Cutting costs is the cornerstone of any profitable or successful company. Lowering overhead, finding cheaper suppliers and vendors, and searching for more affordable labor improve the bottom line while also satisfying shareholders or stakeholders. Nevertheless, the emergence of remote work has created a hotly contested issue among both employees and employers: location-based pay.
Predicated on the idea that someone who lives in a lower-cost area should be paid a lower rate, location-based pay makes sense for employers. However, a lower sense of worth or value in the minds of employees can manifest itself through burnout, poor productivity, or apathy altogether. If you’re considering location-based pay, weighing all potential repercussions and benefits is essential.
What Is Location-Based Pay?
The idea of location-based pay is fairly simple. You pay workers in high cost-of-living areas more than those in lower cost-of-living areas. For example, all things the same, an employer might pay a worker in Chicago $100,000 while a worker doing the same job in Louisville makes $80,000 a year. This discrepancy in pay allows both workers to essentially live the same lifestyle, simply because Louisville has cheaper housing, car ownership costs, food, and entertainment costs.
Several top-paying remote employers including Google and Facebook have adopted location-based pay and 62% of remote employers now use this method of compensation for their workforce. Furthermore, many remote employees have come to terms with this style of pay, with 67% of employees now expecting location-based pay. But whether this matter of compensation is fair remains a topic for debate.
Is Location-Based Pay Fair? Dissecting Location-Based Pay Vs. Value-Based Pay
The crux of the issue regarding location-based pay centers around fairness. More specifically, the idea that location shouldn’t play a factor in how much remote employees are paid. This idea centers around location-based pay vs. value-based pay.
From the perspective of the worker, value-based pay is the only viable way to compensate employees. Just because someone lives in a lower-cost area than another person shouldn’t affect benefits, pay, or other forms of compensation.
Factors Surrounding Location-Based Pay
However, the attractiveness of location-based for employers is valid. It cuts the cost of labor without ostensibly affecting the performance or morale of employees. For employers aiming to implement location-based pay, these factors must be considered:
- Income taxes: Every state has different income taxes. For example, nine states have no state income tax at all. Conversely, California, Hawaii, and New Jersey all have rates over 10%. Furthermore, certain cities also have income taxes, with rates over 3% in cities like Baltimore and New York.
- Property taxes: Not every worker owns a home, but those that do have to pay property taxes that can add up. Despite its relatively low cost of living, Milwaukee has some of the highest property taxes in the country, levying a 2.17% property tax.
- Market rates for each job: Websites such as PayScale and Glassdoor make the search for market rates much easier than ever before, especially because these are figures given by actual employees. Employers can use these resources to find a competitive rate based on job type and geographic location.
- Cost-of-living indices: This is perhaps the strongest determinant in location-based pay. A cost-of-living index rates each city on how affordable it is based on a median score of 100. If a city’s index score is higher than 100, it’s more expensive to live in. Factor in that the average household has $5,111 in expenses each month to put everything in perspective.
The Remote Worker Discount
Another major factor to help employers determine whether location-based pay is the best idea for their business is the nature of remote work. However, this isn’t simply the idea of implementing hybrid schedules or fully remote teams. It’s all about the premium that remote workers place on the home office.
According to a joint study from Owl Labs and Global Workplace Analytics, up to 50% of remote workers would take a 5% pay cut if it meant they could continue working from home. These findings are actually a boon for employers looking to capitalize on location-independent talent while also paring down their payroll. However, employers would have to provide some sort of guarantee as to the longevity of remote work to get workers on board.
The Problem With Inequity
A major problem with location-based pay isn’t attributed to fairness based on geography. It can also stem from a problem with pay inequity in regard to women and people of color. On average, women are paid 17% less than men while people of color are paid 13% less than whites. Moreover, Asians make 15% more than their white counterparts for the same job.
When you factor in location-based pay, this can lead to an even greater pay discrepancy between men, women, and people of different ethnicities. Employers looking to improve diversity and inclusion may find that location-based pay creates more problems than it solves. With respect to inequity, employers will have to weigh both sides of the equation.
The Future of Remote Work
While some companies have stated that remote work is part of the future indefinitely, other companies are hurrying back to the brick-and-mortar office. Not only does in-office work enable more hands-on management practices, it can also forge a company culture and camaraderie between employees.
As time goes on, employers will have to determine how willing they are to continue remote work arrangements. At the height of COVID, around 67% of employees worked remotely compared to just 6% prior to COVID. If employers continue to form a line back to the office, the number of remote workers may shrink significantly. In this regard, the idea of implementing location-based pay isn’t worth the effort, at least in the long term.
How Location-Based Pay Affects Your Bottom Line
All things considered, location-based pay seems like a phenomenal way for employers to increase their bottom line. But in reality, this isn’t necessarily the case. The free flow of conversation in a remote workplace is not easy to monitor; employees will discuss their pay at some point. It’s only a matter of when.
The idea then becomes not whether you’re saving money in the long run. It becomes whether you’re willing to lose top-tier talent based on where someone chooses to live. While the idea may seem fair from the eyes of an employer, the employee likely won’t see the situation similarly. However, the competition created through location-based pay may work in your favor. It’s up to you to find a comfortable medium, but don’t let great workers pass you by. Sometimes, you can’t weigh everything in dollars and cents.
What are your thoughts on location-based bay? Connect with Virtual Vocations on Facebook, Twitter, LinkedIn, Instagram, and YouTube to share your thoughts. We’d love to hear from you!
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