The Death of Location-Based Pay?

Should it be? For most organizations, we think it probably still makes sense.

by Tristan Orford and David Wohlreich

Is location-based pay dead?

Should it be? For most organizations, we think it probably still makes sense.

Pay matters

Pay is really important. It seems silly to have to say it, but sometimes folks conflate recognizing that pay isn’t the most important part of the “employee value proposition” with saying that it doesn’t matter. Pay matters. A lot.

Pay isn’t the most important thing. You can’t pay people enough to be happy or to do great work. You can’t pay enough to make toxicity or sexual harassment not matter (side note: please don’t attempt this). But you can definitely pay too little, or unfairly, or even illegally.

So, pay matters, it’s emotional, it’s the assignment of value to our labor, and, for many workers, an assignment of value by our employer to us as people. It determines our lifestyle, limits or unlocks parts of the world and means of expression or mobility, and ultimately determines what our life looks like in many ways. And while most people want more pay (your authors very much included), even more they want fair pay – though how folks define that and what feels “fair” will be highly variable and idiosyncratic. They want to understand and believe that their pay is aligned with their values, their contributions, and their peers.

It’s little wonder, then, that the recent discussion (argument/battle/firestorm) about geographic-based pay practices and remote work has exploded. From a once esoteric compensation practice (I remember having an utterly geeky argument early in my career with a colleague as to whether four or five geo tiers for the US was the better practice), it’s made headlines across the country and fallen neatly into building movements calling for greater pay transparency, workers’ rights, and even a rebalancing of power in the employer-employee relationship.

The usual disclaimer (for real)

While we may allude to legal considerations, we are not lawyers, and any professional is advised to consult an experienced employment or labor attorney prior to engaging any area with a lot of complexity – like pay or benefits. Similarly, while both authors are employed as total rewards professionals, these words are our own and are informed by as broad a review of the space as we’re capable of. They do not necessarily represent the views or actions of our current or any past employers. While both authors have experience in global rewards, we are both Americans and recognize our frame of reference is anchored in U.S. employment, particularly technology, media, gaming, and entertainment employment.

Remote Work

In the old days, the before times, most people lived and worked in a single place. Movement was limited, and companies paid based on what it cost to hire people where they were hiring. A manufacturing plant in Boise paid differently from a plant in Northern California which paid differently from a plant in Jakarta. And that’s still true, for the most part. But some things have changed.

Workers are more mobile, particularly knowledge workers. Globalization, teleconferencing and video conferencing technology, and cultural norms, have all increased both the available pool of talent and where people could be based for a given job. Remote work grew, but was still largely a niche practice for certain jobs, certain companies, and certain individuals. 

Then the pandemic hit, and offices everywhere shut down as folks moved away or worked from home. Companies leaned into what they saw as the future of knowledge work and adopted remote-first or remote-friendly practices. Some companies went fully remote and gave up their offices entirely. By some estimates, the pandemic accelerated the proliferation of remote work by more than a decade.

Inputs, Outputs, Widgets, and Woe

How do we determine what to pay someone? As your authors have spent the better part of two decades working on the answer(s) to that, it shouldn’t come as a surprise that we’d say “it depends.” Broadly, pay management is the intersection of business context, talent competition, company culture, and business operations.

• Most of all, we pay what we need to in order to hire and retain the people we need to run our business at a cost we deem acceptable. If we paid everyone local minimum wage, we’d never be able to hire or retain most workers. If we paid everyone a million dollars, we’d go bankrupt and cease operations. 
• Pay is also modulated based on internal policies and ways of assessing impact and value (think: job levels and roles), operating and profitability constraints, regulatory and labor requirements, and a host of other nuances.

The way most companies with knowledge workers determine pay is based on role, level, geography, and sometimes performance. An entry-level clerk makes far less than a Chief Software Architect. A coder in Sofia makes a different amount^[1] Typically thought of as “less” when converted into constant currency, although the true answer is more complex than that due to variations in purchasing power by location. than a coder in Tokyo. A top salesperson hitting 135% of quota and all sorts of accelerators makes more than a peer who fails to meet quota. Very little of that seems controversial (although believe us when we say there are still debates about these concepts in practice).

Yet remote work and mobility create complexities and challenges for companies which operate in more than one talent market, or who find themselves competing with an increasingly global talent pool. Consider an employee who moves from an office in Indianapolis to an office in New York City. The cost of living is dramatically higher, the cost of office space is much higher, and that employee would need to earn far more for that move to be anything other than a massive cut in spending power. The reverse holds as well; someone moving from NYC with NYC pay to Indianapolis would be able to recognize a standard of living on par with someone making many multiples more back in NYC – and they’d be making way more than their local colleagues who had only worked in Indianapolis at Indianapolis pay.

