As companies survey the new remote work landscape, questions about location-based pay loom large: Do you pay a software engineer living in San Francisco the same as an engineer relocating to Kansas City? How do you ensure pay adjustments are calculated fairly, and how do you communicate the shift to employees?
These questions have merit. According to PayScale’s cost of living calculator, Kansas City has a cost of living that’s 45% lower than San Francisco and a housing market that’s 72% lower. An average software engineer making $130,000 a year in San Francisco would only need to earn roughly $72,000 to maintain their current standard of living in Kansas City.
That’s oversimplifying what goes into the adjustment, but it does help companies better understand what a switch to location-based pay might look like for them. Yet, a change in how companies pay different employees in the same position can reopen speculation of pay disparity that’s rooted in existing pay gaps and inequity.
A lack of transparency into how you calculate pay and why your company would make the switch to location-based salaries can negatively impact employee morale. “When you don’t give people clarity or transparency…,”says Ian White, CEO and founder of ChartHop, “…people fill in the gaps with their own (often worse) assumptions.”
For companies entertaining a switch to location-based pay for remote workers, pay transparency is a must. It minimizes the risk of pay disparities by ensuring your team bases pay adjustments on data and objective criteria and helps employees understand how your company calculates their pay.
1. Ground your efforts in pay analytics
Companies adopt pay transparency to promote fairness and eliminate pay disparity. As you adjust pay to reflect an employee’s location, it’s more important than ever to ensure these practices don’t contribute to existing pay gaps. Pay analytics can help you identify and monitor those gaps.
Pay analytics allows your team to break down and view compensation data by specific demographics, such as race, gender, orientation, or any combination of these. By revisiting these metrics over time, your team can see whether you’re making progress toward your pay equality goals.
Location introduces a new metric to the fair pay equation. Whether your company maintains multiple office locations, was open to remote work pre-pandemic, or experienced a surge of relocated employees during the pandemic, visualizing employees by their location can give you insight into how you might approach defining pay locations.
For example, prior to COVID, Slack maintained two pay zones for their U.S.-based employees: New York and San Francisco. Each zone took into account the cost of living expenses for employees in those zones. In anticipation of employees relocating outside these zones post-pandemic, Slack expanded pay zones to five in total. “We created these bands in order to provide transparency and fairness to our employees,” says Nadia Rawlinson, Slack’s chief people officer.
How your company chooses to define location will be unique to your operation. If analyzing location data reveals concentrated pockets of employees in certain states or cities, you might choose to approach location-based pay by the cost of living in those areas. However, if you see a broader distribution of employees, you might choose to adopt a regional approach, looking at broader cost of living expenses for the West Coast versus the Midwest. The key is being able to tie your decision to what the data tells you about your employees and their locations.
2. Create a clear and objective salary formula
Salary formulas enable companies to calculate employee pay based on objective metrics. Basing salary on concrete metrics helps companies eliminate subjective opinions on an employee’s output and worth.
An objective, location-based salary formula involves three parts: base pay, growth levels, and location. Let’s break these down a little more:
- Base pay. Ground base pay for a specific role in market data. Sources like PayScale, Radford, and Dice routinely analyze compensation nationwide to help you keep your base pay competitive.
- Growth levels. Levels further define a role by an employee’s skill and experience, like an associate, mid-level, or senior marketing manager. Levels also help ensure fairness in employee advancement by defining concrete, skills-based criteria that set each level (and salary increase) apart.
- Location. Be clear about how you measure cost of living. Buffer, for example, incorporates their cost of living zones in their salary calculator. These zones—average, intermediate, and high—factor nationwide cost of living trends.
Location-based pay should also consider factors unique to remote employees. At the office, employees have access to company-provided internet, computers, headsets, printers, and general office supplies. But at home, employees pay for internet, phone, and supplies themselves. Factoring these additional expenses into the cost of living for remote employees ensures you’re accounting for an equal work experience for all.
3. Have a communication and training plan ready to go
Educating managers and other leaders on location-based pay helps your team anticipate employees’ pressing questions and deliver clear, unified answers. It’s also an opportunity to get ahead of speculation and rumors.
With transparent communication and training for your salary policy, employees have clarity on how competitive their salary is in the market. (Source)
Comparisons between employees and questions about compensation can be especially common when employees don’t fully understand how their company determines pay or why their company transitioned to a location-based pay strategy.
“When employees understand how pay decisions are made, they’re more likely to feel confident they are fairly paid,” says Jingcong Zhao, a senior content marketing manager at PayScale. “We’ve learned the way people feel about their pay is closely linked to their level of engagement and satisfaction at work.”
A key part of your communication plan should involve educating your managers on the reasons behind your company’s switch to location-based pay and how your company calculates pay. This training is twofold: it reiterates the role managers play in the fair advancement of employees, and it prepares managers for their daily and direct interaction with employees. Consider managers your strategic partners when it comes to consistent messaging about location-based pay. They can meet with employees, answer questions, and float concerns upward to leadership.
When employees understand how pay decisions are made, they’re more likely to feel confident they are fairly paid. We’ve learned the way people feel about their pay is closely linked to their level of engagement and satisfaction at work.
Once you’ve educated your managers, decide how you will inform the rest of your workforce about the move to location-based pay. Some companies might choose to make salary ranges public. This might involve specific figures by role or a clear breakdown of pay by level, location, or zone. Whatever option your team chooses, make sure your formula and rationale are clear, so employees can understand how you factor location into pay.
4. List salary ranges and compensation strategy on job postings
Remote candidates deserve to know upfront if their location will factor into the salary offered for the role—so make it known in your job postings. Doing so allows candidates to know whether they can support themselves and their life situation on that salary.
Being upfront about location-based pay requires that members of your recruitment and hiring team understand and feel comfortable speaking to your company’s compensation strategy. Just like with employees, it’s critical to anticipate questions candidates might have about location-based pay and how it impacts growth opportunities for the role.
Disclosing a location-based approach to pay at the applicant stage is not without its disadvantages: talented candidates might opt to pursue opportunities at companies that pay a more uniform salary nationwide. However, in being transparent about pay, you set expectations and help your recruiting team identify qualified applicants interested in a position. It can save your teams time and remove the burden of salary negotiation on the part of the applicant.
Regularly revisit your commitment to pay transparency and location-based salaries
Compensation should never be treated as a fixed figure, and neither should the cost of living. In order to stay competitive—and committed to pay transparency—companies should continually revisit market data and cost of living figures and adjust base pay and location factors as needed. Being upfront about these adjustments can go a long way in helping your employees understand their pay and feel confident about their growth opportunities at your company.
Learn more about how your company can approach location-based salaries while prioritizing pay transparency with our Setting Remote Work Salaries guide.