A seismic shift is taking place in the world of work as employers contemplate making remote work opportunities permanent. The next question? How to set pay for remote workers.
Recently, Facebook made waves when it announced that it expects nearly half of its workforce to permanently work remotely in the future and that compensation will be adjusted — i.e. lowered from Silicon Valley premiums — according to where those workers live.
The statement has received a mix of reactions. Some have called the strategy doomed to failure on assumption that paying employees who work outside of San Francisco less than their teammates performing the same job will devalue and demoralize the workforce. Others have lauded it as a sensible strategy that — as long as it’s backed by mature salary market data — will increase job flexibility and create more opportunity for workers, including previously marginalized groups who are effective teammates when working from home but are unable to commute into an office.
Facebook isn’t the only company exploring remote work as a permanent possibility and cost savings strategy. A Gartner survey in March of 2020 revealed that 74 percent of CFOs intend to shift at least some onsite workers (at least 5 percent) to permanently remote positions. Nearly 25 percent of respondents said they will move 20 percent of their on-site employees to permanent remote positions. The objective is to save on costs associated with employing workers in high income areas.
But do remote workers actually make less than onsite employees? If you are considering a permanent remote work strategy, how do you go about setting compensation for those positions?
We looked at the data to find out.
Why Permanent Remote Work Matters Now
First, it must be stated that remote work isn’t anything new. According to PayScale’s annual Compensation Best Practices Report (CBPR), 48 percent of employers offered remote work opportunities in 2019, which has been trending up year over year in recent years.
Of course, not every position is viable for remote work. Discussion about making remote work permanent weights toward professions that are performed at a computer and don’t require physical interaction with customers, equipment, or a team. While there are many positions that meet this definition, not all positions do. Of those that do, most are not open to remote work — or weren’t before the coronavirus forced social distancing.
The reasons for this are psychological more than technical. The technology to make remote work possible for computer-based positions has been around for decades. Most people today have mobile devices to manage their affairs from almost anywhere with an internet connection. Customers expect to be able to interact with businesses via these same channels. Employees likewise expect to be able to connect to their employer’s applications via the cloud. In a way, it is rather astonishing that remote work has taken so long to catch on.
However, despite having the technology to support remote work for decades, many organizations have been hesitant to allow remote work to become a normal part of the business, either as a cost-saving measure or as a work-life balance benefit to employees. Although there are some examples of companies where remote work is the norm, before 2020, remote work positions have been available only on a limited basis, largely reserved for particular types of roles that may have been difficult to fill otherwise or for special circumstances to accommodate employees with unique needs.
The coronavirus has changed all that. In 2020, many organizations were forced to enable remote work for the first time for their entire workforce. Although the necessity was met with a lot of anxiety about how to manage employee performance outside of an office, the results have been a pleasant surprise for many employers.
Previously, employers feared that employees would be less productive when working remotely. Although there has been ample research that workers are actually more productive working remotely than they are in an office, it took social distancing forcing the issue for many executives to realize that employees don’t have to be watched by managers to perform at high levels.
There are also a lot of benefits. Although working in an office has benefits and likely won’t disappear anytime soon, workers save time not having to commute into an office every day and can be more focused as a result of being less distracted by coworkers and office events. Remote work also provides employees with flexibility, which research shows increases engagement and has a positive impact on business outcomes.
Another reason some employers have been hesitant to allow employees to work remotely is because of the benefits inherent in human interaction. This is especially true for extroverted employees and managers who gain energy and stimulation from being around people. Face-to-face interaction also forges deeper bonds and can spark creative energy between team members. However, virtual conferencing is effective at helping team members get to know one another and even workshop together, as long as it doesn’t become so ubiquitous as to be fatiguing.
Last but not least, some organizations are hesitant to allow remote work because they don’t know how to compensate employees who live in geographical areas that are not near one of their office locations. This is especially true for organizations who rely on traditional survey data for specific regions relevant to their business to inform their pay structures. For these organizations, setting pay for remote workers will require investment in additional compensation data — or possibly a whole new approach to managing compensation with compensation management software.
Do Remote Workers Make Less Than Onsite Employees?
Although CFOs may be looking to save payroll dollars by making some positions permanently remote, whether this is the case depends on where employees are located in relation to the business as well as the organization’s compensation strategy.
How to compensate remote workers can be perplexing for organizations that do not have standardized processes in place for setting pay by geographical location as well as position. This is especially true when current pay structures are based on a limited number of office locations.
The question of how to set pay for remote workers is an important one. Should workers be compensated according to where the company is headquartered or where workers are located? Should there be a national pay rate that gets adjusted according to cost of living? Does it depend on the industry, occupation, or specific job position? Does it matter if a remote worker is doing the same job as a team that is otherwise located in one place?
Many organizations (who are not customers of PayScale) don’t have the salary market data to answer these questions even if they have resolved on a compensation strategy for remote workers.
Generally speaking, working remotely should neither negatively nor positively impact a worker’s pay as a result of not being onsite. For example, workers currently at home during the coronavirus are unlikely to receive a pay raise or a pay cut just because they are no longer commuting into the office. Where remote workers’ pay becomes tricky is when you are hiring for new roles that are permanently remote and for which the candidate pool can be sourced from anywhere in the country.
