Location vs. Performance - How Should You Pay Your Remote Team

November 3, 2021

Your team might love the freedom that comes with hybrid schedules and work-from-home options. However, that doesn't mean that these choices come free of their own sources of tension. Office politics persist, even when no one goes to the office.

To optimize their ability to attract talent from any part of the country, many companies have turned to geography-based pay rates. This policy might make sense in a vacuum, but some workers in lower-pay areas have pushed back on the idea that their coworkers would make more than them for the same basic role.

It’s key to resolve this friction before you take your small business forward. In a world where work-from-home has become a standard component of the work routine, you have to determine the best way to set compensation rates to thrive in the new economic realities.

In a world where work-from-home has become a standard component of the work routine, you have to determine the best way to set compensation rates to thrive in the new economic realities.

Hybrid Schedules Are Here to Stay

The pandemic accelerated a long-simmering trend toward work-at-home schedules. COVID forced companies to abandon crowded office environments and rely heavily on remote collaboration. Employees got used to the added freedom and flexibility of these systems.

Now, many employees still prefer the at-home option. Some of the world's biggest companies have decided to offer longer-term remote schedules, including the likes of Microsoft, Twitter, and Amazon.

Like these massive conglomerates, your small business has to stay current. Given the changing tastes of the best job candidates, you need to determine how you'll support remote schedules as well.

Determining Pay in a Work-From-Home World

Let's start with a real-life example. In September, Zillow announced that it would implement a new pay policy for its remote staff. For work-at-home positions, the firm's compensation packages would be "primarily tied to an employee’s role, responsibilities, and performance."

In other words, the firm would not focus on where its worker came from. Rather, it would look primarily at what they did.

The company argued that this made it easier for its employees to move around as they wished. Team members didn't have to worry that a move from San Francisco to Cleveland would trigger a pay cut. Zillow added that the structure would put the emphasis on performance rather than location.

Did Zillow make the right move? Whether you should follow their lead depends on the dynamics of your startup and your industry. Let's look at some of your options.

How Startups and Small Businesses Should Handle Remote Work Compensation

Given that many companies are new to the work-at-home trend, many startups have scrambled to create policies on the fly. Decisions related to compensation have often been determined on a case-by-case basis, without an overarching strategy.

This improvisational process was made necessary by the fast-moving nature of the COVID pandemic and the speed with which companies had to adjust. However, the ad hoc nature of these decisions can create hard feelings in retrospect. They can also lead to suboptimal policies.

Don't let that happen to you. As you implement your work-from-home structure, consider the best method for determining pay rates. This way, your small business will be positioned to drive growth in a world where hybrid work schedules are becoming the norm.

Is locally adjusted pay fair?

Judging whether local-adjusted pay represents a "fair" compensation strategy opens up a myriad of philosophical questions. How do you define "fair?" What's the difference between being fair and being equitable?

Pretty soon, you're cracking open your Plato and launching debates about justice at meetings with your top executives.

Ultimately, as a business, you have to judge your options from a business point of view. Of course, any decisions you make need to remain socially responsible. But within that framework, you have to make the right decision for promoting growth at your startup.

Compensation strategies for work-from-home employees

With that in mind, what are your options for setting pay scales for remote workers? And which of these offers the best chance of supporting your small business long-term?

You have three basic concerns to keep in mind with your compensation policy:

  1. Finding and attracting the best talent
  2. Staffing your company at the lowest possible cost
  3. Creating a policy that employees perceive as fair

As you structure your pay program, try to triangulate these factors. They are often in conflict with each other, but you should weigh the needs of your small business and determine the best system for you.

Here are a few options to consider:

Pay by worker location

Here, you include geography-based pay rates. Typically, this involves determining a base amount, often using a national average, and then making adjustments based on where a worker resides. A standard-of-living calculator can help you make these determinations.

Argument For: You'll remain competitive in every market, meaning you can grab the best talent wherever it arises. At the same time, you won't overpay for workers in less-expensive parts of the country.

Argument Against: As we've mentioned already, this format can become controversial. If your team becomes aware of the geographic discrepancy, you could alienate staffers who have lower salaries. At the same time, this structure makes it harder to plan. You won't know what a position will cost you until you determine the candidate you want to hire.

Pay worker based on company location

Don't look at where your employees are. Instead, look at where you are located.

In effect, you treat your remote employees as if they were coming into the office. You act as if you were drawing on your local talent pool, paying the going rate in your area.

Argument For: You have a clear standard for your pay scale. At the same time, your compensation structure is predictable and scaled to your home market.

Argument Against: A lot suddenly depends on where you have your headquarters. You could be overpaying most of your workers or offering the majority below-market compensation, based on where you happen to have your home base. Your pay packages are equal and your budgets predictable, but they are also somewhat arbitrarily tied to your zip code.

National pay scale

In this structure, you become completely agnostic about geography. You look at a national average for that position and set that as your baseline for compensation.

Of course, individual employees might make more or less than that standard. However, those differences are based on considerations like experience and skill set. The topic of where they choose to work does not come into play.

Argument For: You have a transparent, well-established base for your compensation packages. As with basing pay on your corporate location, you have an equitable system that makes planning easier.

Argument Against: By leaning on a national average, you actually end up favoring lower-cost geographic areas. Your salary becomes more competitive in areas that sit below the standard and less competitive in areas above it. In practice, then, you undercut your ability to draw employees in some of the most talent-rich areas of the country.

Preparing for an At-Home Future

More employees are demanding work-at-home options or a hybrid schedule. To keep up with more established competition, startups and small businesses need to embrace this change in the labor market. That means offering flexible options of your own.

To create a workable remote-working strategy, you have to construct the right framework. That means deciding on a compensation strategy that is fair and competitive.

But don't ignore the details. To create a workable remote-working strategy, you have to construct the right framework. That means deciding on a compensation strategy that is fair and competitive. With the information provided here, you can decide which system is right for your company.

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