In the first episode of The HR Bartender Show, my guest Jim Stroud, vice president of marketing for Proactive Talent, mentioned a challenge for recruiters that revolved around location-based pay. It had been reported that Facebook was going tie pay to location. For example, if I worked for Facebook in California and during the pandemic I moved to North Carolina, my salary could be adjusted according to the North Carolina salary market.
Since Jim mentioned this, I’ve seen an increasing number of comments from recruiters about location-based pay. I wanted to get some more information on the topic, so I reached out to our friends at WorldatWork to see if they would give us a primer on the role location plays in compensation. Alicia Scott-Wears, GRP, CCP, GPHR is director of total rewards content at WorldatWork. Her experience includes compensation, benefits, recognition, and systems in the technology, automotive, and manufacturing sectors.
Alicia, thanks so much for helping us. Let’s start at the beginning. What’s a compensation system, what are the traditional factors found in a compensation system, and why should organizations have one?
[Scott-Wears] An organization’s compensation system or program entails mindset, approach and delivery. The two factors that support a compensation program are:
- The pay philosophy (or strategy) which sets the purpose and approach the organization intends.
- The compensation structure leverages data to frame and deliver the intended pay strategy.
In order to construct a framework from the most comparative segment to your organization, the common factors considered in building compensation structures are:
- Geographic location (or market)
- Industry
- Organizational size and revenue
Organizations benefit from an established compensation system to achieve common objectives like strategic alignment to the organization’s goals at an acceptable cost; attracting, motivating and retaining top talent; having equitable, competitive and legally defensible pay approaches; and providing a pay approach that is understandable and efficient to administer.
You mentioned geographic location or market as being a factor in building compensation structures. Why is that? And why is that a challenge right now?
[Scott-Wears] Companies want to be competitive and pay fairly/equitably so location has typically been a consideration in determining compensation because it reflects the competitive or ‘going rate’ for talent in a geographic market.
Recently, challenges have arisen due to significant increases in remote work. Many workers are asking to voluntarily relocate and take their newly remote job with them. In some cases, this has drastically changed where work gets performed and where talent resides – often in locations where organizations did not previously have operations or employees.
Organizations are now choosing whether to leverage remote jobs to expand into new geographic markets where they can source talent. They are also evaluating overall geographic pay policies to determine whether to consolidate geographic pay policy by region, expand by metro area, or to perhaps go with a national structure for geographically disperse remote workforces.
Do cost of living adjustments (COLAs) play any role in this challenge? Why or why not?
[Scott-Wears] Cost of living may be a consideration for some, but most organizations are more focused on cost of labor. WorldatWork’s recent Geographic Pay Policies Study found that 91% of respondents indicated that cost of labor was highly influential in determining their geographic pay policy approach.
Cost of living is related to consumer costs but when organizations are aiming to achieve market-competitive pay rates the goal is to assess the relevant talent costs. Using cost of labor, they are seeking to align employee pay with the comparative cost of attracting and retaining talent in that geographic market.
What are the advantages/disadvantages to NOT using location in compensation design?
[Scott-Wears] Whether or not to use location in compensation design is a strategic decision for competitive positioning of the organization. It may only be relevant to those with notable variations in cost of labor based on geography and whether that geography is determined on worker location or employer location.
Where such variations exist, there is the potential for under- or over-paying if additional location consideration is not given. This could have recruitment, retention, and cost implications. Historically, location has not been a factor for certain roles, like top executives, and instead a ‘national’ rate approach may be applied as this encompasses nationwide locations rather than a specific location. Overall, organizations will determine the ‘right fit’ that allows them to attain a competitive and equitable approach that aligns with their culture and goals.
Last question. Right now, some organizations are telling employees that they can live / work wherever they want, but their pay might be adjusted. Are there any suggestions you would give to employers considering this move?
[Scott-Wears] My first suggestion would be for organizations to thoroughly think through how their pay philosophy and organizational culture will align with, or be supported by, their geographic pay practices.
I also recommend careful consideration of the ‘anywhere’ approach, even just within the United States because this can entail legal establishment, additional administrative expertise, and costs for things like payroll set up, taxes, unique state laws and disclosures, and workers’ compensation. I would also recommend that they consider their level of transparency around work from anywhere; consider how broadly it will be communicated and to what detail. They should monitor and analyze the alignment of their practice with their policy to avoid any unintended pay equity issues.
And finally, I would recommend they have a thorough plan for enablement which may include:
- Coaching managers on managing a remote workforce;
- Remote-conducive methods for achieving recognition, ongoing engagement, and well-being; and
- Optimized electronic processes and tools for effectiveness and efficiency.
I want to extend a huge thanks to Alicia for sharing her knowledge with us. If you want to stay on top of the conversation about this topic, check out WorldatWork’s Workspan publication which focuses on all things total rewards. And they also have a COVID-19 resources page which discusses how the pandemic is impacting total rewards.
This conversation is just one of many that are going to emerge in the months to come. The pandemic has changed the way we work. Organizations have some decisions to make. My takeaway from today’s conversation is that organizations need to take a hard look at their culture and what they want the employee experience to look like when making these types of decisions.
Image captured by Sharlyn Lauby while exploring ZooTampa at Lowry Park in Tampa, FL
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