Permanent remote workers also don’t necessarily make less than onsite employees. In fact, PayScale data on remote workers shows that professionals who telecommute for work generally make more than workers who do not.
Prior to the coronavirus, PayScale analyzed over one million salaries and found that 54 percent of telecommuters earned more than those who worked in an office. Since the pandemic hit, PayScale has continued to see higher pay for remote workers, especially in the tech industry. By isolating 89,919 survey respondents nationally and 14,161 Bay Area respondents within the technology industry specifically, PayScale compared the median salaries of remote workers to non-remote workers and found that remote workers generally make higher salaries.
The difference in pay is more dramatic in the uncontrolled group than the controlled group. In the uncontrolled group, which doesn’t account for job title, location, or years of experience, the median pay for tech workers nationally is $86,800 since March 1st. For remote workers, median pay jumps to $93,300, which is a 7.2 percent increase in pay. In the controlled group, where workers have the same job and qualifications, PayScale found that the median pay in the Bay Area for tech employees is $104,000 while Bay Area tech workers who telecommute make $105,000. Median pay for remote workers has also generally been increasing. Last year, the median pay for tech-industry telecommuters in the Bay Area was only $84,700.
However, it is important to note that remote workers are not paid more because they work remotely. In this case, correlation is not causation. Rather, the hesitancy of employers to allow remote work has likely resulted in reserving remote work opportunities for particularly trusted and high performing employees. These are employees who make more than their peers anyway and have essentially earned the right to work from home.
How to Set Compensation for Remote Workers
The objective of CFOs in the Gartner survey would be to expand remote work opportunities in order to realize cost savings from employing talent in less expensive markets. However, the approach to setting compensation for remote workers is not one-size-fits-all.
In order to grapple with how to set compensation for remote workers, organizations must evaluate all the options. There are primarily three:
- Set remote worker salaries in line with salaries at company headquarters (or reporting office)
- Set remote worker salaries in line with where the employee lives
- Set remote worker salaries in line with a national average
The right scenario will align with your organization’s pay philosophy. For example, if it’s important to you to attract the best talent and you live in a hub for talent critical to your business, then setting remote worker salaries according to the location of your headquarters or the office into which the worker reports may be the right strategy. This may also be the right strategy when you have teams of workers on the same projects and you want all team members, regardless of where they live, to be paid equally for equal contribution to the project.
Paying worker salaries according to where the employee lives can also make sense. This is particularly true if your headquarters is located in an expensive area and you know there is ample talent in less expensive areas that you would like to add remotely to your teams. Although this may seem uncharitable to some – such as detractors of Facebook’s proposed remote worker strategy — it can also work in the favor of employees. Consider a business with a headquarters in an area with lower cost of living, like somewhere in the Midwest, looking to hire talent typically found in more expensive coastal cities. In this case, paying the employee according to their location is actually to the employee’s benefit and may be the only option the employer has to work with that talent.
Lastly, you can pay remote workers according to a national average. However, this can be tricky for both the reasons mentioned above. Candidates in areas with a lower cost of living will do well but you may be unable to attract candidates living in areas with a higher cost of living. You therefore have to weigh this option carefully and consider adjustments for cost of living in areas that are out of your pay range otherwise.
Fortunately, cost of living adjustments are nothing new in the world of compensation management. Frequently abbreviated as COLA, many compensation professionals are proponents of reviewing employee salaries regularly against cost of living and making adjustments in salaries that align to changes in inflation based on the Consumer Price Index of a particular region or geographical area. These market adjustments are usually made in tandem with annual increases and merit increases.
Check out PayScale’s COLA Calculator.
However, COLA isn’t the only consideration when it comes to how to set compensation for remote workers or in a new geographical location and is an outdated way to determine salary adjustments unless you have no better option. This is because there are also differences in compensation at the job level by location, emphasizing the importance of using robust salary market data from multiple sources for setting pay. Indeed, if you rely on COLA alone, you could be overpaying some remote workers.
For example, software developers in Seattle earn more than software developers nationally and so do accountants. This is because the cost of living in Seattle is higher. However, the percentage increase for software developers in Seattle is greater than the percentage increase of accountants. This is because there is more competition for software developers specifically in Seattle than there is for accountants. In other words, you have to consider the market data holistically and against a specific position in a specific location to set pay accurately.
Interested in geographical location differentials? Learn more about PayScale Compensation Data.
When it comes to how to set compensation for remote workers, the right strategy will vary by industry, organization, and position. It is likely that many organizations will need professional assistance in how to set pay for remote workers and will need to align their remote work compensation strategy to their overall pay philosophy.
While some organizations will set pay according to the employee’s location, others might find that setting pay according to national averages or based on the company’s headquarters to be more aligned to their talent acquisition and retention strategy.
Regardless, many organizations adopting permanent remote working environments will be able to provide more opportunity and more job flexibility to workers. This shift in employment is seismic and can spurn more organizations to evaluate pay equity across regions through a dynamic, data-driven compensation strategy.
Organizations are going to need a modern and sophisticated approach to compensation management in order to create the financial models necessary to chart the course. They’re also going to need the right technology platform to support it. The benefits and time savings of compensation management software is therefore worth serious consideration.
Fortunately, PayScale is uniquely positioned to lead organizations through this transition in workforce management, providing fresh, accurate salary data by geographical location within context of the specific job as well as compensation management software to help every business get pay right.
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