Should Remote Workers Be Paid Based on Where They Live?

Most employees don’t choose their employers solely based on how much they are paid. They consider the entire package, including benefits, career opportunities, and meaningful work.

But the compensation piece is essential—otherwise, you’d have volunteers, not employees. As more of the workforce becomes remote, businesses are grappling with equitably and fairly compensating remote employees, especially those that move to lower cost of living regions.

Is it fair to pay remote employees differently based on where they choose to live? Is it short-sighted to cut the salaries of employees who move to a lower-cost area? Should where an employee lives be, or have ever been, part of the compensation package?

Everyone has an opinion, including your employees. We certainly don’t claim to have the answer. But if your team includes remote employees, read on for some insight.

The Difference Between Cost of Labor and Living

Intrinsically, we hear “cost of living” and think, “Workers in San Francisco are paid more than workers in Wyoming.” The work product may be the same—the tasks associated with serving food in a casual dining restaurant are similar. However, to hire and retain workers, businesses adjust wages to reflect what an employee needs to live in the area. $20/hour goes a lot further in small towns than it does in large metropolitan areas.

Economic Research Institute (ERI) sums up the difference between the cost of labor and cost of living:

• “Cost of labor is determined by the supply and demand of labor across all industries and occupations by geographic location.”
• “Cost of living measures the required costs to maintain a certain standard of living within a geographic location (based on a market basket of goods and services including consumables, transportation, health services, housing, and taxes paid by an employee).”

Options for Handling Location Differences

Before the remote work boom, most employees were paid based on where they worked. If a business had 2 locations, employee wages reflected the location where they worked.

Now, some or all of your employees may be 100% remote. If that’s the case, how should you handle geographical differences in your team? An employee with limited ties to an area may choose to relocate to a lower cost of living area. But that individual isn’t more or less valuable than an employee who can’t relocate because their position isn’t remote or they have ties to the area like aging parents or school-age children.

One solution is to add an optional geographic differential line item to compensate for employees based in a geographically expensive area. Catherine A. Hartmann, North America rewards practice leader with Willis Towers Watson, told SHRM that one of their clients managed many remote workers. As a result, “They shifted their compensation program design to a national structure, identified geographic premiums for certain locations, and called them out as a separate line item.” If the employee’s location justified the premium, it’s added in. If the employee moved, it’s removed.

This option could save businesses money since they wouldn’t be paying cost of living premiums unnecessarily. But it’s not a risk-free option, as we’ll cover later.

Basecamp chose another option. This all-remote technology company decided to base its pay on a national standard for Chicago. That makes sense since it’s where they are headquartered. But then they paused and asked themselves why Chicago should be the base? Instead, they chose to pay “everyone as though they live in San Francisco and work for a software company that pays in the top 10% of that market.”

Basecamp’s novel approach means they aren’t losing top talent based on where employees live. If they had paid Chicago rates, they could miss out on talent from the San Francisco area.

Zapier took yet another approach. As another 100%-remote team, they offer a de-location package to move out of the Bay Area—even if you don’t work for them yet. Essentially, anyone living in the Bay Area who works for or receives an offer from Zapier can apply to receive reimbursement for relocating. There are stipulations, of course. Eligible moving expenses incurred in the first 3 months up to a $10,000 limit are reimbursed, and the employee must stay with the business for a year. But this offer signals clearly that an employee’s value to the company isn’t tied to where they live.

The Risks of Paying Remote Employees Differently

WorldatWork, a nonprofit focused on helping Total Rewards professionals, raises a valid point—why start paying differently now? Historically, companies didn’t reward or punish employees who chose long commutes or hotel stays Monday through Friday to stretch their paycheck and their family’s standard of living.

“This new normal shouldn’t change the fundamental practice of using jobs—rather than people—to define pay structures and make effective and fair pay decisions,” Lori Wisper, a senior director and office line of business leader for rewards at Willis Towers Watson, told WorldatWork. “In fact, prior to the pandemic, employees who worked in high cost-of-labor locations could choose to commute from low cost-of-living locations, thereby stretching their incomes to even higher levels of buying power. And, no one talked about changing their salary because they chose a 2-hour commute over the convenience of living close to the office.”

There are other risks to paying remote employees differently based on their home base. It could contribute to pay inequity as not everyone can relocate based on living costs.

Additionally, in the current YOLO economy, workers leave jobs if they feel unfulfilled, unheard, or underpaid. Thus, altering pay based on where remote employees live could negatively impact employee retention.

What This Means to Your Small Business

If you have remote employees or plan to in the future, this topic is definitely worth investigating. Unfortunately, there’s no one-size-fits-all answer as every business is unique.

You’ll have to do some business soul-searching to answer key questions. How competitive is the skill set you need to hire? What is your pay transparency or equity strategy? How does the question of geographic differentials fit into your overall reward package, including benefits such as mental health coverage or flexible work schedules?

Equitable, consistent, and employee-retaining compensation packages can be complex. You can always use financing to hire an HR or Payroll consultant to help you make the best choice for your business needs.