Thanks to COVID-19, remote working became the norm, with around 70% of people working from home during lockdowns. On a larger scale, 16% of companies went entirely remote, and 62% of workers say they're now part of a hybrid working arrangement (for the uninitiated, this is a mixture of location-based work and remote working).
Given these stats, a major consideration is whether employees should be paid based on their location or if job responsibilities should be the only deciding factor.
With 41.8% of Americans still working fully remotely, these are essential questions to answer. This is especially true when you consider that the number of remote workers is expected to double in the next five years, compared to pre-pandemic numbers.
In light of that, this article aims to explore the difference between job-based pay and location-based pay, to help you decide which option could be right for your organization.
Let’s get started.
Job-Based Pay Versus Location-Based Pay
In the location-based pay scenario, salaries are determined according to the employee’s location and cost of living. Traditionally, this is how salaries were calculated (.i.e., those living in areas with a higher cost of living would typically expect a higher wage than those who didn’t).
Some companies also compensate workers with travel expense benefits or reimbursement.
But should workers expect to lose these salary perks if remote working becomes the norm?
The answer is complicated and will vary from company to company.
Location-Based Pay Considerations
Assessing location-based pay can be a tricky process. Employers must consider not just local expenses but also market rates and the employee's skills and experience.
Let's dig a little deeper into this:
- Market rates: The range of pay for a specific location or/and in the country as a whole. Using salary research tools can help companies determine each role’s market rate.
- Cost of living index: The measure of a location’s cost of living expenses, such as transportation, housing, utilities, food, etc.
- Income tax rates: Companies might consider giving a slight salary boost for international employees living in considerably high tax rate areas.
- Experience and skills: Companies should evaluate an employee’s skills, education and the length of time spent in their position (or similar position) to determine whether they should be paid below, at or above the market rate.
The advantage of location-based pay is that employees are, in theory, paid a livable wage, regardless of where they live. Employees should also enjoy peace of mind knowing that their salary should always match the cost of living.
However, the disadvantage is that remote workers living in areas where the cost of living is cheaper don’t get paid the same amount as co-workers living in more expensive locations. This happens despite doing the same job with the same responsibilities.
Job-Based Pay Considerations
In contrast, some companies base salaries purely on job responsibilities. This can make salaries simpler to calculate compared to location-based pay. However, depending on the job seeker's location, their salary offer could also be less competitive in the job market.
Job-based pay considerations only have two variables to assess:
- The employee’s skill and level of experience
- The national market rate for the position
Let's explore both factors in more detail:
National market rate: To keep a salary competitive, companies should be within the top 25% of U.S. salary rates. Falling below average may result in the business struggling to fill the position with high-quality talent. Again, using a salary comparison tool can help ensure you're offering wages that align with the national average.
Experience: Once you've determined the national average for the role you're recruiting for, you can adjust the compensation according to the employee’s experience and skill level. In short, employers should expect to pay above average for candidates with a higher level of expertise and skills.
That said, as job-based pay is based on experience and skills, employees should be incentivized to progress in their careers, as better wages occur with promotions and experience.
What Works For You?
Ultimately, the choice is made by the company, as they decide which option is best.
But if you’re a job seeker, you may wish to consider which pay option would suit you best. So if this sounds like you, bear in mind:
- Location: If you move to a high-cost area with a fixed salary, you may find yourself a bit short each month. However, moving to a low-cost area with a fixed salary could work to your advantage.
- Career expectations: If you want to progress in your career and have ambitions to get promoted and climb the career ladder, you may want to lean toward a job-based pay position.
Both payment scenarios have pros and cons for businesses and job seekers alike. Only you can decide what you prefer and what works well with your lifestyle/business needs.