The work, though, hasn’t necessarily changed. If this is a software engineer, they’re likely writing code, planning architecture, doing code reviews, sprint planning, and doing everything else they did in their previous office. The input (work done, performance) hasn’t changed. Why should pay change? 

That disconnect, the adjustment of pay based not on contribution but on location, seems deeply unfair – even discriminatory. And that’s exactly how it’s been branded in much of the press and editorial coverage of this topic. “Google Threatening to Cut Remote Worker Pay” was a trending headline for some time, even though the practice was only considered news because it was affecting more people (because they were allowed to move and were doing so), not because it was actually a new practice (it wasn’t). It feels like a punishment and is thus portrayed as such. The core of the remote work pay pain is likely the conflict between perceived fairness on the part of the individual and what’s fair at scale across the entire company. As a rule, employers need to treat employees fairly, and they particularly need to solve for the health of the organization as a whole. The employee, of course, is primarily concerned with their own situation. That’s not ego; that’s human. 

But what is the alternative? And what if the alternative is worse? We hope to illustrate in the next sections how making adjustments to pay based on an employee’s geography is in fact a fair way to manage pay, and that for many organizations, it may be the most viable way to manage compensation at scale. While there are alternatives, these will likely be applicable in specific circumstances, which bring substantial trade-offs of their own, both for individuals and organizations.

Alternatives to Geo Pay

A number of companies have come out to publicly state that they’re eliminating geographic differentials. In other words, they’ll pay everyone using the same rates, irrespective of geography.^[2] It should be noted that the vast majority of these define this domestically, i.e., they will pay people within the same country the same rate. This concept is very difficult to administer … Continue reading Most of these companies are smaller with only/primarily domestic workers and often a heavy anchor point in a high cost-of-labor area. But not all of them. And there are reasoned and principled arguments why national pay practices are compelling (some of your authors’ favorite people have written on the subject). It’s infinitely easier to administer. It feels more just at a micro level to know that you’re paid based on your work, not where you work. The costs, particularly for smaller businesses, aren’t likely materially different.

But it’s worth also considering the limitations of this approach. Specifically, not differentiating pay makes it very difficult to change your context (for example, to scale up to substantial size), and it may introduce perceived or real fairness issues of its own. We’ll explore these in the next section when we talk about why this becomes more important at scale.

What About at Scale?

At the macro level, and at scale, things start to get trickier. To start with, part of what makes pay at large organizations such a complex topic is that at large organizations, it’s effectively impossible to definitively say how much value any given individual contributes. If we could do that, we would make that the basis for pay and the whole matter would be closed. This may sound trivial or scary (we’d argue the latter can be true at times), but we bring it up more to acknowledge that context matters. How the organization manages pay for a given role is inextricably linked to other practices, such as how large organizations can pay their employees when they take vacation (this is not how a sole proprietorship works, unless you have an entirely passive business model). The point of this is, any individual knowledge worker cannot say what they’re worth (in terms of value added to their business) on an individual basis, at least not with a high degree of certainty. There is some ability to understand these things on a relative basis and at a macro level (i.e., as a whole, we’re making more money than we spend so that’s probably a sign we’re doing something right), but not at the level of an individual employee. However, it’s exactly the point of a person’s pay relative to other employees where another imperative does come into play, pay equity. Organizations do need to manage the pay of their people relative to one another, so in other words, there is a strong ethical and compliance push to have people in the same location and job making similar amounts (assuming similar performance). The fact that the equity of pay can be evaluated in more quantifiable (if not exact) terms than an individual employee’s direct value add is, in a nutshell, why organizations with geographic pay bands will adjust pay for their employees when they move geographies.

Additionally, few companies, especially in the knowledge economy, have global pricing for their products. Their offerings are usually priced based on local or national conditions, which has an impact on what they in turn can pay employees in that location. If prices are much lower in a lower cost-of-labor area, and salaries aren’t similarly lower, profitability may be greatly damaged – or impossible. At some point, this translates to insolvency for the company and no job for the people at that organization.

