In a remote world, should pay be based on location?

Remote work, already on the rise before 2020, went mainstream during the pandemic. Now in the second year of Covid-19, even more companies are embracing ongoing remote or hybrid models of work, with employees based in other cities or other continents. According to the ADP Research Institute, more than half of employees worldwide were working remotely or in a hybrid arrangement at the end of 2020. 

LinkedIn reports that since March 2020, remote job postings increased 2.8 times globally, with even bigger increases in countries such as Brazil, Spain and the U.K.

Pay trends are usually locally defined — by law or by the market. But during the pandemic, as many companies went fully remote, there was an exodus of office workers from high-cost-of-living cities to cheaper ones, which may change the way companies set pay.

Since the start of the pandemic, 75% of workers globally have changed or plan to change their living arrangements, according to the ADP Research Institute report People at Work 2021: A Global Workforce View. United Van Lines, a moving company in the U.S., reported that requests to move out of high cost-of-living cities such as San Francisco and New York increased by 23% and 45% respectively in 2020.

This raises a prickly question: Should the local cost of living play a role in how much a remote employee is paid?  

The conversation has been intensifying since June 2021, when Facebook announced pay cuts for remote employees who move to  lower-cost regions, and Google made a similar announcement in August. It’s something other global companies are also considering: is location-based pay fair for employees and employers? 

Location-based pay in action

Many companies around the world have had entirely remote workforces for years — to save on office expenses and attract top talent — and have figured out location-based pay structures that employees find fair. 

Miranda Yen is the founder of VinPit, a vehicle search company registered in Singapore with over 100 employees based in China, Singapore, India, Pakistan and the United States. 

“We have a very diverse workforce. There is definitely a payment difference based on location,” she says. “We take into consideration factors such as the local average salary system, the exact work type and industry salary standards. It depends on the labor market standards of the country, but also on exactly what kind of work you do, whether it is copywriting, marketing or IT.” 

Many businesses that recruit worldwide end up paying employees in low-cost-of-living countries more than what the local job market dictates. Businesses keep their personnel costs lower, while employees are paid generously for their local markets. 

VMware, a U.S.-based cloud computing company with 35,000 employees worldwide, announced last year that employees choosing to become permanent remote workers would get a pay cut if they left Silicon Valley for a less expensive city. At the time, Human Resources VP Rich Lang told Bloomberg Quint that some employees could see pay cuts, while others could get a raise if they chose to move to a larger or more expensive city.

“We adjust pay in line with our competitors’ and industry practices, based on the cost of labor in any given market,” says VMware public relations director Michael Thacker.  “Specific pay adjustments are based on extensive research that we conduct to ensure competitive compensation for different markets.” 

Considering location-agnostic pay 

Some companies find location-based pay an unfair practice that can exacerbate pay inequality by gender or ethnicity. Some global companies pay employees on the same scale regardless of the worker’s location, often pegging salaries to California market rates. 

Help Scout, a global software company headquartered in Boston, transitioned from location-based pay to location-agnostic pay in 2018. “The question is, what is the intrinsic value of the work? A taxi driver in Vietnam gets paid differently from a taxi driver in New York City, which makes sense,” says co-founder and CEO Nick Francis. “But if you work online, the intrinsic value of your work is the same independent of geography. It’s not more valuable because it was created in New York City instead of Vietnam.”

“One of the reasons we moved to location-agnostic pay was employee feedback,” he says. “It’d be difficult to argue that paying people equitably for the same work is unfair. We don’t ask them to live in a city with a high or low cost of living — it’s their choice. As a business, that’s not really our concern.”

Localized pay has traditionally been standard practice for companies looking to cut costs. North American and European companies have tended to set up software development and customer service centers in developing countries where labor costs are low. After the pandemic hit and remote work temporarily became the new norm, smaller operations especially continued to recruit from regions where the cost of labor is low. 

Working in your home country but getting paid in euros or dollars is a dream come true for anyone.

Sanjana Murali

Sanjana Murali is a product marketing manager who works from her home in Chennai, India, for Leadfeeder. The fully remote Finnish company, based in Helsinki, has a diverse team spread across 25 countries. Murali’s pay is on par with European market rates, higher than a local job. 

“I’m happy with my pay as it is way more than the Indian market rates. I’m completely satisfied,” she says. “Working in your home country but getting paid in euros or dollars is a dream come true for anyone.”

But when global giants like Facebook and Google reveal their intention to cut the pay of existing employees if they decide to move to a less expensive area, the backlash should come as no surprise. Executive and HR leaders across the world have spoken out against this. 

Regarding location-agnostic pay, Francis says, “I don’t believe it’s going to be much of a debate 10 to 20 years from now. Location-based pay is only logical if location affects the value of the output. For most online businesses, this is not the case.”

While she supports setting pay based on location as well as skills and experience, Yen says cutting pay for existing employees is discouraging.

The companies willing to pay equitably based on the value of the work will attract the best talent.

Nick Francis, CEO of Help Scout

“From the perspective of the business, it can really reduce a lot of spending in terms of management, salaries, space. But I also think there are some concerns,” she says. “If a company is simply paying their employees different salaries for the same work just because they are in different locations, this system can easily backfire and result in a lot of talent loss. Some employees would probably get paid less for the same amount of work if they relocate to other areas, which can be demotivating.” 

Workplaces are constantly evolving and adapting, and each company will have to figure out what works for their business. Remote or hybrid work, which was seen as a rare privilege until only a few years ago, is now the norm. Similarly, the debate about location-based pay vs. location-agnostic pay may look very different a decade from now as supply and demand and employee sentiment shape the future of work. 

Francis says, “We’re all competing for talent, and the companies willing to pay equitably based on the value of the work will attract the best talent.”

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