Many companies have now fully embraced remote or hybrid work. The change has been welcomed by employees. With the opportunity to work from anywhere, many workers are saying goodbye to crowded city centres. But this migration of workers has left some companies rethinking their compensation strategy.
Between July 2019 and July 2020, a record number of people moved away from Toronto and Montreal. As remote workers move to smaller towns and cities, some companies have announced that they will be adjusting wages based on an employee’s location. This has become known as “postal code pay” or location-based pay.
How does postal code pay work?
Essentially, new and existing employees’ wages are determined or adjusted based on where an employee lives. The adjustment is typically based on the cost of living (cost of goods and service) or cost of labour (market rates) in the employee’s location. For example, this would mean that an employee who moves from Toronto to Charlottetown would see a decreased salary because of the lower cost of living and labour in Charlottetown.
Paying remote workers based on their location isn’t a new concept. However, the massive shift to remote work has led more employers to consider this pay model. Google and Meta, for example, have announced pay cuts for remote workers who move to less expensive areas. Countering this, companies like Reddit and Zillow have said they will pay employees the same salaries regardless of where they live.
Location-based pay has become a hotly debated issue. Let’s look at both the advantages and disadvantages of this type of pay model.
The pros of location-based pay models
- Potential cost savings:The initial appeal of this pay model is that it appears to save companies money. For companies located in high-cost areas with a largely remote workforce, basing salary on geography could help reduce operating expenses. These cost savings can then be invested into other areas of the business. At the same time, with financial stress at the top of many employees’ minds, this model ensures that employees will still be paid a living wage for their location.
- Encourages hybrid workplaces:Postal code pay could keep workers nearby, which may help build a strong hybrid workplace. A higher salary may encourage employees to live within commuting distance to the office. This could be particularly beneficial for businesses that benefit from frequent in-person collaboration.
- Attracts talent from other markets:You never know where the perfect job candidate may be located. Location-based pay opens opportunities to talented candidates from across the world. Having a competitive compensation package that meets a candidate’s financial needs could help employers recruit top talent from around the world.
The cons of location-based pay models
- Heightens employee conflict:Suburban or rural employees may find themselves earning less than their metropolitan counterparts, even if they have the same responsibilities and title. This could lead to perceptions of unfairness, which can cause resentment and lower workplace morale. It can already be challenging to keep remote and onsite workers united. Differences in salary would likely be another source of tension.
- Increases administrative workload:It’s important to consider the level of work that goes into establishing and maintaining a location-based pay model. There are lots of logistics to work out, such as defining geographic salary area and monitoring costs of living in the various places employees are located. A location-based pay model requires valuable time and resources to be successful.
- Makes retention more challenging:A location-based pay model means that employees who move from a high-cost area to a lower-cost area could find themselves facing a pay cut—which likely no one would be pleased about. For some, this loss in wages may lead them to look for opportunities elsewhere.
Is location-based pay right for your company?
Changing a pay model is a big deal, and there are important factors to consider before implementing a location-based pay model. To help you decide whether this model is right for your organization, our HR experts have put together a guide that dives into three questions every employer should consider before implementing postal code pay:
- What will your model look like?
- How will this affect employees?
- How will you address questions of fairness?
Download our FREE Guide to Location-Based Pay Models now!