Types of Remote Pay: Location-Based vs. Job-Based

Should you be paid based on where you live? Or should your job responsibilities be the only deciding factor when you work remotely? Nearly half of employers in a Gartner survey from 2020 said that they will now let employees work remotely, full-time on an ongoing basis. Meanwhile, Upwork’s Future Workforce Pulse Report states that by 2025, over 36 million people in the U.S. will be working remotely. According to the report, this accounts for 22% of the national workforce, and marks an 87% increase from pre-pandemic levels.

For employees, this presents an intriguing possibility: Could they take their current salary, which was perhaps previously tied to a location with a high cost of living, and move somewhere less expensive?

If those employees work at Reddit, for instance, the answer is yes. In an October 2020 blog post, the social content company announced that it will eliminate geographic compensation zones in the U.S., meaning employees can work wherever they choose in the country, but still earn compensation tied to the pay ranges of high-cost cities such as San Francisco and New York. Other employers, including Facebook, have taken a different approach, permitting workers to telecommute but adjusting pay to reflect the cost of living in employees’ new locations.

Will location-based salary and decentralized pay scales become the norm for remote workers? For most employees, it depends on the industry they are working in, company policy, and how effectively the job can be done remotely.

Remote Pay Options

Before the advent of the internet and mobile technology, most work had to be done on-site. And depending on the city and cost of living in it, what could be considered a good salary could look very different for the same role in different locations. 

Similar criteria still apply in today’s era of remote work, as there are several options for compensating employees, including pay based on the employer’s location, pay based on the employee’s location, or a pay scale based on a national median. 

• Pay based on company location: Let’s say, for example, that you’re a software developer currently located in San Francisco. According to PayScale, the average salary for your job title in San Francisco is $105,898 per year.
• Pay based on employee location: If you take your skill set and experience as a software developer and move to Tulsa, Oklahoma, however, the average annual base salary for your role would be $64,297. That’s not as bad as it sounds—the cost of living in Tulsa is actually about 49% cheaper than in San Francisco, and housing is 80% less expensive.
• Pay based on national median: If the same software developer was paid based on the national median, the Bureau of Labor Statistics (BLS) reports that the median annual wage for this profession was $110,140 in 2020.

How Should Remote Workers Be Paid?

Research-based consulting organization Global Workplace Analytics (GWA) estimates that 56% of U.S. workers hold a job that’s compatible with at least part-time remote work. However, in the wake of the coronavirus pandemic, GWA predicts that 25-30% of the workforce will telecommute multiple days a week by the end of 2021.

The increase in remote work has complicated compensation strategies for employers. Should remote employees who live in a different location be paid based on the cost of living in their city or state? Or should pay scales be set on a company-wide basis? Some employers pay local rates of compensation based on the cost of labor. However, the job is also a factor, especially in high-demand occupations.

To use the example from earlier, the BLS estimates that the number of software developer jobs will increase 22% between 2019 and 2029, much faster than the average increase for all occupations. Companies relying on a workforce with hard-to-find technical skills and a surging occupational outlook may be more likely to pay at a higher scale.

Employers are grappling with issues surrounding pay for remote employees. The Society for Human Resources Management (SHRM) reports that employers are faced with deciding whether to adjust compensation to align with the local cost of labor, or to continue to pay higher wages based on the organization’s location and the employee’s current salary. 

Pros & Cons of Decentralized Salary

From a worker perspective, decentralizing salaries would seem like a definite win. But for both employers and employees, there are pros and cons to working from anywhere while keeping HQ-level pay.

Pros of Decentralized Salary Explained

• Higher pay: The biggest pro for employees is the most obvious: more money.
• Flexibility: The other pro for employees is flexibility. If you’re not locked into one location, you can work remotely from anywhere.
• Increased worker loyalty: Employers may see considerably longer employee tenures if they allow workers to live anywhere and keep their salaries. In addition to boosting job satisfaction, higher pay may make it impractical for workers to change jobs in their new location.
• Attracting talented candidates: Without adding a dollar to their budget, employers may appeal to candidates who have their choice of job opportunities.

Cons of Decentralized Salary Explained

• Salaries may flatten over time: Even if most employers who go remote choose to allow their workers to take their salaries with them, that bonus may fade with time. If permanent remote work-from-anywhere becomes the norm within an industry, employees may find themselves facing competition from many other skilled workers. Some of those workers may even be based in countries where the cost of living is much lower than in the U.S.
  
• Stiffer hiring competition for small businesses: Local businesses may find themselves in competition for talent with global enterprises. Our software developer in Tulsa, for example, isn’t going to accept a $64,000 annual salary if they can get six figures there without having to cope with the Bay Area cost of living.
• Employees may wind up feeling trapped: It’s too early to say whether implementing location-agnostic salary ranges will become a widespread trend. If only a few employers do so, there’s a possibility that some employees would wind up locked into a lifestyle they couldn’t afford if they changed jobs.
• Tax complications: Payroll, income tax, and benefits may become complicated when a company is in one state and its employees are in another. Each state has different guidelines for taxes, unemployment insurance, and workers’ compensation that employers must comply with.

Salary Negotiation Tips

You probably won’t be able to negotiate decentralized pay, but you can use this concept to help you get a higher salary.

Start by scanning job advertisements. It won’t be too difficult to figure out which employers offer tech-hub pay for work-from-anywhere positions. They’re likely to mention it right up front as an employee benefit.

No luck finding job listings that offer location-independent pay? Take note of other pay factors that influence salary ranges. Are employers seeking certain skills, certifications, or experience? If you have them, make sure to mention them in your cover letters, resumes, and during job interviews. If you don’t have them, look for ways to add the qualifications that you’re missing.