A global pandemic began in 2019 and pushed many employers into remote work for the first time. While only 25 percent of workers in the United States are in remote-compatible roles, most employers that could offer remote work rose to the challenge. In fact, many found that remote work was not as bad as they thought it would be. Sixty eight percent of people said they were successful working from home, and 70 percent of leaders said that working from home was the same or better for their team’s work performance.

This foray into remote work has made many companies and employees reconsider the role of the traditional workplace in favor of a more distributed model. For instance, Twitter and Square are allowing employees to work from anywhere indefinitely, so long as their roles don’t require a physical presence. Shopify and Coinbase are going a step further by shifting to a remote-first model, where everyone will work as if they’re remote—even if they’re in the office.

As remote working continues to be normalized, more employers are realizing the benefits of transitioning to a hybrid work model, or even embracing a fully distributed team. With this change, they will need to formalize remote work policies and programs—including a remote compensation strategy.

3 approaches to remote pay

Office-based work has historically meant that employee compensation was based on a company’s physical office location. Companies with multiple headquarters in multiple regions typically would pay local rates based on each office location. For instance, a team member working out of the New York office would be paid rates appropriate for their local market. And a team member working out of the St. Louis office would be paid a lower, but still fair and competitive, wage for their local market.

Remote employees can work from anywhere. This adds an extra layer of complexity to compensation decisions, as people are no longer bound to a finite number of offices. As you embrace permanent remote work, it’s important to carefully consider your remote compensation policy.

There are a few basic approaches for paying remote employees.

Option 1. Use job-based pay

Some organizations use job-based pay for their hybrid or fully distributed teams. That is, location is not a factor in employee compensation decisions, though things like experience, education, and skill sets may still be used to differentiate pay. A job-based pay rate may use the market where the company headquarters is located, although some companies choose to use other markets. For example, Basecamp is a Chicago-based company that pays in the top 10 percent of the San Francisco market—regardless of where the worker is located. There are no negotiated salaries, and everyone in the same role at the same level is paid the same. This approach helps them set pay in a “fair, transparent, and systematic way.”

• Easy to explain, manage, and administer. This is arguably the simplest approach to remote pay, as you only need to maintain job grades and salary bands for a single market.
• Popular with skilled workers if you benchmark to areas with a high cost of market, like San Francisco and New York. Your remote workers will likely enjoy being paid top of market rates, while being able to live anywhere.

Drawbacks to this approach may include:

• Golden handcuffs: If you pay average or above-average salaries, remote workers in low-wage regions earn more than they would at another company. This discourages them from leaving—even if they’re unhappy.
• Higher compensation budget: Paying people above their local market rates may require a higher compensation budget, which could impact your ability to hire more people, or invest in other areas of the business.
• Low geographical diversity: If you anchor your pay to a region with below-average salaries, you may find that remote workers are concentrated in areas with lower costs of living.

Option 2. Pay remote workers based on zones

Some companies group geographical areas with similar labor costs into zones, and tie each remote worker to a zone based on their location. Compensation may be determined by setting zone-specific pay ranges, or calculating a flat percentage increase or decrease between zones.

For example, 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, intermediate, average, or low cost of living.

Companies may use this approach because it is:

• Relatively easy to explain, manage, administer. Once you set the zones, it’s fairly straightforward to determine remote worker compensation. 
• An easy retrofit for companies that already use zones. Companies with offices in several major metropolitan areas may already determine compensation by zone. Remote workers can be quickly grouped in with existing zones.
• More consistent standard of living across your remote workforce. Compared with using a global salary rate based on a single market, zones can help account for different costs of living between different areas.

Drawbacks to this approach may include:

• “Overpaying” for some roles. This approach isn’t as precise as local-market compensation, and could result in compensation being over- or under-market value.
• More administrative overhead than job-based pay. Zones are easier to administer than using location-based pay, but more work than using a single market.
• More susceptibility to “exceptions.” There may be times when you need to pay in the highest range to win and retain high-value talent. Track exceptions so there’s visibility into why some employees are above-band for their zone.

Option 3. Use granular location-based pay

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

• Create custom salary ranges per-market. Custom salary ranges require you to 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. One-third of organizations with existing geographic pay policies in place use this method.
• Use location factors. Location factors allow you to build a set of salary data for a single region, and algorithmically determine an individual’s compensation from that base rate. For example, if a job pays $100,000 in the San Francisco Bay Area, and the employee is in Peoria with a location factor of 0.633, local market compensation would be $63,300. Final compensation may also account for performance, tenure, or other factors. Forty one percent of organizations with existing geographic pay policies use this method.

For example, GitLab is a global, fully-distributed company that uses a salary formula to determine compensation. In addition to location factors, they also consider each team members’ job level, and their knowledge, skills, and abilities.

Companies may use this approach because it offers:

• A more consistent standard of living. More precise compensation means you’re less likely to under- or overpay remote workers for their market, leading to a more consistent standard of living across your remote team.
• A more strategic use of your compensation budget. Hiring in lower-cost regions can lead to reduced salary spending without losing productivity or sacrificing the quality of work.

Drawbacks to this approach may include:

• More complexity to support. Location-based pay is much more granular than zones, so it’s more labor intensive to build and maintain. At scale, you will need dedicated people on your human resources team and the right compensation tools to keep data accurate and consistent.
• Cost of administration. If you plan to do lookups for every region (instead of calculated factors), know that local market data is expensive so you can plan for that cost.
• Salary data may be limited. The available salary data for remote pay in some regions may be limited. Be prepared for candidate feedback, especially with new roles.

