Does Zip Code Matter? Establishing Pay Localization for Your Remote Workforce
By Clea Badion
Remote work was on the rise well before the pandemic. What’s changed is that working from home is now considered a mainstream option at many companies. And this new reality leaves many companies considering pay localization for remote employees.
Pay localization, or offering salaries based on the cost of living where workers live instead of where a firm is based, is a common approach to compensating remote workers. But does it make sense to pay remote workers who move permanently – or those you hire for remote-only jobs – less than employees who are located near the main office?
Some large tech companies have said they’ll cut worker pay for those who choose to relocate away from their Bay Area headquarters. Other organizations have said they will provide relocation money and then adjust pay. And some companies indicate they will not reduce salaries based on location.
Here are a few things to consider when creating your pay localization strategy:
Determine your approach
The first step in figuring out a pay localization plan is understanding the demand and average pay for each job. Salary guides can help you determine if your company’s starting and existing employee salaries are competitive in different cities. Nelson’s 2021 Salary Guide, an annual listing of compensation across industries, is a popular resource for customized salary recommendations.
Another approach is to evaluate three items:
- cost of living where the company is based
- the cost of living where the employee is based
- the national average pay for the job
A staffing professional can offer local market insights and detailed salary knowledge of your industry and location.
Assess the job
Different types of job are more suitable for pay localization than others. For example, you might have to pay a data engineer the same amount to work in Boise, Idaho, as you would in San Francisco. Why? It’s a high-demand job that requires a specific level of education and skills, making candidates more challenging to find.
On the other hand, there are often more available candidates for entry-level customer service jobs that require less education and skills. For these types of jobs, it makes more sense to implement a pay localization plan that reflects local cost-of-living data.
To avoid inequity, be consistent with the salary approach for each job category. For example, you might offer software engineers the national market rate no matter where they live. For call-center representatives, you might align pay with local cost of living and job demand.
Consider the total benefits package
Base pay isn’t the only thing to consider when compensating employees who do the same job in different zip codes. Benefits are another employee expense that can be modulated based on geographic location.
It’s common to offer employees in major cities benefits such as commuting or parking reimbursement. However, these benefits likely would be unnecessary for a remote worker in Grand Rapids, Michigan.
The result is that the full pay and benefits package might be different depending on where a staff member lives.
Determining compensation during uncertain times is complicated – and that’s before considering how to pay employees working in different locations.
No matter what approach you take to pay localization, be clear about your strategy with employees: Are you basing compensation on national averages instead of averages within a regional area? Is paying remote employees who live in areas with lower costs of living a financial decision or an effort to hire workers for less money?
Your company may decide on and implement an approach to pay localization that initially makes sense. But you may need to rapidly change that plan if demand for a specific job goes up (or down) over the time.
For example, a top employee could be talking to a competitor for any number of reasons. If you haven’t adjusted your salary approach, and the other firm offers more, you may find yourself needing to hire a replacement, and you’ll certainly need to review your salary structure in the process.
Keep your plan flexible and pay attention to market changes that could impact compensation for different positions across the country.