The pandemic has changed the way we work. One of the most notable changes is the shift to a remote working model, and with this shift, some employers are rethinking the way employees are compensated.
Companies have seen their existing employees move away, often from big cities, to more remote areas where the cost of living is lower. They are also hiring new employees who live in places far from their offices, with no expectation of them ever coming in to work - or at least doing so rarely.
This shift has been in the making since even before the advent of the COVID-19 pandemic. Companies have been experimenting with remote work options and results-oriented work environments for years, based on worker demand and evidence that these lead to more productive and profitable outcomes. More recently, even many holdouts have been moved towards change.
This has opened the door to questions about how companies are expected to pay their employees. Some employers are asking why they should pay people who live in areas with lower living costs as much as they pay people who live in more expensive places, and so they are moving towards location-based pay models, which means paying employees doing the same job in different locations different amounts.
This is a departure from the better-known job-based pay model, which is probably what most people think of when we think of how we’re compensated at work.
Location-based pay vs. job-based pay
What is location-based pay?
Location-based pay means paying different salaries to employees doing the same job based on the standard market rate for the employee’s location, which can mean city, province, or country, even though they work for the same company and do the same job.
So, a software engineer working for a company based in Toronto, ON, but living in Vancouver, BC, might earn a salary of $108,000, the average salary for that job in the province, while an engineer doing the same job in Regina, Saskatchewan, might earn a significantly lower salary of $69,904, the average salary for that job in that province.
The pay is ostensibly based on a few factors, including local tax rates and cost of living, which can vary dramatically. For example, the average rent on a one-bedroom apartment in Regina is $939, while in Vancouver, rent on a one-bedroom is up to $2,176.
Who is using location-based pay?
One of the best-known examples of a company using the location-based pay model is Google. The search engine giant made news in the summer of 2021 when it announced that it would cut the salaries of remote workers who chose to move to less expensive locations and rolled out an internal calculator to show how these salaries would be affected.
Reuters reported that a Google employee who left San Francisco for Lake Tahoe, for example, would face a startling 25% pay cut. The cuts also affected those who previously worked in-office and, though they did not move, chose to continue to work from home. In that example, it was reported that a Google employee who previously commuted one hour from Stamford, Connecticut, to Manhattan before the pandemic would take a 15% cut if they choose to continue working from home after the pandemic.
Facebook, Twitter, and LinkedIn also reportedly claimed that employees who left expensive cities like New York and San Francisco would face pay cuts. Meanwhile, small tech companies like Reddit and Zillow said they would pay the same regardless of where employees live.
What is job-based pay?
Job-based pay, on the other hand, is based on the role and credentials of the employee.
All pay is job-based, of course. Location-based pay just adds in the extra element of location, and, to be fair, that concept is not new like remote work. Businesses have always based pay partly on the job and the employee’s credentials and partly on where they live and work. This is why salary calculators show different compensation levels for the same job, depending on location. But before the pandemic and the move towards remote work, most people lived within commuting distance of their jobs, which was less of an issue. What’s sort of new is the idea of slashing the pay of existing employees because they’ve decided to work remotely and/or move.
The advantages and disadvantages of location-based pay
Location-based pay largely benefits people who live in more expensive areas, and it benefits companies because it allows them to save money on salaries while still being able to access remote talent pools.
It also allows people in some markets to access opportunities they might not otherwise have access to, albeit at a lower pay rate. And it might benefit people living in areas where the cost of living is higher if they are actually able to use this as an argument to demand a higher wage. Most of the news stories on the subject, however, have centred around employees in cheaper locations taking pay cuts rather than those in pricier areas getting raises.
If people are able to ask for wage increases based on location, they should also be able to ask for increases as the cost of living rises.
Downsides to location-based pay may include a negative impact on employee morale. People who are paid less for doing the same job as others who are paid more are not likely to feel good about it and may feel demoralized. Moreover, there are often advantages to living in urban areas, which is one of the reasons they are more expensive.
Women may also feel more of the negative impact, as they are more likely to be caring for children while juggling work and, therefore, may be more likely to choose remote work.
The advantages and disadvantages of job-based pay
Job-based pay doesn’t allow companies to save money on remote employees, but this BBC article suggests that one of the advantages is that it’s more likely to lead to staff harmony. People in higher-cost areas may feel unfairly treated because their salaries don't go as far, but this probably doesn't have the same negative impact on morale as a significantly lower salary for doing the same job. Also, people living in less expensive places can stretch their earnings further and save more money.
Job-based pay may also allow for more clarity about whether an employee is earning what they deserve based on their impact and value to the company.
It's all relative
It’s all relative, of course. Kara Alaimo, an associate professor of communications at New York City's Hofstra University, wrote in a CNN article: "Some may question if it's fair not to cut employees' pay if they move to a less expensive city, particularly if workers originally based in the less pricey location have been making less money.” She states that this is a reasonable question but adds, “the problem is that staffers who once opted for long commutes and lived outside the cities where their offices were located could be subject to pay cuts if they go 100 percent remote -- even if they haven't moved. That's not fair."
Also, if someone leaves an urban area for a less expensive – and often less convenient and/or exciting – place, there’s a very good chance it’s to save money. Cutting their pay negates the whole point of making that choice. So, these same people might reasonably go looking for other jobs.
Things to consider when negotiating salary
If you’re negotiating a salary, what are some things to consider regarding job-based and location-based pay? Workers in higher cost areas may be able to ask for higher wages. On the other hand, by choosing a location-based pay component, workers in lower cost areas may find better opportunities to get a foot in the door for by working for less than a more expensive competitor.
Before negotiating anything, do some research. Explore the market rates for the job based on both your qualifications and location and go from there.
