Location-based Compensation: Should location decide the future of compensation?
The pandemic has made companies adapt to new realities, compelling them to shift their entire workforce to fully remote or hybrid operations. Remote work has boomed, and because of the pandemic, both employees and work went home.
By 2025, 22% of the American workforce will be working remotely. In this post-pandemic era, talent management teams have an uphill task of rethinking their geographic pay policies.
Location has been a pivotal factor in what people earn. While the concept of paying employees based on their location has grown globally, only a few companies have developed comprehensive policies around these situations.
Pros of location-based compensation
While the interest in work from home model continues to grow, companies are now willing to adjust their approach to manage their remote workforce. For businesses to flourish in times of crisis, hiring a reliable remote team becomes indispensable.
Of all the benefits that come with location-based pay, the significant reduction in operational costs is the most notable reason businesses have introduced this payment model. By introducing a base-level pay model depending on employees’ location, companies can free up funds that would otherwise be tied up.
Further, this allows companies to cut down on their operational spending and empower them with more financial freedom. The savings can be allocated to recruitment, training & development programs, business investments, and more.
The introduction of a location-based compensation model can often lead to complications but, when implemented correctly, may turn out to be the right approach for your company. Companies offering competitive wages to employees scattered across different cities and countries can stand out from counterparts in their industry.
Cons of location-based compensation
Location-based salary has a fair share of drawbacks too. A growing number of companies have taken steps to abandon this practice.
The most resounding argument against location-based pay policy is that employees working in lower-cost areas may earn much less than those working in high-cost areas.
Reddit, for example, has adopted a hybrid pay model to phase out this location-based compensation system. The San Francisco-based social media forum decided to shelve the idea of location-based pay to retain talented professionals and build a more diverse workforce.
Similarly, e-commerce startup Gumroad raised employees’ pay to make them more equitable to employees residing in expensive cities. To compensate for this increase, the startup eliminated its highest pay level for new recruits and restricted the number of weekly working hours.
Employers must take a hard look at location-based compensation as scrapping it is a complicated process. The companies mentioned above are only a few examples of those moving away from this system to offer equal opportunities for talented professionals, regardless of where they come from.
COVID-19 has offered important lessons. The pandemic has propelled businesses to evaluate their policies based on the lessons learned since the crisis first hit.
Talent management teams need to assess all possible options and evaluate their strategies. In light of these changing circumstances, companies keep an eye on competitors to see how different policies play out.
Addressing the question of whether remote compensation should be based on where employees live or not isn’t going to be an easy one, as the relationship between pay and location will always remain complex.
With the growing use of AI-powered tools in every facet of our lives, talent management teams are solving insurmountable problems of the 21st-century workforce. AI-based talent compensation tools like Draup are reducing pay gaps and eliminating discriminatory compensation practices. The talent intelligence platform assists companies in gaining more targeted peer analysis of pay structures across verticals, locations, and ecosystems.
