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Should Compensation Be Based on Location?

June 28, 2022 Talent Management
Kaya Ismail
By Kaya Ismail

The widespread adoption of the remote workplace has heated up a debate that's been simmering for a while now. Should an employee be paid based on the going rate where they live or should they receive the same compensation regardless of where they're located? In other words, should employees who choose to live in cheaper locales be paid less than those in more expensive areas?

The decision isn't cut and dry, nor should it be made lightly. The choice can have a significant impact on employees and on an organization's ability to attract and retain employees. Here's how leaders can choose what is best for their organization.

Location-Agnostic Pay Vs. Location-Based Pay

The difference between location-agnostic pay and location-based pay is fairly straightforward. Location-agnostic pay is compensation that does not account for an employee's location. The company's internal pay scale, the skills and experience of the employee and the person's overall performance are the criteria that typically determine pay in a location-agnostic setting.

In contrast, location-based pay is when the employee's address determines the compensation. The salary scale is based on the local area's average. This style is practiced in many regions across the world. For example, several organizations in the UK pay employees more if they work within the city of London — and pay those based in Asia less than what those working in New York.

The rise of remote work has made the issue more complex, with legions of workers previously tied to an office location, and a location-based pay model, unleashed and able to work from anywhere. Add the challenges of the Great Resignation and the challenges of hiring and retaining employees in a disrupted job market and you've got recipe for trouble.

Related Article: Geographic Fluidity and the Quest for Talent

Pay Attention to Pay Equity

Perhaps the biggest problem with a location-based pay model is pay equity. This has become a hot-button issue, particularly a rising tide of regulations require mroe transparency about what people are paid. If employees find that other staff members are being paid relatively more for the same work, they can become disengaged and seek employment elsewhere.

But choosing a fair and equitable location-agnostic pay scale can also be challenging. Companies that operate across countries will need to pick a pay scale that is suited to the global workforce. 

"Giving an employee living in San Francisco a salary the same as a person staying in Thailand isn't going to work out for you," said Peter King, co-founder of Authority Builders in Singapore. "If you demand good work quality and a high skill set, you must also pay your employees adequately." 

However, this assumes that the organization is basing compensation on a location where wages are lower, for example basing salaries on Indian pay rates for staff in the US. Companies may instead want to pay their staff in India the rates of workers in the US, which would present a highly attractive incentive for workers in that region since the average Indian salary is $482 per month, while the average US salary is $5,345 per month

Related Article: 5 Things Leaders Can Learn From Airbnb's Approach to Remote Work

How Durable Is Your Remote Work Model?

The workplace of today is in constant movement — and so are many of its workers. Allowing employees to work from anywhere around the world and to relocate as they please means a location-based pay model can be problematic in the long run. The value of what an employee is paid would change from one place to another, thus requiring constant changes to the accounting process. That can be very costly and unsustainable for the organization, not to mention frustrating and confusing for the employee whose pay would be constantly changing.

Companies that choose to allow employees to relocate should have a clear policy. One tactice could be to require a "permanent" address that serves for both pay and tax purposes regardless of where the employee is choosing to work from for periods throughout the year.

Another challenge is the fluctuating exchange rate. What the dollar is worth one week to the next can sometimes change dramatically. To counter this, companies would either need to pay employees in local currency or make clear in the employment contract that an employee's salary may fluctuate over time. Even with a location-agnostic pay model, employees who opt to move around would encounter fluctuations in their living wages due to the changing currency exchange rate.

Related Article: How to Grow a Global Talent Pool

Be Transparent About Policy (and Reasons Behind It)

Regardless of the decision, one of the most important considerations is to figure out a way to prevent conflict. Leaders should be fully transparent about the policy they've chosen, as well as the reasons why they settled on that approach. From it's important to carefully explain how it will be handled in each possible scenario.

Whether pay is based on location or not, companies will need a pre-determined policy for raises, promotions and bonuses so employees know what to expect. This creates transparency and builds trust. Unfortunately, there's still work to be done and there are not many examples to learn from.

“I have not seen a company design a policy that pays the same salary for a job regardless of where the job would be performed,” said Anthony Smith, chief HR and operating officer at Chicago-based Atlas.

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