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Over the last decade, work from home has been slowly increasing in frequency.
Last year, with the pandemic lockdown, work from home became standard for organizations. This started a trend with the thought: “Well, if I am working from home, I can work from anywhere.” Thus, the remote work craze started.
For HR and compensation professionals, these new remote work scenarios have added complexity from a compliance and a competitive pay perspective. On the compliance side, where you work and where you establish residency have an impact on the state taxing your compensation. For example, if you live in New Hampshire but you commute into your work office in Massachusetts, you pay Massachusetts non-resident state income taxes. (NOTE: New Hampshire does not have a state income tax on wages.) Working from home for a day or two per week, you still are expected to pay Massachusetts state income tax. However, with a remote work scenario where you are working full time from your New Hampshire home with a periodic business visit to the office, New Hampshire would argue that their resident would no longer need to pay Massachusetts state income tax because the work is performed in their state and not Massachusetts.
On the other side, Massachusetts does not want to see that source of tax revenue go away and wants to continue to have that worker pay Massachusetts state income tax by reference to the physical location of the employer. New Hampshire has filed a court case in the U.S. Supreme Court challenging how this should be handled. While this mostly affects smaller states, namely in New England, there are many examples of cities across the U.S. that overlap or are on borders of states where this tax question will be raised. This will be settled by the courts, but it will raise further issues on assessing pay levels for compensation professionals and potential further shifts in remote work.
Many companies are setting up remote work policies and stating that their employees can work anywhere. This “work where you want to live versus live where you work” trend has significant questions for the compensation professional.
Forever, we have been told one of the key factors in setting pay for employees is based upon the appropriate labor market competitive rate. What is the relative labor market when someone is remote working? Is it the labor market of where the individual lives while remote working? Did the labor market even change because in some way they are still tied to the previous location? Is it a national labor market rate? Oh, what to do as a comp professional?
In the long term, it is my belief that we will end up paying skills/roles based upon a national rate for these remote workers. A remote worker has a skillset that we need, and Adam Smith’s invisible hand will create a national labor market for this skillset.
Over the past decade, we have seen a global labor market for types of executive roles which are not defined by national borders. Obviously, locally defined roles will be paid based upon those local labor markets, but those skillsets that lend themselves to be able to work from anywhere will create a national competitive rate. However, this will take time to reach, although some companies are going with a national pay level for these jobs/roles. Unfortunately, these national rates will be higher because it will be uplifted by those pay rates in higher pay areas like New York, San Francisco and Boston.
Companies that use the national rate as their baseline will be spending more money on compensation for some time. What is a comp professional to do now that ensures the company is spending their compensation dollars wisely as we move to this national pay level?
Here are some approaches:
- National pay approach as mentioned.
- Pay the remote worker based upon local pay levels.
With these approaches, you have two methodologies. You can try to access additional surveys that will inform you of the current market rate for that role in a certain geography. Unfortunately, this will take time and will be costly, although it keeps the old adage of “use cost of labor for the market.”
A more simplified approach is to apply a cost-of-living differential from the labor market that the employee departed. Cost-of-living measures are more observable than cost of labor measures. An employee moving to a new location can directly see the differentials through the cost of housing and goods and services. This would be a more transparent measure for the employee. This data has solid sources and is easy to apply. This approach is straightforward when someone moves to a higher cost of labor/living location; you apply either method to their salary. However, complexity is added when someone moves to a lower cost of labor/living location, which seems to be the trend on these remote work assignments.
Do you have a philosophy where you lower the person’s salary when moving to a lower cost of labor/living location? In a recent AIRINC survey on geographic differentials, about a third of companies reported they will adjust salaries up or down. The percentage of companies that adjust increases significantly if the salary falls outside of the salary structure range for that location. Interestingly, the high-tech industry has a greater percentage (66%) that will just pay both up and down.
Utilize Geographic Differential Salary Structures
This is a more simplified approach, as companies will slot employees into a new salary structure based upon the location. In our recent survey, 66% of companies have multiple salary structures based on geographic differentials. For those remaining companies with a single national salary structure, 40% of them are thinking of adding geographic differentiated salary structures to address this issue. For these newly created salary structure differentials, it is interesting to note that some companies are already thinking about using cost-of-living differences (27%), while the majority are still focusing on cost of labor via salary surveys.
As a profession, the consistency with compensation is constant change. With the advent of remote work as a viable solution for attracting, retaining and motivating our talent, compensation is adding complexity to decisions on how best to pay for the talent that we need.
About the Author
Steve Brink is the CEO of AIRINC, a global compensation advisory company.