Pay differentials based on location are common, but how will that work for remote work?
As part of a major push for more employees working remotely, Facebook raised eyebrows recently when CEO Mark Zuckerberg revealed the change could also lead to pay cuts.
Why? Their location.
“If you live in a location where the cost of living is dramatically lower or the cost of labour is lower, then salaries do tend to be somewhat lower in those places,” he said in a videoconference call to employees in May.
“Basically, we pay market rates, we pay very well… and that varies by location. So, we're going to continue that principle so that means if you live in a location where the cost of hiring is dramatically lower or the cost of labour is lower, then salaries do tend to be somewhat lower in those places, even though with a somewhat lower salary, you can often still have a better quality of life than you'd have in some of the big cities.”
Facebook provided a grace period through the initial months of the COVID-19 pandemic, said Zuckerberg, but by Jan. 1, the company will need to know where everyone will be working from. “We'll basically adjust salary to your location at that point.”
The company is relying on the honour code in having people reveal their location, but it could also check VPN locations for confirmation, he said.
“There will unfortunately have to be severe ramifications for people who are not honest about this, because this is important for filing taxes correctly. You may be breaking the law if you're not being honest about this.”
Compensation is made up of a variety of factors including cost of living, the local economy, job growth, demand for certain talent, different business activities and overall employment statistics, says Trina Casey-Myatt, regional manager for Robert Half in Calgary.
“Certainly, location and cost of living, they go hand in hand. And we do find that there are variances based on location. So, it does lead you to think that potentially as companies are more and more flexible in terms of where individuals live and the idea of working remotely or virtually, I wouldn't be surprised if companies start looking at compensation based on that.”
Looking at some of the larger more expensive cities such as Toronto or Vancouver, it’s likely that salaries would be higher there to attract top talent compared to smaller locations where employment opportunities aren't as strong and the cost of living isn't as high, she says.
Most organizations with workers around the country pay a differential depending on the cost of living in various locations, says Gail Evans, president of the Wynford Group in Calgary.
“You have to determine how much you have to bump up the pay in order to keep the person whole in a different location. But it is quite complicated because you would have to look at not only the price of homes but taxes and transportation and all sorts of different things. So, conceptually, it makes some sense... Let's say they moved from Vancouver to Penticton or something like that; the cost of living is definitely lower in Penticton than it is in Vancouver.”
But the calculation is not usually as precise as that suggested by the Facebook CEO, she says.
“He’s sounding like he wants to really fine-tune it so that, if you move from one address to another, they'll have an algorithm that determines what the differential in cost is.”
If you're a global company, you’re probably going to do things, at a minimum, by country and possibly within regions of a country, says Claudine Kapel, principal of Kapel and Associates in Toronto.
“In Canada, some organizations have national pay lines, but they might have regional differentials for certain regions of Canada if it makes sense for them to do that.”
However, the emphasis on regional differentials has diminished in recent years, she says.
“If you look, for example, at the Greater Toronto Area, 20 years ago, you might have seen regional differentials between, say, Toronto and Kitchener. But because a lot of these areas have become more like bedroom communities with people commuting, you don't really see that much of a difference in pay levels, and you probably wouldn't see regional differentials across some of these geographies that you might have years ago, because of the commuting pattern.”
Major push for remote work
Facebook’s announcement was part of a larger transition planned around remote work. Over the next five to 10 years, the company could see about half of its people working remotely. Zuckerberg cited several reasons behind the new strategy, including access “to a lot of new pools of talent out there,” especially in the U.S. and Canada, and the boost in diversity.
“When you limit hiring to people who either live in a small number of big cities or have or are willing to move there, that cuts out a lot of people who live in different communities, have different backgrounds, may have different perspectives,” he said. “That could potentially be very valuable.”
Over the last couple of months, there’s certainly a lot more openness among organizations when it comes to finding talent, regardless of where people are located, says Casey-Myatt.
“It certainly has changed the way that companies are looking to hire, the openness to have people working remotely,” she says. “With some organizations that maybe haven't had to look at it in the past, they are going to have to look at it. So… if you only have one office in Calgary, per se, you’ve only looked at the cost of living and compensation trends within Calgary. But if you're now open to talent outside of Calgary, and you're accessing it and maybe smaller cities or even larger cities, you're now going to have to look at that and take that into consideration.”
But organizations may want to consider this kind of move for new employees versus current employees, says Casey-Myatt.
“It's certainly easier to look at compensation adjustments as you're hiring a new individual versus changing individuals that you currently have on your table,” she says. “It's very difficult to have a conversation with someone to say, ‘We're changing your compensation.’ The most important thing is that there's open communication. And if companies are going to take this step forward, I think [it’s about] making sure that individuals are well aware of what the process is going to look like, that they're very transparent about it. And that they give them the opportunity and the time to adjust.”
It’s also about giving employees a choice, meaning they can continue to travel to the office every day, she says, “or they choose to remain working remotely, and then that comes at a different salary.”
It would be a real employee engagement challenge to give people a pay cut, as suggested by Facebook, says Evans.
“In some cases, they'd have to look into the implications for constructive dismissal if that wasn't something that was laid out in their employment contract… and it said, ‘Going forward, if we move you, we may adjust your salary relative to the location that you're working in.’ But it'd be a little bit of trouble going back to do that retroactively.”
There's pressure for organizations to do more communication around compensation because employees want to know how they're paid and that they're paid fairly, says Kapel.
“I think that that is going to continue and possibly intensify as we move forward, because employees want to know that they're getting fair compensation and a competitive overall total rewards package, especially as the labour market tightens, due to retirements and shifts in skills and skill demands and things like that. We'll see employees seeking more confirmation about: What does the employer offer? And is it market competitive?”
REDUCED PAY OK FOR REMOTE WORK
If a company offers employees the ability to work from home indefinitely, with a 10-per-cent reduction in pay:
44% would accept the pay cut
32% would look for another job
24% would keep going to the office
Source: Jeremiah Owyang