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Geographic Pay Issues Appear to be Resolving Itself

May 26, 2022

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

With the onset of the pandemic and the issue of remote workers, a big question in compensation has arisen: do you pay rates based on the location the employee had been physically working or do you pay the rate in the geographic area the employee now lives?  Although IT was most impacted by this issue, with many moving to Texas or Florida, where state income taxes are zero, other industries allowing remote work are being impacted.

Organizations originally approached this issue by paying remote workers less because the trend at the time was cutting pay for remote workers.  They weren’t working onsite or at the location of the site they worked.  They worked somewhere else in the U.S.  California is expensive, Texas not so.  Of course, this approach made employees angry, and in a time of the Great Resignation, only increased the turnover. 

As a result, World at Work did a survey and found that organizations appear to be simplifying pay philosophy and policies surrounding geographic pay.  The study, “Geographic Pay Policies,” shows that employers are starting to eliminate various geographic tiers of pay and using a more “global” approach. “Geographic pay policies have existed for many years, but in the past were more about an organization’s multiple physical work locations rather than where the work was being performed, including employees’ homes like with remote work,” said Alicia Scott-Wears, WorldatWork Director Total Rewards Content. “With the increase in remote work over the past two years, these philosophies and policies have required more attention and communication.”

The survey found that 28% of organizations responding plan to modify their policies through consolidation of pay differentials, while 13% are considering eliminating differentials by geographic area.  The 13% is an increase of 6% from the previous year.  The survey also found that:

  • 45% of organizations apply pay differentials as a premium or discount to either a baseline/single pay structure or individual pay, and 24% create separate base pay structures for each/different geographic location.
  • For in-office or hybrid employees the geographic pay locations are most often determined by their nearest work location (45%) or reporting location (31%), while over half of full-time remote workers are tied to location of residence.
  • 56% of organizations use city/metro area to base geographic pay differentials, and labor cost is overwhelmingly a greater influence than cost of living for determining pay policy approach.
  • Only 7% of organizations report geographic pay policies as ineffective for reducing turnover.
  • Of the 57% of organizations with existing U.S. geographic pay policies in place, 55% of those are considering modifying or recently modified their policies with the increase of full-time remote work. Those that have modified in the past 12 months have nearly doubled since 2021.
  • Just as many organizations are expanding as are consolidating the pay differential application in relation to their geographic pay philosophy and 29% of those changes would impact employee pay immediately upon policy rollout.
  • These changes and/or considerations are pertinent as 73% of employees expect their pay to differ based on a geographic location.
  • While employers often feel their communication of the geographic pay policies and procedures to employees is primarily transparent, employees appear to be receiving the transparency they need with 85% reporting their organization is moderately to extremely transparent.

Even if employees expect pay differentials, they don’t have to like it, and it could cause turnover.  With pay being an attraction and retention tool, a “global” policy that eliminates geographic differences is likely the wave of the future, especially with inflationary pressures experienced today.  With work flexibility still a major desire for employees, many are feeling they should not be penalized for a pandemic they couldn’t control.  Remote and hybrid work was a trend that was coming, which the pandemic caused to speed up at lightening rates – again not the employee’s fault.

As the future of work is still developing, flexibility will be a driver of employee retention, with 38% of employees to consider looking for new work if discontinued. This has increased 17 percentage points since the COVID-19 Employer Plans and Employee Perceptions Study conducted in 2021.  Therefore, with jobs unfilled and with the ability for remote work, a remote workforce is the wave of the future and pay practices will be a major consideration of potential employees in this market.

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