a base rate for the role (a la GitLab). 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 will earn $63,300. Final compensation may also account for performance, tenure, or other factors. This is much more granular than zones, so it’s more labor intensive to build and maintain—but also more precise.

This method can best ensure that you’re able to pay in accordance with your compensation strategy, in every market you hope to attract or retain talent. Paying too little could cause you to lose great talent. And paying too much would unnecessarily inflate your spending and cause employees to stick around for the wrong reasons.

Final thoughts on paying remote employees

As more companies adopt remote work, distributed teams will become more common as well. Brilliant talent can be found anywhere, and employers don’t need to be limited to talent only in their geographic locations.

But as we make this shift, it’s important to be clear and consistent about how you will pay remote employees. Embracing a distributed workforce may be a change in policy, and so your compensation philosophy must also adapt. Compensation is already complex for employees who work within the same office, and a remote workforce adds an additional layer of complexity. A thoughtful pay strategy for remote workers can ensure you make fair, consistent decisions that will help you attract and retain talent.

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