Geographic pay policies and the growing remote workforce

Geographic pay policies are receiving more attention as interest in remote work grows

As remote working continues to experience a renaissance, the list of positives that come with it continues to grow.

For employees, improved work-life balance, greater productivity, and reduced commuting costs are some of the proven benefits.

On the other hand, employers have cited higher profitability, lowered operational expenses, and improved employee retention as a result of shifting to a fully or hybrid remote working model.

For businesses looking towards global expansion, hiring a strong remote team is essential to their growth. Not only does it allow businesses to explore new opportunities in a borderless marketplace, it also means that you can access a wider scope of talent free from geographic limitations.

As interest in remote work continues to grow on a global level, companies must be willing to adjust their approach to managing their remote talent. One of the key areas that must be evaluated is compensation.

As remote work rises, questions are being raised about geographic pay policies and what counts as fair compensation

Source: Andrii Yalanskyi/Shutterstock

Maintaining a just and transparent work culture is extremely important. One of the ways to do this is by ensuring your employees are being paid fairly.

Recent reports have drawn attention to the increase in remote working and its relationship with geographic pay policies.

What are geographic pay policies?

As companies reevaluate their geographic pay policies due to the increase of remote workers based in various locales, let us first identify what a geographic pay policy is.

Simply put, it means pay localisation.

This happens when companies provide their employees with compensation according to their location. The pay often reflects the market rate of what other employers in the area are paying their employees in similar roles to reasonably cover their cost of living. It’s also a means to ensure that salaries are being fairly tabulated.

While the concept of localised pay is nothing new, it was previously mainly used by tech companies such as GitHub with primarily remote teams.

However, as more businesses shift to remote working models, the conversation surrounding localised rates will grow as workers question its place amidst a distributed workforce.

In 2020, major companies announced their decision to adopt localised pay policies

In May 2020, Mark Zuckerberg announced plans to have 50% of Facebook employees working remotely within 10 years and that they would be paid based on where they chose to live.

In a recent WorldatWork survey, out of the 62% of companies who have implemented geographic pay policies, 44% are looking into modifying their policies due to the increase in remote work.

The visual below illustrates further notable findings:

Information compiled from WorldatWork's Geographic Pay Policies study

Localised pay involves many complexities that depend on the nuances of managing a global workforce. Hence why it is important to consider various approaches employers can take to implement these policies.

Reddit for example, adopts a hybrid pay approach. After evolving to a 100% remote workforce in 2020, they had to restructure their compensation model for their US employees. The company were adamant about being able to support their employees’ rights to live and work wherever they choose.

To support this, Reddit did away with geographic compensation zones for their US workers and instead, scaled their compensation packages to reflect the pay ranges of high-cost areas such as New York and San Francisco, regardless of where their employees lived.

Reddit now adopts a single pay range across all of the US and this practice is consistent with their international locations.

The advantages of geographic pay policies

Perhaps the most resounding argument of all, lowered operational costs is one of the main reasons why many businesses have begun to implement geographic pay policies. By setting a base-level pay for employees according to the market rate of where they’re based out of, companies can free up funds that would otherwise be tied up.

Not only will this enable companies to reduce their operational spend but it also creates room for more financial freedom. Allowing businesses to invest their dollars into areas such as hiring, employee development, business investments and more.

Additionally, localised pay has been a major draw for remote talent. Offering it as part of your company’s pay policy can provide you with a competitive edge.

Scott Cawood, CEO of WorldatWork observed that the increased adoption of geographic policies is strongly motivated by the growing requests of employees for remote work.

With remote working requests continuing to emerge and surprise leaders, companies are re-evaluating how to create cohesive, consistent, and fair geographic pay policies as employees push to straddle multiple geographies.

What used to only be an occasional issue is now a frequent request and savvy employers will need to respond with fair, transparent, and attractive geographic pay policies for distributed workforces if they wish to remain competitive.

A business that is able to offer competitive wages across multiple cities, states and countries sets itself apart from other businesses in the industry.

Developing a compelling compensation package that takes consideration of employee circumstances is a key differentiator for hiring the right talent. Companies that focus on a building a healthy and inclusive culture that transcends the physical workplace will have an upper hand in attracting and retaining talent.

Methods to consider when executing localised pay

Source: wutzkotphoto/Shutterstock

Performing periodic evaluations of geographic pay structures for the regions your company is based in is absolutely vital. As there is no one-size-fits-all approach, companies must be versatile in revising these structures to reflect the current competitive reality.

We take a look at several considerations for how businesses can tackle this emerging phenomenon.

National pay structure

Companies can move towards a national pay structure based on the national average of the company’s location. In some cases, the pay structure will be determined based on the location of company headquarters.

Employees will be paid based on the value of their role within the company regardless of where they’re based out of.

For remote employees, or employees whose role requires them to be based in locations where the cost of living is especially high, geographic premiums can be applied to their compensation package.

Location-based compensation

Some companies may opt to pay their remote employees location-based compensation packages based on the market rate  or geographic pay zones where they are based out of.

As remote workers can often be scattered across multiple locales, this approach can be complex and costly. In many cases, companies may choose to limit their hiring of remote employees or relocate existing employees to locations where they have an existing entity or within the region.

Cost-of living-adjustment

The cost-of-living adjustment for remote worker compensation has become a major talking point as more companies adopt a work-from-anywhere approach. The ability for companies to hire from practically anywhere in the world has led to the emergence of a global labour market.

However, most still lack a system to accurately determine the cost of labour for a globally distributed labour force.

An emerging concept for paying remote workers is to apply a cost-of-living differentiator to the base salary of the employee based on where the employee lives. This is similar in effect to location-based compensation with the exception being that the differential is based on cost-of-living data instead of market rate.

Geographic pay differential for remote employees

Geographic differential rates for remote employees in disparate location have become one of the go-solutions for many companies.

Based on the average national market rate or a company’s work-from-home pay structure, all remote employee salaries will include a designated remote GEO-differential, regardless of their location.

For example, if your company wants to encourage more people to work remotely, you can choose to set your GEO-differential between 5 to 10% above the in-office pay structure.

Alternatively, if your company prefers to have employees work in-office but still want to provide the option for employees to work remotely, you might set your GEO-differential between 5 to 10 % below your in-office pay structure.

Implement fair geographic pay policies with payroll solutions from Airswift

Airswift can help assess and implement geographic pay policies that align your company requirements. We also promise to be 100% compliant with the payroll and labour regulations of the countries you operate in.

Our global team comprises of experienced consultants across more than 40 countries. All ready to provide you with the advice and guidance you need to effectively manage complex payroll administration and other global mobility challenges.

Reach out to us today to learn more about successfully managing remote teams and much more.