Should you get paid based on where you live?

As many workers scatter from big-city headquarters to smaller, remote-work-friendly enclaves, should their pay be adjusted due to lower cost of living?

The Covid-19 pandemic is transforming how and where people work. Although it’s hard to pin down long-term trends, many are considering moving away from expensive city centres. In Poland, searches for suburban houses and bigger apartments have increased since the start of the pandemic. In Australia, real-estate experts are predicting that the property market will be hardest hit in the relatively dense and pricey state of New South Wales. 

And in the US, analysis of housing data shows that demand has dropped more in densely populated cities and neighbourhoods – driven in part by increased telework options and decreased urban amenities due to social distancing. One July/August survey of high-earning New York City residents showed that 44% had considered moving in the previous four months, primarily due to the cost of living. 

In light of these changing circumstances, employers are scrambling to adapt their policies on working location. Facebook, which says it will allow most employees to work from home permanently, announced in May that it would consider adjusting the salaries of those who relocate to areas with a lower cost of living. The suggestion was immediately criticised; one-third of 7,000 survey respondents in the UK felt this plan was unfair. 

Then in September, another Bay Area-based tech company, payment-platform Stripe, declared that it would go even further, giving a $20,000 bonus to employees who leave the expensive cities of New York, San Francisco or Seattle this year. However, this initial payment would be accompanied by a 10% cut in base pay. Although Stripe hasn’t specified this, the new policy would presumably save the company money in the long run.

In this uncertain period of trial and error, companies will be keenly watching each other to see how different policies play out. But the relationship between pay and location is complex, and there’s no magic formula for it. And the issue can be contentious, dividing employees to the detriment of company morale. 

Perceptions of fairness 

There are some obvious benefits to location-based pay. If staff located in cheaper areas are paid less, the company saves on salaries. “The number one cost is human capital, the workforce,” notes Sudarshan Sampath, research director at PayScale, a US-based salary-management software company. These savings can be reinvested, allowing a company to expand or reach its goals more quickly. Conversely, paying staff more to live close to a big city-based corporate headquarters can also be in a company’s interests, preserving in-person collaboration and supervision, and reducing reasons for employees to scatter. 

There are some equally obvious downsides; one common argument is that saving money on some salaries isn’t worth the loss to staff harmony. If people are doing the same jobs, being paid less than a colleague at HQ can feel unfair. Yet one tricky aspect is that perceptions of fairness are subjective. Employees in expensive areas can feel put out when they earn the same amount as colleagues in cheaper areas. I’ve seen London-based staff grumble that colleagues in Edinburgh earn equal salaries, given they go further in the Scottish capital than the English one. Thus, WaterAid, which has a more consistent approach to salary than many other non-profits, applies a capital-city weighting in two of the countries where it operates: the UK and Madagascar.

In fact, the aid sector, which has long struggled with the disparity between ‘international’ and ‘local’ contracts, offers some lessons. Ishbel McWha-Hermann, of the University of Edinburgh Business School, researches NGOs’ attempts to make pay fairer. This research shows that organisations with dual pay scales, which depend on employees’ ‘home locations’ rather than the nature of their roles, weakens the morale of both lower-paid and higher-paid staff alike. “They had reduced job satisfaction, reduced engagement at work [and] higher desire to leave the organisation,” says McWha-Herman. These factors clearly contribute to diminished productivity and increased turnover. 

A more uniform approach to pay can help avoid tensions that arise when two people are doing the same work at different salaries. But it’s unlikely to make everyone happy. 

Broader impacts of reward policies 

Companies’ decisions about location-based pay will also have important ripple effects. Some of these are immediate and obvious, for instance in relation to the house-moving industry. Moving-truck companies charge up to five times as much to leave California as to enter it – reflecting the higher demand for people leaving an expensive state. 

More generally, maintaining high salaries for certain professions, regardless of location, could help distribute skills more evenly across a population. Some economic analysis suggests that placing more high-skilled workers in smaller cities would benefit the US economy overall, by potentially reducing congestion, spreading out the tax base, enabling more spending choices and improving wellbeing. 

There are equity concerns either way. Location-based pay is likely to drive competition among companies, to the benefit of larger and better-resourced firms. Pegging salary to address means that lower-paid workers can be lured away by competitors who are willing to pay headquarters-level wages no matter where a person is actually based. This is particularly the case for in-demand professions like software engineers. For instance, a Seattle compensation package may induce an employee in Atlanta, earning an Atlanta salary, to change jobs. (This would make it hard for a smaller Atlanta-based company to stay competitive.)