Not sure which approach to take?

Choose the one that best supports your business practices, views, goals, and values. As you consider different approaches to remote pay, take the following into account:

• The reason you’re going remote. Are you offering remote work to increase employee retention? To be able to hire and support a more diversified workforce? For business continuity in the event of a crisis? To save money? Your leadership team should be on the same page about your goals for going remote.
• How you define “fair pay.” Some believe that employees should receive the same compensation for the same work, regardless of where they’re geographically located. Others believe employee compensation should vary by location, so remote workers in different areas may have similar standards of living. Each approach has its pros and cons, so consider your goals for going remote and optimize for those to determine what’s fair.
• Your current relocation policy. If you already pay people differently when they relocate, you may already have a viable remote compensation approach. Consider whether it will work for your company long-term, and if it’s consistent with your principles.

Retrofitting your remote compensation policy

Setting your remote compensation strategy can be a challenge in itself. But companies venturing into remote work for the first time must also decide how to retrofit a remote compensation strategy for their existing workforces. Some considerations may include:

• Your current relocation policy. If you have multiple locations now, how do you handle relocation between those offices? 
• The financial impact. If employees have already relocated, or have plans to in the near future, how will your remote compensation policy impact them financially? And how will it impact your company financially?
• Your goals for going remote. Do you want to improve employee retention? Reducing pay as employees relocate to areas with lower market rates could lead to turnover. Do you need to reduce your compensation budget? Making adjustments as employees relocate could make an impact faster.

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 use a job-based remote pay strategy, retrofitting for remote work is very straightforward. Compensation would be based on the same job grades and salary bands you’re already using—for remote, hybrid, and non-remote workers.

But if you’ve decided to use zones or local-market compensation, this may not be the best approach. Let’s say you have two employees in the same role relocating to Boise. One earns San Francisco rates, while the other earns 15 percent less in Atlanta. Will one team member perpetually earn more than the other, even if they’re in the same role and the same city?

Option 2: Make adjustments as employees relocate

An employee relocation may indicate an increase or reduction in pay in order to adhere to your compensation strategy. If you intend to make compensation adjustments as employees relocate, provide ample notice about your remote pay policy so employees have time to plan accordingly. This is crucial, as 50 percent of workers say a pay adjustment would be influential in their decision to relocate.

Let remote workers know that if they choose to move, you may adjust their compensation—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 this could lead to a pay cut.

There may be cases where the employee requests a relocation to an area that your budget or company structure can’t support, so also be clear about when you may need to cut ties. This empowers employees to make more informed decisions.

Give employees plenty of notice about your remote pay policy. They need to have time to plan accordingly.

Option 3: Make gradual adjustments

Some companies may prefer to take a more gradual approach to adjusting compensation as employees relocate to areas with a lower cost of market. This could be to reduce the financial impact to employees, or to help with retention. You may also go this route if your company is the one suggesting a change in location, perhaps due to wanting a presence in another time zone or major metropolitan area.

Set new targets according to your 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 most would eventually meet up with tenured employee salaries. However, some employees making big shifts may never get to local market rates—make sure you’re ok with this.

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

Communicating about your new remote compensation strategy

Strong communication is key when making significant changes to the way people work—and how they’re compensated for that work. It’s crucial to communicate early, often, and clearly.

Communicate early, communicate often, communicate clearly

Great communication may be better enabled by:

• A written remote compensation policy. As you formalize your remote compensation policy, write everything down. This includes how you came up with your policy, how you apply it, when you make exceptions, and how it will look in the future. A written policy gives your team something to reference, so you can apply it more consistently.
• Advance notice of changes. If you’re planning to change compensation, give managers a head’s up so they can be prepared to answer questions from their reports. A “Frequently Asked Questions” cheat sheet can be helpful. Then announce the changes to employees well in advance, so they can digest the information and have time to adjust. 
• Transparency around your compensation policy. No matter what method you use to determine how to pay remote employees, be ready to communicate how you determine individual compensation. It’s not enough to say “we decided to pay local market rates.” If you’re using a formula, be clear about the data that goes into that equation and where you’re sourcing your information. Even if your employees aren’t happy about shifting to local market rates, they can process the change easier if you explain how you’re applying those changes consistently throughout the company.
• Repetition. You can’t communicate too much in a remote setting. Get everyone on the same page and aligned with the same information and details. Repetition is key. Utilize various technology and communication channels, including human resources systems, spreadsheets, surveys, emails, internal posts, all-hands meetings, leadership communications, and total rewards reports. 
• Asynchronously available information. Remote workers may be spread across time zones and have a question about compensation when your team isn’t available to answer it. Asynchronous communication is key in a remote environment, so employees have the information they need, whenever they need it. Make sure you put pertinent information in a place that’s accessible to everyone.

Final thoughts on remote pay

There’s brilliant talent everywhere, and offering remote work may help you build a stronger, more diverse team. As you shift your policies to accommodate remote work, pay particular attention to your remote compensation strategy.

Compensation is likely your organization’s largest operating expense, and you will want to ensure you’re using it strategically. Don’t wait too long to modify your policy, as this could cause undue hardship on your team members. In fact, 38 percent of workers are stressed about the uncertainty of needing to take a pay cut to work remotely.

Take the time to think through remote pay and communicate about changes to your remote compensation strategy with your team members sooner rather than later. Compensation can be a very emotional topic. Be clear and consistent in how you approach it so you can attract and retain the talent you need to meet your business goals.