How will permanent work-from-home strategies affect location-related pay weightings?

The big Covid work-from-home experiment has been a success. We may be starting to miss some form of contact with colleagues. But yes, it is possible. Yes, many employees prefer it. And yes, we can still be as productive, if not more so. 

How will permanent work-from-home strategies affect location-related pay weightings?

It’s clear the pandemic will mean homeworking is now a viable long-term approach. Many organisations are already making plans for a workforce that is based remotely, including Facebook which has predicted that as much as 50% of their global workforce will be remote in the next 5–10 years.

What does this mean for pay?

It’s not unusual for organisations to reference local market rates to help set pay, leading to higher weightings in London areas and cities such as Reading, Cambridge and Edinburgh.     

But this ‘premium’ will no longer be relevant for home-based roles. It’s illogical, and potentially unfair, to pay someone a premium based on an office location that they don’t actually work in. We are already seeing organisations reducing pay for those who move to home-working contracts, with Silicon Valley leading the way.  

However, removing a location premium is not easy. For many, it is wrapped up in a contractually agreed salary. Even those with a separate weighting may struggle to lose it overnight as it not only compensates for travel, but other fixed costs such as higher property and living costs.

So, what can you do when office working becomes safe again but the role is home-based?   

  • Remove weightings: if discrete location allowances are clearly defined in employee contracts, these could be removed
  • Impose a pay cut: the office-based role could be made redundant, and a reasonable home-based alternative on a lower salary offered
  • Negotiate a pay cut: a reduction could be negotiated on the basis that ‘compensation’ for travel time and costs are an implicit part of the salary
  • Red circle pay: pay could remain fixed over time, with no annual increases until it comes into line with a home-based rate
  • Red circle a location allowance: a discrete element of pay could be identified as an implied location allowance and gradually consolidated into pay in lieu of any annual increase, until it runs out.

The right approach will depend on many factors including culture, employee engagement and whether working from home is of mutual benefit for both employee and employer.

But it doesn’t stop there. The pandemic will fundamentally change how we work. It would be short-sighted to take any of the actions above without also considering future organisational design, and associated pay policies, frameworks and rates.

Broader pay issues to consider

What working patterns will your organisation support going forward? Can employees come into the office for just two or three days per week? Can they work dynamically from any location/hub/office as appropriate? Will they be required to physically come into an office each month? 

And how will you set salaries for these roles when the market data available is built on a pre-pandemic world? Not only will many roles operate differently, the cost of living across different geographies, and associated pay rates, will likely erode. 

My recommendation is not to focus too heavily on market data as ‘the answer’ but to blend it with other factors when setting pay. 

For roles that must be location-based, such as lower-paid key workers, local market rates are still an important reference. However, an approach that blends this with individual competence (e.g. a skills ladder) will enable employees to take more control of their pay progression by developing knowledge, skills and expertise.

However, where roles can be more agile, we are at a point where our decisions will influence pay rates for the future. By blending market data with a measure of the value of the role (e.g. internal level or job evaluation) we not only soften some of the volatility of the raw benchmarking data, but also achieve a greater degree of internal consistency in pay across different roles, and different locations.

Even more importantly, less focus on market data and more on the actual value of roles, will start to erode some of the second-generation discrimination and occupational segregation that is inherent in our market data.

So, although the burning platform is the immediate issue of location-based pay, I can’t help thinking this is our opportunity to address some bigger issues as we shape pay for the future.

The author is Samantha Gee, director at Verditer Consulting.

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