Don’t let location-based salaries stall pay equity and diversity goals
Location-based compensation sends an unspoken message that people who live in more affluent areas are worth more to the company.
Before the pandemic hit in 2020, the number of companies offering employees the option to work remotely had been steadily gaining ground but still applied to a relative few. The pandemic forced a worldwide experiment in remote work, and the verdict is in — for jobs that don’t require an onsite presence, remote work works.
But as HR teams prepare for a post-pandemic future that includes hybrid and all-remote workforces, they’ll have to address the location-based salary question. It’s already being debated along these lines: does paying people who do the same work different salaries, according to their location, help or hinder the effort to achieve pay equity and workplace diversity?
As a founder and CEO with significant experience leading diverse remote teams, I come down firmly on the side of equal pay for equal work. I believe a merit-based system works best for employees and employers alike, and now we have an unprecedented opportunity to move away from location-based salaries and toward more equitable and diverse workplaces as the pandemic begins to recede.
How location-based salaries are unfair to employees
If an employee in rural Texas or small-town Ohio is paid $75,000 annually and a colleague in San Francisco with the same job and responsibilities receives $120,000, the math tells the story: the pay is unequal. That’s not fair to employees, and it will hurt the company in the long run too.
When employees know they’re receiving a lower salary for doing the same work as colleagues in other locations, it undermines morale and increases turnover. It sends an unspoken message that people who live in more affluent areas are worth more to the company, and that doesn’t encourage lower-paid employees to grow with the business and develop new skills.
Employees on the receiving end of higher location-based salaries are now finding that the advantage may be short-lived. In the tech sector especially, many people dispersed from cities during the pandemic, fleeing areas that were hard-hit initially to feel safer and moving out of urban areas so they could afford more space (including room for a home office), or to be closer to their families.
Now companies are using remote work as an excuse to cut costs. They are hiring remote workers in low-wage areas for less than they pay coworkers in cities. In some cases, they are providing incentives for workers to leave expensive cities and move to regions with a lower cost of living — while reducing their salaries at the same time.
For example, fintech company Stripe recently announced a program to pay $20,000 for relocation, but the catch is the employee’s salary will take a 10% hit. Facebook has also warned that it will cut pay for remote workers who move to less expensive places. On the surface, it might seem fair because costs are lower in non-urban areas, but this practice just perpetuates pay inequity. There’s a better approach.
The positive effects of avoiding location-based pay cuts
The current tight labor market, magnified by the Great Resignation, has put employees in the driver’s seat, especially if they have hard-to-find skills. That means now is a good time for employers to offer incentives to attract and keep valuable talent on board rather than trying to reduce costs on the backs of workers. Remote work and equal pay can be an important part of a company’s retention strategy.
In today’s job market, most employees are looking for a raise of more than 5% when they switch jobs, so offering a lower salary based on where a candidate lives is unlikely to be appealing. Offering lower pay outside expensive cities may also be a barrier to recruiting diverse candidates since many women and people of color have already experienced pay inequities based on gender or race and may see it as a fairness issue.
When companies don’t penalize employees for their location, it signals that they trust their staff and value their work ethic and productivity, no matter where they live. Keep in mind that employees today aren’t just looking for the highest salary. They want to associate with a company that reflects their values and appreciates their contributions. A commitment to pay equity communicates those values.
Setting up a fair compensation plan in a remote work environment
Employers who avoid the location-based pay trap will be in a better position to attract and retain employees, but a fair compensation plan for the remote work era starts with building trust. Employers can create trust by approaching the recruiting process with honesty and transparency, setting realistic salary expectations and discussing compensation, skills and experience with candidates.
It’s also a good idea to invest in salary surveys and conduct research on salary ranges for specific roles across multiple locations to get a baseline. With these tools in hand, HR and recruiting teams can determine how competitive their current pay levels are and understand how well the pay structure supports the organization’s goals.
Trust will be essential throughout the employee’s tenure with the company. If the company builds a culture that’s based on transparency, signals a genuine concern about employee wellbeing, solicits feedback, and provides details about how policies and programs work, employees will feel heard and valued, and that goes a long way toward maintaining trust.
Ultimately, it all comes down to fairness. Employees in the same jobs who shoulder the same responsibilities should receive the same pay. That satisfies basic fairness. But it also opens up new possibilities for companies. Instead of competing for a small pool of employees in an expensive city, employers can recruit talent worldwide and hire on merit.
Widespread adoption of merit-based remote hiring would allow talented employees to pursue their professional goals regardless of their ZIP code and country of origin. In exchange, companies with a location-agnostic compensation policy get access to the best and brightest employees the world has to offer, and that would result in greater fairness and equality for all — and better business outcomes.
Babak Varjavandi is CEO at Nakisa.
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