Head to head: Should employers implement location-based pay for remote workers?

Work location is certainly a factor to consider when determining pay for remote workers.

When conducting compensation benchmarking, it’s common practice to look at pay rates by region to determine appropriate market rates for positions. For our clients with offices across Canada, pay grids are often determined by the work location, based on compensation data for that region.

Read: What employers need to know about determining remote workers’ province of employment

This could result in pay differences by office. For example, a position in Vancouver may be paid a different rate than that same role in Brackley Beach, PEI, which may be different from Red Deer, Alta. Some companies try to equalize pay practices across all locations, but it can be difficult to establish market competitive salaries that apply to all locations, nationally and internationally.

Using that same logic, it’s reasonable for the location of residence to be a factor in determining pay for a remote worker, taking into account the cost of living, housing costs, taxes and other financial considerations.

Geography shouldn’t be the sole determinant of employee pay. Other factors which influence what to pay include skill, experience and qualifications, performance and perceived fairness and equity of the practice both internally and externally.

Read: CRA clarifying how employers must determine province of employment for remote workers

The establishment and communication of a clear compensation policy is key to the successful implementation of a location-based pay policy for remote workers. It’s important that employees are aware of what happens if they move work locations to an area with a higher or lower pay range, the impact on bonuses and benefits and the effects on pay if they need to work in an alternate location on a temporary or permanent basis.

Regardless of which approach an employer takes, the decision on how to pay remote workers needs to align with the company’s overall compensation strategy coupled with the ability to attract and retain employees.

Courtney Lee, vice-president of people at Humi

Location-based pay was designed for the traditional physical office era, in which employees were typically domiciled in the same region as one of the company’s offices.

One of the biggest issues with location-based pay is that it compensates employees based on where they live, not their value to the company, which flies in the face of pay equity. In theory, an employer could easily have an average performer earning more than a high-performing peer, simply due to the location in which they reside. There may also be instances in which an employee’s pay is reduced if they relocate to a lower-cost region, while the employee’s value and impact to the company stays the same. With a growing trend towards pay transparency, it’s easy to see how this could lead to employee frustration and morale issues.

Read: Half of Canadian employers have finalized approach to balancing in-office, remote work: survey

Aside from pay equity and employee engagement, it’s an administrative nightmare to manage location-based pay. It requires deep knowledge of benchmarking and regulations in many jurisdictions and employers are constantly required to amend salaries if employees change locations.

Location-based pay can also complicate a company’s budget process, as the predictability of headcount costs is reduced. If an employee from a low-cost region leaves their position and is replaced with a candidate from a high-cost region, the employer could exceed their salary budget. To mitigate this financial pressure, companies run the risk of hiring less-qualified candidates to avoid paying high-cost location salaries and they may also inappropriately bias promotions and internal mobility by prioritizing location costs over merit.

A location-based compensation strategy may seem enticing on the surface, as it factors in cost of living and gives companies a chance to go after lower-cost talent markets. However, it’s becoming increasingly evident that the downside far outweighs the positives.

Read: How remote working is impacting employee mental health