Over the past year, companies have reacted swiftly to unprecedented disruptions. Changes wrought by the COVID-19 pandemic have not only accelerated the future of work, but also brought long-anticipated changes to workforce models and workplace designs in a highly accelerated time frame. As a result, organizations across industries are reviewing changes to their workforce, and from there, are looking at how new model(s) or new work environments call for a review of their overall compensation strategy.
Even organizations that have been less adversely affected by COVID-19 should preemptively consider revising their compensation strategy to meet the demands of their current workforce model and ensure preparedness for talent market shifts. The technology space has been perhaps the most vocal within the market, with media headlines citing pay reductions, and one-time bonuses taking center stage.
Facebook, Twitter, and VMware have all proposed (or are considering) reductions in pay for employees who move away from high-cost cities near their company headquarters; Spotify has said it will set its national salary rates to a level equal with its salary rates in San Francisco and New York; and others, such as Reddit, have not made any change in compensation. Ultimately, the imperatives are to avoid losing key talent, to ensure equity in one’s approach, and to make sure that the approach aligns to the workforce and broader business strategy.
Aligning Workforce Model to Strategy
Before conducting a full-scale review of its compensation strategy, an organization must first be intentional in solidifying its remote work strategy and determine which workforce model (remote, hybrid, on-site) to employ moving forward.
A remote workforce is one where workers do not commute or travel to a central working space, an on-site workforce is one where workers perform their duties at an organization’s central location, and a hybrid workforce is one where workers perform their duties in part remotely and in part on-site. Choosing the ideal workforce model requires an assessment of the current-state segmentation of the organization’s workforce — that is, where workers are currently working — and consideration of the organization’s future talent strategy. Misalignment between the two will likely result in failure to reach the organization’s strategic vision.
In fall 2020, Deloitte Consulting, in partnership with Empsight, conducted a survey on remote work practices and trends. When determining your approach to remote work, consider: 1) over 90% of companies surveyed have a remote work policy; 2) 42% of companies have an ongoing and permanent remote work policy; and 3) most companies (68%) don’t restrict where remote individuals can work (see Figure 1). Organizations with remote work options are leading the market, which may force peers into carefully considering a workforce’s preferences.
Determining Use of Geographic Differentials
Once an organization has determined its remote work strategy, the next step is to consider whether it will use a national average to compensate jobs or employ geographic differentials.
Before determining use of geographic differentials, consider the finding that 70% of companies use geographic differentials to adjust salaries based on the individual’s location; and that geographic differential policies could present a significant cost-saving opportunity, particularly with increased remote work becoming the “new normal.” However, organizations with a large, geographically disbursed remote workforce may want to use national averages to ease the administrative burden.
Comparatively, WorldatWork’s “Geographic Pay Policy Study” found that of the 62% of companies with geographic pay policies already in place, 44% are considering or have recently modified those policies.
Talent retention is an important consideration to keep in mind. For example, reducing the salary of a top or even average performer because of a move to a lower cost of labor location may be demotivating to the employee and result in unintended turnover or lower productivity. Furthermore, most data show that at a certain salary level (typically somewhere above $150,000), geographic differentials, except for locations with the highest cost of labor, become statistically insignificant, as the talent market at that salary level is more of a national market and not as sensitive to geographic variances.
After an organization determines its point of view on using geographic differentials, it will want to consider for which populations it will use them. For the remote workforce, for example, most companies Deloitte surveyed with a geographic differential policy apply it to their remote workforce, and 70% of companies that have a remote work policy apply geographic differentials to individuals working remotely 100% of the time. For the hybrid workforce, only 55% of surveyed companies apply geographic differentials for hybrid remote work arrangements.
WorldatWork’s survey found that, of the 1,063 responding organizations, 55% used the city/metro area as the indicator for pay differentials. Furthermore, cost of labor was a much greater influence than cost of living in determining pay policy approach.
Regardless of which model an organization adopts, it will want to consider developing a formal policy on how to treat its workforce to promote consistency and pay equity. For example, an organization may choose to maintain existing base salaries when employees relocate and redline their compensation for future adjustments based on new location — i.e., if the employee is relocating to a lower-cost area, freeze their salary and allow the market to catch up over time.
The WorldatWork survey revealed that 41% of surveyed organizations apply pay differentials as a premium/discount to either structure or individual pay, whereas 33% create separate base pay structures per geographic location.
After the organization has determined for which, if any, populations it will employ geographic differentials, it will want to consider whether to apply them differently for disparate jobs and levels. If there is an appetite to employ different approaches by job, consider paying a high, competitive wage regardless of location for specialized talent that is hard to find, or paying by location and targeting areas with a lower cost of living for positions for which there might be an extensive talent pool. And, again, if there is an appetite to employ different approaches by level, consider that geographic differentials are generally paid up to base salaries of about USD $100,000-$150,000. Based on research and client experience, the geographic differential for compensation has only negligible impact at a salary level of approximately $200,000 and above.
Addressing Tax and Equity Implications
Organizations will also need to plan for how to address geographic tax and regulatory landscapes, paying particular attention to budgeting appropriately for income tax payments and defining “work from anywhere” parameters. Failure to correctly report taxable wages, and to collect and remit withholdings to the correct state agencies, presents employers with a compliance risk (with associated penalties).
Where remote work locations have created a taxable presence in a new jurisdiction, additional or amended W-2s (and W-2 equivalents outside the U.S.) might be needed, and workers are likely to look to their employers to address these reporting failures. Organizations not proactively monitoring the location of their remote workforce would be well served to revisit their compliance strategy and address payroll obligations, especially as state revenue agencies may be looking for revenue in the current environment.
Organizations will also need to consider how changes to the compensation structure affect different populations of workers to ensure employees experience compensation increases or reductions fairly. Any changes to compensation mix, levels, and/or vehicles should be reviewed within the context of the company’s broader total rewards strategy (benefits, well-being, culture, etc.).
About the Authors
Gregory Stoskopf, CCP is a managing director and national practice leader at Deloitte’s Compensation Community of Practice.
Sheila C. Sever, CCP is a senior manager at Deloitte’s Compensation Community of Practice.
Chad Atwell, CCP, GRP is a senior manager at Deloitte’s Compensation Community of Practice.
Anneliese Sendax is a senior consultant at Deloitte’s Compensation Community of Practice.