For decades, location has been a big factor in what people earn. But thanks to COVID-19, which thrust many of us into remote work, I’ve come to believe that paying people a salary based, at least in part, on where they live should be seriously reconsidered if not phased out.
Already a few tech companies have taken steps to abandon location-based pay. And as we all know, HR and recruiting trends that begin in tech often spread to other industries.
Here’s why I believe it could be time to let go of location-based pay for some employees, with examples of companies already doing it — and how they’re doing it.
(By the way, I first dropped my ‘get rid of location-based pay’ bomb as a panelist during a recent Indeed Leadership Connect virtual event. Leadership Connect is Indeed’s complimentary, invitation-only community of VPs, SVPs, CHROs, and other HR and TA executives. Learn more and apply for membership to stay informed of upcoming events.)
The office used to be everything
Prior to COVID-19, we’d never have thought so many knowledge worker jobs could be done remotely, full time.
When COVID-19 hit, we rallied and moved everything from the office to our respective home offices. What we all went through, and the velocity with which we went through it, has shown us that the office need not be the center of the work world for knowledge workers any longer. In other words, location as a job requirement no longer matters, at least not as much as it did. And in that revelation, we also learned something about compensation that we can’t unlearn.
Outcomes, not locations, are what really matter
Success in a knowledge worker role is often tied to the outcomes produced, which rarely has anything consequential to do with where the outcomes are produced. So why should a knowledge worker’s pay reflect where the outcomes were produced?
Let’s say you’re a director of demand generation for a company. The company pays you a base salary of $140,000, and your topline goal is to produce 240,000 net new leads annually.
Pre-COVID-19, this job would have required you to be in the office at least most of the time. But in March, you and your job went home. Turns out, you could still hit your outcomes without being in the office. In fact, you might even be more productive at home than you were in the office.
Now suppose that the director of demand generation job has been tied to a Los Angeles office. The person in that role still needs to deliver 240,000 net new leads each year. However, before the pandemic, that employee’s base salary would have had to factor in L.A.’s high cost of living — and its competitive marketplace. But if this job no longer needs to be tethered to L.A., you’re able to hire someone in, say, Waco, Texas, which means you’re not required to pay a high L.A. salary. Instead, you have the flexibility to set a new, national salary range for that role.
Of course, there are plenty of places with a density of certain skills — stockbrokers in New York, programmers in Silicon Valley, data scientists in Boston. Given that these are all expensive areas, you have likely had to pay high salaries to attract professionals with those skills in the past. But remote work is enabling people with all sorts of skills to live where they want. And that may well erode the density of skills in certain areas over time — maybe forever.
The benefits of abolishing location-based pay
Maybe all this sounds unrealistic, even far-fetched to you. But as I mentioned, a few tech companies — specifically Reddit and Zillow — are already abandoning location-based pay, at least on a trial basis, as a means of retaining talent and gaining a hiring edge.
San Francisco-based Reddit’s chief people and culture officer Nellie Peshkov told The Wall Street Journal that the move away from location-based pay should help the company retain current talent and build a more diverse workforce. She said she hadn’t heard complaints from the company’s employees in San Francisco, with its high cost of living, about being paid an equivalent salary to someone doing the same job in a lower-cost location. “They appreciate this overarching philosophy to pay people for impact and not where they live,” Peshkov said.
Abolishing location-based pay could also help eliminate or reduce gender-based pay inequities that may have been previously obscured. For instance, if a man and a woman do the same jobs and have approximately the same seniority and experience, but the man lives in Boston and the woman is in Kansas, probably no one would question why you paid the guy more. When you remove the geography factor, though, you’ve removed any justification for paying the man more, which should help close the pay gap.
The complications and opportunities to consider
There are complications to consider if you take geography out of your pay scale.
Despite Reddit’s example, employees may resent colleagues who make the same salary as them but live in cheaper cities. Some employers worry that paying a national scale will drive up compensation costs overall and could be a pricey gamble — especially scary during an economic downturn.
At a minimum, creating a new compensation scale that doesn’t factor in geography can require a lot of time spent deciding how to implement it; discussing and perhaps renegotiating pay with some if not all employees; and rethinking where you hire talent, among other things.
Here’s how some employers are getting rid of location-based pay, as reported by the Journal:
- Seattle-based Zillow told its employees that their pay wouldn’t be cut if they left the expensive metro area. Zillow is making the move to retain employees, not save money, and is trying out the compensation model through the end of 2021.
- At Reddit, some employees outside its main operations areas of New York and San Francisco are receiving pay raises to make pay more equitable across the country.
- Small e-commerce startup Gumroad raised some employees’ salaries to make them more equitable to employees living in more expensive cities. To offset the increase, Gumroad eliminated its highest pay level for new hires and limited weekly hours worked.
- It’s worth noting that by eliminating geography as a salary consideration, Gumroad has heard from job seekers in India, Nigeria, Singapore and Eastern Europe. The company expects that as more people in a diversity of locations compete for fully remote jobs, salaries for those positions will eventually fall.
New rules for a new year
COVID-19 has offered important lessons. We can rally faster than we thought. We can change the way we work. We don’t have to be tethered to an office. We don’t have to live in expensive cities. We can pay folks fairly and equitably for the contributions they make to our organizations.
Most of all, we don’t have to go back to business as usual. We can — and should — create or revise our playbooks based on the lessons we learned in 2020. Taking a hard look at location-based pay — and getting rid of it — is a difficult but important step we can take toward a more equitable pay scale for all employees and more opportunities for talented professionals, wherever they call home.
William Tincup is the President of RecruitingDaily. At the intersection of HR and technology, he’s a writer, speaker, advisor, consultant, investor, storyteller & teacher. Find him on Twitter, Facebook, Instagram, LinkedIn and YouTube.
The views and opinions expressed in this post are those of the author and do not necessarily reflect the official policy or position of Indeed.