Insights

In the new world of remote work, does a regional pay structure make sense for your business?

Analysis
Published on: August 27, 2021
Subjects:  Total compensation

Remote work is here to stay. After steady growth starting in 2016  and a major boom over the past year, the practice of remote work is now widespread in Canada as well as abroad. In fact, it’s only going to get more popular.

For businesses in all industries, the prevalence of remote work has brought many opportunities, challenges, adjustments and questions. How do you maintain productivity levels and your company culture? How do you keep people connected and feeling a sense of belonging? How do you motivate your employees and keep their workplaces safe? All of these are important questions, worth considering and discussing in depth.

One question that comes up a lot is how to determine the base pay of employees located in different areas or different provinces. Some American companies have opted for a compensation model that factors in geographic location for employees who work remotely on a permanent basis.   In today’s world of widespread remote work, should you take a similar approach, and raise or lower salaries based on the local cost of living?

For reasons of equity, other companies have taken a different approach, and chosen to use the same pay structure for all their employees.

Transitioning from a national pay structure to a localized approach (let’s call it a “geographic pay policy”) can have major consequences for an organization. You should consider your options very carefully and give the issue some thought. Read on, and we’ll discuss the advantages, disadvantages and unique aspects of a geographic approach. 

What does it mean to implement a geographic pay policy? 

A company that wants to set up a geographic pay policy needs to make some choices in order to offer competitive compensation. It might opt to adjust its pay structure based on cost of living, salary level or a combination of the two, in each region where it operates. As shown in a WorldatWork  study on the American market, this means that employees with the same job title would be compensated differently depending on where they live or work. That pay differential could entail:

  • Applying a premium/discount to the salary structure or to individual pay, or 
  • Creating a separate salary structure for each geographical location

In the same survey, WorldatWork also found that the majority of participating organizations with a geographic pay policy use city or metro area as the indicator on which geographic pay differentials are based. Also, for 91% of those organization, the cost of labour (or market pay rates) has a much greater influence on their compensation approach than cost of living. WorldatWork reported that organizations generally determine employees’ geographic pay locations based on the employee’s:

  • Reporting location, such as headquarters or a business unit (38%)
  • Nearest company work location (29%), or
  • Location of residence (20%)

Regional pay in the USA

The WorldatWork study found that of its respondents, 62% of American organizations already have a geographic pay policy in place; of those, 44% had recently modified their policy, or were considering expanding or strengthening their policy in response to the increase in full time remote work. As for the employees surveyed, 67% reported that they expected pay differentials based on variations in cost of living and cost of labour for their work location. 

Will the new remote work paradigm and trends in the US lead Canadian companies to move toward regional pay structures? 

Between 2016 and early 2021, Statistics Canada  noted a 28% increase in Canadian employees aged 15 to 69 who worked most of their hours from home. Furthermore, 80% of new teleworkers aged 15 to 64 stated that they would like to work at least half of their hours from home once the pandemic is over. Statistics Canada found that workers’ preferences for remote work are positively associated with their productivity per hour.

So, the teleworking craze is real, and seems only likely to grow. Neither remote nor in office work is going away any time soon, although the proportions will vary by industry. But does that mean that every company should switch to a geographic pay policy? Not necessarily.

Weighing the drawbacks 

Changing how you pay your people is a decision that requires a rigorous examination of the impacts of the proposed change, and how they might negatively affect your company’s success. At first glance, it appears that the potential drawbacks might well outweigh the benefits.

Benefits

  • Potential to improve talent attraction and retention by offering pay that is competitive with the local job market
  • Better control and use of labour costs, which are modelled based on regional needs 
     

Drawbacks

  • Greater management complexity 
    • Job markets may be regional or national depending on the type of job
    • Comparator markets may vary by region
    • Companies need to get compensation data from credible and reliable sources for each target region, and keep that data up to date
    • More managerial communication required
  • Potential perception of pay inequity
    • Employees are paid differently for the same work
    •  Employees receive different pay, even though some of them may not have a choice of work location
    • An employee who changes regions might have their pay cut (or increased)
    • Compensation trends in a region may change, forcing the company to freeze or reduce the pay structure for the region
  • Difficulties in retaining or attracting talent
    • Employees with in demand skills can potentially work for any number of companies; those who decide to pay less because the employee lives in a given region may lose key employees

Before implementing a geographic pay policy, your company should consider the benefits and drawbacks that apply to its particular situation, as well as several other variables: the type of jobs, their geographic spread, the percentage of employees working remotely, the company culture, the company’s ability to pay, major competitors’ practices, etc. If you decide to go ahead with it, you will also need to identify the regions you’ll use and your basis for calculations (cost of living or market compensation rates), make sure that you have reliable long term employment data and measure the potential impacts on employees.

Summing up

Remote work is more widespread than ever, and many may be wondering about the arguments for adjusting employee pay according to the employee’s region, to ensure equitable compensation management and employee retention. Our neighbours to the south certainly seem to be trending in that direction. However, transitioning to a geographic pay structure is a major decision that should not be taken lightly. Once you carefully consider the situation, the drawbacks may outweigh the benefits.

Are you considering switching to a geographic pay structure? Talk to our experts to make sure you have all the tools you need to make an informed decision on the matter.

Author

Isabelle Caron, Ph.D., Senior Consultant with the collaboration of Marc Chartrand, CPHR Distinction Fellow, ASC, Associate

References

i Statistics Canada, Travail à domicile : productivité et préférences, April 1st, 2021.

ii Reuters, Pay cut: Google employees who work from home could lose money, August 10, 2021; Bloomberg, VMware Cuts Pay for Remote Workers Fleeing Silicon Valley, September 11, 2020.

iii U.S. Geographic Pay Policies Study, WorldatWork, April 2021 (member-restricted study), Workspan excerpt

iv Statistics Canada, Travail à domicile : productivité et préférences, April 1st, 2021.

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