The work-from-anywhere era changes everything about compensation
Companies that say they’ll let people work where they want have yet to figure out what that means for pay. Here are the questions that need answering.
Some of the tech industry’s giants have been dealt a giant blow by the COVID-19 crisis, laying off thousands of employees in San Francisco in recent weeks. These companies—and many others—are now looking at a future that includes moving entirely remote, or shifting to a hybrid policy in which employees are in the office only on certain days.
Employee compensation is a company’s largest operational expense. Yet those announcing new remote work policies have yet to reconcile how the new rules impact compensation in the long term. Though some companies, such as Facebook, have already announced their intention to pay different rates for employees working outside an office, most have been holding back on making that decision. But once the dust settles and many or most employees have moved off-site, employers will be looking at shifting pay policies while employees reconcile how this affects their paychecks and plans.
The coronavirus has laid bare several falsehoods about the American dream—from healthcare tied to employment to our definition of who is an essential worker to the critical need for childcare. For many white-collar professionals, many of whom are in the throes of raising children and seeking more space, the shine has fully come off the idea of urban living. Living in more affordable regional hubs with more space suddenly looks more compelling—and possible in a world shifting quickly to remote work.
Until recently, many top-tier companies have resisted (or completely eschewed) hiring outside an established office. Though they may have had a few employees working from home, this was uncommon and typically designed to accommodate highly sought-after talent. Now they are facing a huge policy reversal—with many or even most employees looking to work outside of the office. Companies need to adapt, and fast.
HOW TO CREATE A REMOTE WORK COMPENSATION POLICY
Your compensation strategy must support your company goals. Maybe you’re looking at a projected 35% decline in revenue this year. Or you may no longer be in a position to justify the expense of that Class A office space. Moving to a remote-friendly policy can help a company close the gap and buy runway while the economy recovers. If you’re going to make the most of it, you need to think beyond the next 12 months.
If you’re trying to make your cash reserves last as long as possible, your compensation strategy will look different than if you’re actively investing to grow your team in a remote-first environment.
More than ever, it’s critical for companies to understand how their compensation philosophy supports their organizational goals. Policy changes can embrace new ways of working, but ask yourself: Is this intended to be mid-term? Long-term? When things settle down, do we plan to have some people in-office and others distributed? Do people in-office have different benefits than their work-from-home colleagues? What about other benefits, such as reimbursement for home office setup and internet fees?
DEFINING “FAIR” WHEN IT COMES TO EMPLOYEE PAY ISN’T SIMPLE.
Decide what’s fair. Now that you’re going remote-first (or remote-friendly), you have some hard questions to answer. Do you reset remote employee pay to local market rates? Maybe you decide to pay everyone the same no matter where they live, as Basecamp and HelpScout do. Or you could set a path to ease your company into new locally anchored pay ranges over time. The right path for your company largely depends on the reasons you’re moving to a remote-friendly policy and your sense of fairness when it comes to employee pay.
But like all things related to money and people, defining “fair” when it comes to employee pay isn’t simple. Highly sought workers often evangelize that the only fair way to pay remote workers is to give the same cash compensation, no matter where they live. This provides for a very high standard of living for employees in lower-cost areas when compared to their office-bound colleagues in pricier regions.
Let’s consider two people who do the same job and receive similar salaries, but live in different areas. Is it necessarily fair that one can only rent a modest apartment while their colleague can afford a mortgage on a large four-bedroom house? Your company may take the position that it’s more fair to pay these two employees differently, accounting for their lifestyle experiences. If you do, it’s still important to provide great pay compared with local standards.
If you decide to move to local market pay rates for distributed employees, you don’t need to do it all at once. Not everyone has to take the plunge like Facebook. Instead, you may decide to align newly remote employees to local target rates as part of the next several raise/review cycles. New hires can be hired at rates appropriate to their location, while current employee rates are adjusted over time to reduce shock to their pocketbooks. This process can take a few years to work through changes, so prepare to revisit this over the next several comp cycles.
The decision to pay differently for remote workers versus those in the office should also reflect how you think about the experience. In a remote-first environment where there are fewer employees in the office, will it be a chore or a benefit to work together in a communal space? New York University marketing professor Scott Galloway recently posited that working in the office will become its own perk: a place for community, free meals, and socializing. Will you continue to invest in spaces that support these interactions, or scale back both the footprint and benefits of being at headquarters?
DON’T FORGET THESE CRITICAL STEPS
- Consider the whole picture. Compensation is complex and includes salary/wages, bonus programs, and stock grants. Remember to take all of these into account when revising your compensation philosophy.
- If you’re working to conserve cash, you may want to rebalance total compensation to be heavier on variable or stock for employees in less-expensive regions. You may decide to cover employee benefits at a different rate depending on the employee’s location. If you’re reducing perks, you may find that the cost of office snacks makes a good stipend for remote workers to improve their home offices.
- Make sure you’re still investing in the right people. Companies always want to keep their stars, and most will pay premium rates to do so. But just because someone was a must-have a few years ago, are they still the ones to take you forward? Now is the time to dig into why your stars get special consideration, and make sure they’re still earning it.
- Consider the results they have delivered over the past year—not just since the pandemic hit—and make sure you’re not calling them stars out of habit/old victories. Also consider their past history of compensation changes, bonuses, and stock grants: If they have recent changes, you don’t need to double-down on them now.
- Forget what you did before. Even if your company has had a few remote/distributed employees up to now, that may have been driven by recruiting and accommodation needs, as opposed to a cost-reduction or expansion strategy. The policies, processes, and compensation rates you’ve used up to this time won’t automatically work when you shift to having the bulk of your company working remotely. When doing data analysis and projections around remote employee compensation, remember to exclude these outliers.
Don’t let important indicators hide in your compensation data. Depending on how your company returns to work, differences between in-office and remote employees may grow. Keep an eye on your company health with remote-aware insights into your data.
For example: How does employee pay compare between remote and HQ-based employees? Are pay differences driven by location or other factors such as gender or ethnicity that must be addressed? Do workers in-office receive raises at a rate that is not commensurate with the geographic differential? Consider performance ratings, promotion rates, and total compensation in this analysis to ensure your company isn’t falling into the trap of “out of sight, out of mind.”
Communicate clearly. No matter what method you use to determine pay for your employees, be ready to communicate to the company how you determine individual compensation. It’s not enough to say “we decided to pay local market rates.” If you’re using a formula, be clear about the data that goes into that equation and where you’re getting your information. Even if your employees aren’t happy about shifting to local market rates, if you can explain how you are applying this consistently throughout the company, it will help them process the change.
To make this work, invest in your HR and finance teams. Even simple compensation management can be time-consuming for HR and finance. Consider how you can help them successfully manage and support the complexities of local market pay for your employee population. When every employee has a different target compensation, it is more difficult to do the data analysis that leadership depends on to guide decisions. Realizing this, you may decide to add headcount, improve HR and finance tools to reduce tedious manual processes, or both.