Then there’s the competition among locations. According to Singapore-based lawyer Amarjit Kaur, who focuses on employment law, location-based pay could increase inequality between rural and urban parts of a country, or between cities. Those from lower-cost areas will face more hardship amassing enough resources to move to a higher-cost area, believes Kaur. “To penalise employees for choosing to live where they can afford to live, particularly in lowest income areas, will perpetuate this vicious cycle.” 

On the other hand, some version of location-appropriate salary might be necessary to avoid negative effects on local economies. Paying salaries that are reasonable internationally, but inflated locally, could distort local markets and drive up prices. In Phnom Penh, where McWha-Hermann used to live, “What you saw emerging was a dual economy within the city itself.” The expat economy and the local economy existed at very different scales, because expat salaries weren’t pegged to locally appropriate standards. 

A middle ground 

Even if a company wants to peg an employee’s home address to salary, creating the formula to establish the cost of living can be very complicated. “The cost of living is not the only factor into how you set your compensation,” insists Sampath. Other “compensable factors” include education, specialisation, job title, years of experience and demand for certain jobs in a certain location. Sampath believes that it’s not enough to look just at purchasing power when setting pay; it’s important to also examine what competitors are doing. Another factor that changes the spending power associated with a given salary is the tax rate in that jurisdiction. 

PayScale draws a distinction among equal pay, fair pay and competitive pay. While equal pay would involve everyone being paid the same for the same job, regardless of location, fair pay would take into account different experiences, needs and difficulty levels. Competitive pay is the level of compensation that retains and attracts employees. Highly granular and up-to-date data isn’t always available or affordable to achieve the optimal balance of fair and competitive pay. But equal pay is relatively easy to administer. 

In the case of the aid sector, fair or equal pay might come at the expense of competitive pay because many organisations are nervous about losing international talent (without necessarily recognising the wealth of local talent available). Non-profit organisations report that their staff are often poached by the United Nations, whose reward packages tend to be high for the sector.

Clearly there’s no perfect answer, and, in reality, many companies steer a middle course among equal, competitive and fair pay. 

MURAL, a company that provides digital workspace tools, is a hybrid company, with a mix of remote and in-person employees. It assigns pay based on zones, which are simpler than completely individualised compensation packages, but more complex than a single-pay system. MURAL has three zones within the US, as well as country-by-country zones (Argentina and the UK are the two biggest international hubs). The highest-paid US zones are San Francisco, where the company is headquartered, and New York City. Then there’s a 5% discount for places like California (outside of San Francisco) and a 10% discount for places like Atlanta. These scales are revisited about every six months. 

Adriana Roche, MURAL’s head of people, acknowledges that an employee who leaves San Francisco without informing the company might be able to keep their higher salary in a cheaper location. But a certain amount of trust has to exist for this system to work. “I could play the police and try to figure out their IP address, but that’s not necessarily something I want to do,” says Roche.

 There are also tax and legal issues to moving across state or country borders, which an employee would ideally figure out alongside their employer. So, Roche doesn’t anticipate a permanent stampede away from current locations. Even in the nearly unaffordable San Francisco, for instance, “there is still a little bit of that feeling of, you know, tech happens here and a lot of opportunities happen here”. 

The longer-term future

Overall, Roche emphasises that this is a transitional period, so companies should avoid making irrevocable decisions. “I’ve talked to a tonne of people who are leaving San Francisco to move to Georgia to move in with their parents so they can help them with their kids,” she says. “They still have a mortgage in San Francisco, they still have a number of things that they need to pay for in San Francisco. I think those edge cases are the ones where companies really need to think through how to approach. And possibly what you need to do is just maybe you just don’t change salaries for the duration of the pandemic or for a year or so until things stabilise a little bit.” 

Whatever companies choose, Roche stresses the importance of gradual change, advance notice of the change and frequent explanations of the reasoning. 

“Transparency is a really key part of fairness for reward,” emphasises researcher McWha-Hermann. For instance, in some cases “what we found is that national staff were OK with international staff getting different salaries and benefits; it was the secrecy that was the problem.” As it will be impossible to hit upon a salary policy that pleases everyone, an abundance of information will at lease ease some friction.