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Retrofitting a Remote Compensation Strategy

Jen Dewar
May 27, 2020 1:09:04 PM

For many companies, remote work is here to stay. Twitter, Facebook, and Shopify, among others, have announced their plans to expand remote work, or even adapt to a remote-first company. This shift may require companies to change the way they’ve traditionally done things—including compensation.

There are a few basic approaches to paying remote employees, from using a single market to determine everyone’s compensation, to setting compensation by zone or local-market. But retrofitting a remote compensation strategy for your existing employees can get complicated if your decisions could change the way they’re compensated. Here are a few ways you can ease the remote work transition for your team.

Option 1: Keep everything the same forever

If you’ve decided to base everyone’s pay on a single market, retrofitting for remote work is very straightforward. Compensation would be based on the same job grades and salary bands you’re already using—whether employees work in the office or remotely.

Some companies choose this route because they consider it to be the most fair. Afterall, if employees are making the same contribution, shouldn’t they be paid the same amount? On the flip side, other companies find this practice grossly unfair. If you have a remote employee in San Francisco and another in Wichita earning the same salary, the one in Kansas will have significantly more discretionary income. Not to mention, payroll costs would likely be inflated quite a bit.

If you decide to go this route, be forewarned that it would be challenging to change your policy at a later date. If you have plans to scale, bring your company public, or get acquired, this cost-heavy approach may not bode well. But changing this approach at a later date may mean salary cuts for many employees in areas with a lower cost of living, which could lead to some very unhappy employees. Think very carefully about how taking this approach would play out long-term, and if it’s the best solution for your company.

Option 2: Make adjustments as people move

A more common approach to remote compensation is to pay distributed employees according to their local-market compensation or zone. This aligns with the way companies with multiple locations handle compensation. Other companies may choose to pay remote employees a certain percentage less than office employees, regardless of location. This approach is certainly simpler than developing salary bands for each location employees work, but is far less precise. Either approach means you would reduce salaries for some employees as they go remote, which can be difficult to do.

A good way to apply this is to give current employees the choice to stay in their current location, or move. Let them know that if they choose to move, you will adjust their compensation accordingly—and be transparent about what their new salary would be. For example, Facebook is allowing eligible employees to request remote work status and relocate to another metropolitan area, but have alerted employees they would be paid local-market rates.

If your company is the one suggesting a change in location, however, you may want to consider leaving compensation as-is. This may be due to wanting a presence in another time zone or major metropolitan area, which benefits your company.

Option 3: Make gradual adjustments

The trend toward remote work means that your company is now competing for talent with more companies than ever before. Some of these companies may not be exercising geographical differentiation in their compensation strategy, increasing the risk that you lose talent. Let’s say, for instance, you have an employee who accepts a pay cut in order to move from San Francisco to Omaha. Another company offering San Francisco, New York, or Los Angeles rates could very well make your employee an offer they couldn’t refuse.

You could mitigate that risk in the short term by keeping salaries the same for now. Set new targets according to your new compensation strategy, and “red circle” anyone who is out of range against the new targets. As you undergo salary band updates and compensation cycles, above-band employees would have reduced eligibility for raises. More recent remote hire salaries would increase a bit faster, and would eventually meet up with tenured employee salaries. At a time when pay cuts are common and wage growth is steadily declining, this “slow adjustment” could help you hang on to your tenured remote employees in areas with lower costs of living. Just be sure to communicate why some employees are earning larger salary increases than others.

You may also take a blended approach, where more competitive roles get a slow adjustment, and all other roles require a quicker adjustment. This reduces the risk of losing talent in positions that would be difficult—or excessively costly—to backfill.

Taking this path is probably the easiest for your company to absorb, but can be challenging to manage and administer. Compensation management software like Compaas can help.

Final thoughts on retrofitting remote compensation

Regardless of your approach, be consistent in how you set your targets—and be transparent about your process. Communication is key when making significant changes to the way people work—and how they’re compensated for that work. If your company plans to transition more toward remote work once the country opens back up, you need to think through how to pay remote employees now. Many people in areas with a high cost of living are already considering moving to other areas to stretch their paychecks further. Don’t wait until employees have already relocated to inform them that their compensation could change as a result of their move. You could do some serious damage to employee relations and your employer brand if you’re too slow to roll out and clearly communicate your remote compensation strategy.

Over time, we should see a shift that reduces the variation in pay between markets. As talent begins leaving expensive metropolitan areas and becomes more interspersed, local compensation will likely shift. Areas with traditionally low costs of living should see an increase in compensation, and areas with traditionally high costs of living may see compensation fall. Over time, small adjustments here and there could lead to a big change in how compensation is distributed across markets.

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