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3 questions to ask before adopting location-based salaries

Aug 25, 2020| Reading time: 8min

BY ChartHop

Paying remote workers based on geography may be the right approach for your company, but before you adopt the model, consider what a location-based salary vs. value-based salary looks like in practice for remote organizations.

We put together this guide to explain the logistics of offering location-based and value-based salaries by describing how companies calculate these pay models and the challenges that come with each one.

In this post, we’ll discuss how to successfully execute location-based salaries model, you have to weigh a number of variables for each employee, and you risk creating wide salary gaps if your calculation is off.

Answer the three questions below to determine whether location-based salaries make sense for your company.

1. Are enough employees working remotely to warrant location-based compensation?

It’s likely that calculating location-based pay isn’t worthwhile if only a small number of employees are working in different locations. Before committing to this salary model, gather executives and department heads to discuss the potential of long-term remote work after Covid-19. The group should identify which roles can be done from home and which need to be in the office and should consider whether any upcoming positions in the hiring pipeline would be eligible for remote work, too.

If fewer than 25% could work remotely, maintain your current salary structure. But if more than a quarter of your organization could work from home, it’s time to survey employees. Ask if they would choose to go remote and, if so, where they would work from. Their answers will help you predict whether location-based salaries would be cost-effective for your business.

If you’re a ChartHop user, we’ve set up a bundle so you can survey employees and easily analyze responses, all from our platform.

Sample report showing employee surveys on returning to the office

This is a report showing employee surveys on returning to the office. The questions included in this survey will help determine who is moving, who will be coming to the office and more.

You can also use a survey tool, like SurveyMonkey or Google Forms. Both products allow you to export answers into a spreadsheet so you can manually analyze the data.

Customize the survey by including preset answers, deciding which (if any) responses should be anonymous, and selecting which users are able to view answers to maintain confidentiality.

2. How would we adjust compensation when employees move?

Location-based salaries may seem straightforward to implement initially—just adjust pay based on wherever employees are living. But what happens when a team member moves? Do you adjust their salary again based on their new cost of living?

This policy is bound to demoralize employees who move to cheaper areas and are paid less as a result. Worst-case scenario, they’ll look for other remote positions—or open roles in their local area—that pay more.

Considering this possibility, it’s worth weighing attrition costs against the amount your company saves by reducing the employee’s pay. Say, for example, you’re planning on reducing an employee’s annual salary from $80K to $70K when they move. If they quit, the Work Institute estimates that the cost of replacement will be one third of their annual salary, if not higher.

The attrition cost of $23K arguably isn’t worth the $10K in salary-reduction savings. Not to mention, you may not even keep the $10K in savings if the replacement hire lives in an expensive area.

If you’re a ChartHop user, you can model out turnover costs and salary adjustment savings using Scenarios.

3. How would we ensure that pay disparities are strictly based on location or experience?

With location-based pay, in theory, two employees who have the same position and experience level should receive different salaries only because of where they live. But the truth is, when compensation is variable (as it is with location-based pay), there’s always a potential for unfairness.

We know from aggregate ChartHop data that sometimes pay varies more across genders than across location. In one study, we found that males experienced the biggest gap in pay by location at 22%, yet this gap was still lower than the 28% gap between males and females. This means that for every dollar males earned, women earned $0.78 and non-binary employees earned $0.96. This must be addressed and you need to ensure location-based pay does not widen this gap.

To keep salaries strictly based on ability and location, organizations need clear systems for giving raises and promotions. Download the full guide to see examples on how to keep keep role-level criteria as specific and objective as possible. Make sure everyone sticks to this criteria by sharing each level’s description and salary amount with all employees. This transparency empowers team members to negotiate their pay and acknowledge unfair disparities, if needed.

Monitoring salaries shouldn’t be solely up to your employees, though. For a more rigorous analysis, conduct internal pay equity audits on a regular basis. Using the ChartHop DEI Reporting Guide and bundle, you can create separate gender and race pay-gap reports and assess the likelihood of promotions based on manager assignments. Depending on your budget, you may also choose to hire a pay-equity auditing service to analyze salaries for your organization.

Sample DEI compensation report

If you’re going to vary salaries by location, take a mindful approach by considering these questions. Continue assessing how the pay model affects your organization after you implement it to keep the system as equitable as possible.

Defining your remote culture with salaries

As companies plan to go remote in the long term, salaries will be more than an accounting issue. How you choose to pay remote employees will have lasting impacts on your company culture. Use these 3 questions and download the guide to consider whether location-based salaries align with your organization’s values.

Whatever you choose to do, communicate your remote-pay philosophy sooner rather than later to employees. The decision to pay based on location (or not) affects team members’ livelihoods. Be transparent about your plans so they can prepare for the future alongside your company.

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