Consider where the pay scale is anchored, as well. Most companies which have moved to a national pay structure have strong employment anchors in the highest cost of labor markets (SF, NY). If a company adopts a national pay structure which isn’t anchored on those highest cost of labor markets, they’ve effectively guaranteed they’ll never be able to hire there. And while the availability of distributed talent has never been greater, these famous hotspots of talent and networks persist for a reason – there are simply a lot of amazing people clustered in these areas. And this clustering is often associated with higher productivity of these workers and industries affected by it. In other words, there is a sound economic/business logic to paying more to compete in these markets but perhaps not to pay those market rates elsewhere.

The cost of raising your national (or international) pay practices to align with the highest cost-of-labor markets would devour profitability or even operational viability for many companies, particularly at scale. If you have two hundred people and a scalable software product, it’s probably feasible. At ten thousand or a hundred thousand, you are almost certainly talking about an existential cost. Alternatively, companies going to a single national pay scale may find that the scale which works for them is lower than what would be competitive in the highest labor cost markets.

Lastly, it may actually not be as popular as you think with your people to use a single national pay structure. Said another way, it is possible to overpay on a relative basis between locations, just as much as it is possible to under-pay. This is especially true if you aren’t ready to lean into a remote first or location agnostic message. For example, let’s consider a company with two primary locations of workers – New York City and Indianapolis (we use these cities because one of your authors has lived in both, and can attest that pay and cost of living are profoundly different). New York has among the highest costs of labor and costs of living in the country. Indianapolis is much more modest. Pre-pandemic, workers in NY were being paid far more than workers in Indianapolis, both roughly aligned with the competitive market in their respective areas. Let’s assume that the company decides to pay equally in both of these locations. And let’s even assume they pick the higher NYC rate to pay at. While superficially this seems generous, and we should expect the Indianapolis folks to be quite happy, those in NYC will probably have grounds to complain (and almost certainly will). They might point out, with some accuracy, that if the company is willing to over-index pay by a large margin in the Indianapolis market, why won’t they do the same in NYC? While cost of living isn’t the primary benchmark most companies use, there will be visible disparities in how folks can live between these two places that will be substantially exacerbated under this model. This is especially true if the company expects some of its people to remain in New York at any point in the future. 

Side note: if you’d like to pay your people more, that’s commendable, and we’re generally fans of considering that. An alternative to national pay rates would be more generous pay, but still calibrated to location. So for example, rather than (using the above example) paying people in NYC the same and in Indianapolis 20% more, pay people in both locations 10% more.

Ok, so if universal pay structures aren’t feasible for most companies, why not simply promise not to “cut” pay if someone moves?

This seems like the least contentious approach to mobility and pay, but we’d argue it’s actually the most toxic – and it’s where many companies will end up by default if they don’t take an active and consistent posture related to adjusting pay. Let’s return to our New York/Indianapolis example. If the company eliminates geographic pay adjustments, and a worker moves from NY to Indianapolis, they’ll be paid much more than peers. This feels great for the NY worker. It’s toxic for everyone else. And inequitable. While being paid based on where you are may not be totally free of controversy (virtually no practice is), being paid based on where you were is viscerally and actually discriminatory and not a scalable or compliant business practice. Not that we need to dunk on this concept any more, but it also fails the “reversibility test” (does it work the other way around). Paying someone less because they moved to a higher labor rate location from a lower rate location is not a generally advisable business practice or attractive proposition for the employee.

It’s worth sidebar-ing for a moment on what may seem like a counterexample to the above, the old-fashioned, incredibly rich expatriate packages that executives secure for fixed-term assignments abroad. You send someone from your headquarters to a different market to open a new office, build a team, or something like that. They’re paid based on their home/prior location, with all sorts of perks and benefits, and then asked to hire a local team at local rates. For a short term solution, this can work, and without robust expatriate support, few leaders are willing to take on that kind of disruption. But the key here is time. Even in their heyday, expatriate assignments were considered time-bound, and the expat worker was never meant to be comparable to their counterparts locally. And in fact the whole point was that there were no local counterparts to their roles. If left to persist too long, they could create an effective caste system, where local workers and foreign workers are paid differently, treated differently, and have limited mobility. And these are in fact the very factors behind the waning of this practice. So in short, this is not a promising model for how to handle the current situation defined by workers moving primarily domestically, permanently, and for predominantly personal reasons.

So What Now?

Different companies will adopt different practices related to mobility and pay. It’s an exciting time to be in the field. What matters most, beyond legal compliance, is being consistent and clear. Companies which adjust some workers’ pay and not others will incur significant cultural risk, to say nothing of legal risk. Pay equity has long been the top concern of compensation professionals and an ever-present target for litigation. The usual “we’re not lawyers” caveat applies here, but as HR professionals we can tell you that your practices matter a lot both in actual and perceived fairness of your systems.^[3] We and others have written about the relevant concept, our take is here: procedural justice.

