The Impact of Permanent Remote Work on Salary Data

Employers may have had misgivings about telework before the spread of Coronavirus, misgivings around the ability to effectively manage a remote team, productivity, accountability, or perhaps just a preference for the traditional work setting of a physical office. The COVID-19 pandemic and resulting quarantine thrust us into a unique situation, where work had to somehow continue while the workforce sheltered in place. Flexibility and innovative solutions were necessary responses.

Remote work suddenly became the norm for many organizations and not just technology companies already experienced in successful telework.  As the quarantine continued beyond a few weeks or months and now a year, many employees responded by moving away.  Many decided to move closer to family, perhaps to take care of sick or aging parents.  Some left large metropolitan areas hit hardest by the virus, relocating to the perceived safety of locations with fewer outbreaks.  Still others no longer tied to the physical location of an office left to take advantage of moves to lower cost-of-living locales with friendlier state tax rates, while maintaining their current salaries. Selling a home in a high cost of living area and moving to a lower cost area increased purchasing power (e.g., a larger, less expensive home) while allowing the employee to enjoy lower living expenses.

Now, as we carefully watch the news of the world to determine if we truly are out of the woods, the employees are settling into a new way of working, rather successfully, and companies are responding to this shift by examining their pay policies.  If employees move to a cheaper area, should their salaries be adjusted? Should employees’ pay reflect the geographic location of their residence?  Jobs market-priced in San Francisco or New York typically command higher salaries.  But what happens when those salaries are not reflective of the actual remote locations of employees?  It would demand consideration of not only the geographic location of the workforce (or the base of the company headquarters), but also where the employees reside.

According to a yahoo finance article detailing how a remote work boom will affect salaries, jobs, and where people live, some large organizations like Facebook are taking a close look at localizing salaries based on where an employee lives.  Bloomberg reports how Redfin actually cut salaries for some employees leaving high cost areas to reflect their current residence locations. 

In the traditional sense, location is a big determining factor when it comes to salary ranges because the cost of labor varies so much from place to place. But, with remote jobs, people are often working far away from a company’s office location or, in the case of a fully remote company, there is no office location.  Then there are those employees who work in locations with high cost of living but reside in more reasonably priced locations and endure a longer-than-average commute. Alternatively, some may rent a small apartment near work, while the actual family residence is in a less expensive location.  Traditionally, companies set salaries based on how much similarly qualified and experienced professionals are being paid in the company’s local area, as reported in salary surveys. One argument is that, regardless of whether an employee works from home or in an office, that should not affect the pay range.

Compensation is based on the job. A salary structure is created for each particular job at a particular level, based on the company’s compensation philosophy. Geographic location, as well as company size and  industry, are factors considered in setting the ranges. The job commonly has one salary range, no matter where the employee lives. A geographic differential may be applied, based on the location of the branch office in which the job is being performed. Pay is traditionally based on the location of the business unit, not the residence of the employee.

How Does Remote Work Affect Geographic Salary Data?

So how could permanent remote work impact salary data? The simple answer is “it depends.”  It is really too early to tell just how a permanent or at least long-term remote workforce will impact salary data. If companies change salaries to reflect the geographic location of the employee rather than the job, salary data could reflect lower wages in geographic areas once considered high labor cost areas and higher salaries in the areas typically thought of as cheaper to live.  Will salary decisions be impacted by access to a larger labor pool (national) for jobs typically sourced locally?  Will companies adjust pay policies and compensation strategies temporarily or are there long-term implications? We are just coming out of the pandemic restrictions, so will have to wait and see if remote work is truly a permanent solution and what the impact is on the delivery of service, productivity, and costs to the bottom line. 

In the meantime, companies should monitor the impact of the moves, such as changes in state taxes and compliance-related issues.  Are there impacts to local union contracts if workers are in another state?  Are there added benefits costs due to accessing health providers out of network for those outside of the negotiated network of health care professionals? Companies could see an impact to benefits plan design and employer premium costs.  It may be more expensive to provide benefits in smaller, more rural areas.  Is recruitment and retention impacted if salary is adjusted downward based on home address?  Is the company losing candidates?  Has turnover increased as employees look for jobs elsewhere, where their residence is not a factor in establishing pay?  If an employee moves multiple times to different geographic zones, what are the pay implications and when will they occur?  How often or at what percentage will salary be adjusted with the employee’s relocations?

Salary survey providers will need to ask specifically if companies are adjusting salaries (which may impact average salaries reported) based on employees’ home addresses.  Salary surveys consist of data as of a point in time.  Aging factors and predictors for overall salary increases can be mathematically applied to develop a salary range that reflects the current period.  Companies are still in the midst of making policy adjustments for remote work and may not yet know the full impact of such changes to the bottom line. A comparison of year-over-year changes, once available, can be used to provide insight on any unusual or significant trends.

Changes in the cost of labor will occur as compensation changes take effect throughout the nation.  If telework is prevalent, labor costs will gradually increase or decrease by location.  If remote work is only temporary in nature or only implemented by a small number of companies, it will have less of an impact on the cost of labor in the external marketplace.  Over time, the impact on the cost of labor will be reflected in SalaryExpert’s Salary Assessor and other external market sources.