Should You Adjust Pay Rates for Remote Employees Living in Lower-Cost Locations?

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A growing number of business owners and executives will face this question — 47% of employers responding to a survey conducted by research firm Gartner plan to let employees continue working remotely full time after the pandemic. If your compensation rates are relatively high because of the cost of living in your area, reducing pay for remote employees who move to lower-cost areas may sound like it would make business sense.

But there are many factors to consider. So, you’ll want to look at the advantages and disadvantages of various approaches and how they might apply to your business’s situation. Make sure you rely on solid compensation data to support the approach you choose. Then, openly communicate any changes to your employees. After the compensation strategy is in place, it should be applied consistently and fairly.

What are the choices?

There are several approaches you might consider in deciding whether to adjust remote employees’ pay. Here are a few:

Maintain pay based on the business’s location. Employers located in areas that offer strong pools of talent critical to their operations may find that setting pay levels according to location makes the most sense. First, basing pay on the business’s location tends to be a relatively straightforward approach when developing a compensation strategy.

In addition, employees who move to lower-cost areas and get the equivalent of a pay increase may feel a greater sense of loyalty to the business. That can help rein in turnover.

Adjust pay to reflect each employee’s location. While adjusting the pay of employees who move to lower-cost areas may potentially save the business money, doing so isn’t without risk. Some employees may balk at what they view as a pay cut. If other organizations have decided not to lower pay of far-flung remote employees, these workers may quickly find new employers who can match their previously higher pay levels.

Moreover, many employees who can work remotely possess skills that are in demand and hard to replicate. Losing these workers to competitors may hinder a business’s ability to achieve its goals. For this reason, some organizations may decide to pay top dollar for certain positions, no matter where an employee lives.

Even when employers account for employees’ locations within their compensation calculations, taking this too far can backfire. Organizations may run into challenges if they try to adjust pay within a metro area or region — few employees will consider it fair to pay employees who live in the city more than those who live in the same metro area but in outer-ring suburbs. And adjusting pay by zip code within a metro area may be considered discriminatory.

It’s important to note that, in some cases, businesses will need to adjust remote employees’ pay to comply with local minimum wage and other regulations, which could mean increasing pay.

Offer modified adjustments. Businesses considering pay adjustments for remote workers can mitigate some concerns by doing so on a going-forward basis. In other words, set pay for new remote employees who join the organization to reflect their location.

And rather than cut pay for current employees who move to lower-cost regions and then sit at the top of the pay scale for that area, the employer might freeze their pay. After the employees’ compensation returns to the relevant pay range, they’ll again be eligible for pay increases.

Offer location-based premiums. Another option is to offer a base rate of pay, perhaps derived from national compensation data, as well as a premium that varies with each employee’s location. Employees who move to higher-cost regions receive the premium. The premium is removed for employees who move to a part of the country where the cost of living is lower.

Challenge or opportunity?

While the shift to greater remote work creates challenges, it also offers opportunities. Employers gain access to a larger pool of employees. Businesses that reduce office space may save on facilities costs. Your accounting professional can help you review compensation policies and craft one suited to your organization. He or she also can help you implement it in an equitable and logical manner.

Need Additional Information?

If you need more information, please contact us so we can connect you with one of our CPA advisors who will be committed to your business and personal success. BLS is here to help!