Your authors are not prognosticators (if we were, we’d have made some different investments and probably wouldn’t be working now). But we definitely have some frameworks informed by dealing with these topics in multiple settings and spending a lot of time during and outside of work thinking about them. And in some respects, geographic pay decisions are an attempt to guess where the labor market is now, and where it’s going. So, we’ll offer a few thoughts.

The rise of remote work is legit. It’s not going away. We’ve probably passed beyond a world where most knowledge workers need to come into cubicle farms 5-days a week. More companies will transition to remote-first or remote-inclusive practices. It would be surprising if most companies employing such workers don’t adopt hybrid models and offer more flexibility to workers.

The end of the office is overstated. Human connection, collaboration, and identification has not been replicated or replaced by remote communications technology. Most workers will continue to live and work in related areas, and most workers will have a desk somewhere outside their homes.

Giant campuses will diminish and hubs will grow. Offices will transition more to a place for focused purpose than a default. We’ll go to offices for a reason, and expect that reason to be good. Companies will embrace the opportunities of diverse time zones and cultural coverage which hubs unlock, to say nothing of much cheaper real estate outside the major urban areas of the world.

In this world, geographic factors will remain meaningful in setting pay. Companies adopting national scales will be niche, and their impact on local pay practices will remain modest. If more companies lean into this space, we could see costs of labor rise in lower cost of labor markets just as cost of labor growth slows, or even reverses, in the highest cost of labor markets. This will take time, and probably still be limited. To use our example from earlier, perhaps we will see some evening out between New York City and Indianapolis. That’s likely even desirable. But it won’t mean they’ll be the same. Most workers can’t move, or won’t want to – jobs and relative pay are only one reason people choose a place to live. Most jobs will remain tied to a location, at least to some extent. And the impact of those salaries will be much more pronounced than the relative minority of folks moving to remote-first, even digital nomad existences. 

What Should We Do?

Each company will make its own decisions, based on an infinite number of considerations. And what’s right for one company won’t be right for everyone.

For smaller companies with the means, a national pay band is easy, makes the company incredibly competitive in lower cost-of-labor markets, and has a superficial equity appeal. It may create resentment for those anchored to higher cost of labor markets, and will certainly create profound challenges if companies ever do want to entice someone to move to a higher cost of labor area. Good luck getting an engineer in Indianapolis making NYC money to move to NYC without a pay raise.

For most companies, we expect simplified geographic pay practices to be the dominant paradigm. Whether it’s a state-based cost of labor differential, a closest-city-based rate, or even an exhaustive ZIP code table, most companies will pay folks based on where they work. And to remain aligned with the market, manage pay fairly, and balance costs, we think that’s appropriate.

In terms of managing both perceived fairness and compliance, we would encourage folks to leverage the “printer test”.^[4] Also, hopefully obvious, but we’re a big fan of aligning with your trusty internal and/or external employment law colleagues on topics like this. Does the reason and magnitude of how we’ve set someone’s pay pass the test of being explainable if it were left on a printer by mistake and seen by that person’s peer, a journalist, or auditor from a government agency? If it’s based on a data point that’s something you can track in an HRIS system and calibrate as an organization, chances are that it passes the test. The good news is that geographic location is a viable option for one of those data points. Not the only reason to use it, but not a bad one either.

Post Script: a Note on Differentiation of Stock Compensation

The above discussion has largely focused on salary, with some implications for other cash compensation as this is often denominated in terms of a percent of salary.^[5]If you don’t happen to define them this way, it’s probably worth adjusting bonuses in line with your treatment of salary. What about stock compensation? We would argue that the same logic largely holds. Namely: context and philosophy matter, but prevailing practices and relative competitiveness of a given quantum of stock compensation will vary radically across geographies, and so you’re probably best served by adjusting your stock granting approach accordingly. So especially as your company grows and evolves, you will likely want to consider granting differently in different geographies. As with salary, this is especially true across international borders (different pay levels, tax treatment, and existing norms around pay mix are all worth factoring in) and where differentials in cash pay are substantial, 10% is a decent heuristic to use for most OECD economies. This doesn’t mean you need to have different guidelines for every country or currency, but we’d recommend asking the critical question of what groupings make sense for the locations you operate across. If you have very different locations, that should probably mean different salaries, and stock guidelines too.