How to Determine Employee Pay in Our Post-COVID World

We continue to live in strange and unprecedented times. Many employers have undergone a dramatic shift in the way they do business due to the rapid movement toward working from home precipitated by the COVID-19 pandemic. Yet as the virus continues to wane (thankfully!), companies are weighing the pros and cons of keeping their workforce remote or implementing a hybrid model encompassing a combination of working in the office and at home.

Much has been written about the cultural benefits and challenges employers are learning to navigate when all or part of their workforce is remote. But there are also fundamental administrative concerns today’s senior leadership must consider. When it comes to hiring new talent, the work-from-home scenario opens up the labor pool in a big way. A company is no longer limited to a local workforce. Think about what this means. Theoretically, there’s no limit to the net recruiters may cast when seeking new hires. But hiring a workforce scattered across the country also raises a couple of significant concerns; one is rate of pay. 

For decades, companies possessing multiple locations in different cities utilized geographic pay differentials to determine employee pay rates. (A business with an office in San Francisco will pay a higher compensation rate to workers than they would in Boise, Idaho, because the going rate for the cost of labor is higher in the West Coast city.)

But what happens when it’s not the organization with multiple locations, but the workforce? According to World at Work’s Geographic Pay Policies Study, 44% of the companies it surveyed that already had a geographic pay policy in place were looking at modifying pay differentials for remote workers. 

Tech companies have been quick to implement changes based on this reality, including Facebook and Twitter. For instance, Mark Zuckerberg announced last year he was instituting pay reductions for employees who relocate from the Bay Area. And according to CNBC.com, the payment platform Stripe is offering employees $20,000 in relocation costs, but it comes with a 10% pay cut. 

So, how are workers responding to this new reality? For many, the reduction is worth it. A recent survey by job search marketplace Hired found many workers would gladly work from home on a permanent basis to enjoy a lower living cost. This falls in line with Zuckerberg’s prediction that half of Facebook Inc.’s employees will work from home in the next five-to-10 years.

As decisions continue being debated over post-COVID work-from-home policies, companies must assess their pay policies carefully. Setting or adjusting geographic pay differentials isn’t as simple as reducing compensation based on national data. The demand for in-demand skill sets, such as prowess with information technology, also bears consideration. 

This point can be illustrated by a study conducted by Mercer management consulting firm revealing labor costs for tech jobs was lower in locations outside San Francisco, but not as low as national data might suggest. For instance, data showed a job paying $100,000 in San Francisco would pay 13% less in Seattle. But in reality, Mercer discovered, the difference was 6%.

Still, this payroll reduction can add up to big savings for employers. But before they start hiring remote employees from places where labor cost is cheaper or greenlighting a work-from-home policy permitting relocation, they would do well to consider various local tax codes, workplace laws and leave laws. 

Importantly, these regulations can vary from state to state. For instance, some require an employee’s taxes be withheld within the state the work is performed, but there are exceptions. Also, corporate income tax returns must be filed within the state in which an employer’s full-time employees work, which may require a company to establish a legal entity in the same state. (According to World at Work, the preeminent compensation and benefits professional organization, only 29% of employers surveyed are willing to establish legal entities in other states.) Beyond these considerations, additional concerns affecting companies include state licensing requirements, home occupation permits, privacy issues, data security, and worker’s compensation. 

Ultimately, when it comes to employing remote workers outside of a company’s home base, there are many benefits to be reaped. Access to a bigger labor force from which to choose when hiring new talent tops the list of advantages. Another yet, is the possible payroll reduction for employees residing where the cost of labor remains low. Even so, this topic continues to be a challenging one and not a situation to be entered into without planning and forethought. 

At Conover Consulting, we possess more than three decades of experience with compensation structure design and implementation. We are also well versed in matters of corporate culture as evidenced by this profile in Forbes. Want to determine the best way forward in these unusual times? Feel free to contact me @laura@conoverconsulting.com. I would be happy to assist you with all of your compensation questions and concerns.