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Location-based pay frameworks: where do we go from here?

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Posted by Justine Woolf on 04 November 2021

Location-based pay frameworks: where do we go from here?

Pay & Reward | Pay framework | Flexible working | Global talent | Pay Structure | Remote Working

Traditionally many organisations have had regional-based pay frameworks – for example, London/outer London, national, or north/south, depending on where employees are located. The rationale for this is based on the fact that the cost of living is different in different parts of the country, so as an employer, you set your pay rates to reflect what you need to pay to attract people to your location.

In the past, home-based workers were more likely to have a national reference point for pay, recognising that they don’t have commuting costs and can be based anywhere to do their work. The value gained by those working at home compensated them for the fact that they maybe didn’t earn the same as those that work in a city location. As one of these people who has been on a home-based contract for 15 years, I’ve always valued that flexibility and while I recognise I could earn more commuting into London, as a lifestyle choice home-working was worth the discount.

But what about now? The pandemic has firmly thrust the idea of home-based working into a reality, and many people don’t want to go back into the office as much as before, or even at all. People have become used to the flexibility – a recent US poll suggested 17 per cent don’t want to go back to the workplace at all, and a survey by EY found that four in five wanted flexibility where they worked, with 47 per cent saying they would consider changing their jobs if flexible working wasn’t an option.

There have been some headlines in the summer suggesting that pay cuts were on the cards for those who were based permanently from home, especially in the US. Google, for example, was said to have developed a pay calculator that lets employees see the effect working remotely or moving offices would have on their pay, suggesting that some remote employees, especially those with a long commute, could have their pay cut without changing address (although Google did confirm an employees' pay would not change if they worked fully remotely from the same city). Other organisations, including Microsoft, Facebook, and Twitter, have offered less pay for employees based in locations where it is more inexpensive to live.

Whilst here in the UK changing pay and place of work is a contractual issue, imposing pay cuts is a high risk, not only relating to contractual breaches, but we are still in an uncertain territory over the long-term impact of hybrid working, and in a very competitive labour market where the tide has turned in favour of employees, and cutting pay could turn off the talent and encourage people to make that move.

But what are the options available and what are companies doing? What is the impact of new ways of working for those who are already home-based (and perhaps on a ‘discounted’ salary compared to those based in city locations) and those on office-based contracts who no longer need to commute into the office every day? As yet, it’s too early to say. Many organisations are piloting hybrid working (3+2), and until we can say the worst of the pandemic is behind us, most companies we speak to aren’t quite ready to propose changes to pay structures. In the short term, this means that those who were previously office-based are now potentially ‘winning’ more than those who were solely remote before. And there is a risk here – that ‘discount’ or benefit that people felt working from home gave them is no longer a USP. This means that you might have remote workers, who are paid less, potentially unfairly. And knowing this might make them open to offers. Can you afford to lose them?

Based on our experience, managing regionalised pay structures can be challenging, as the data in many salary surveys doesn’t typically go beyond very broad regional cuts. This makes it hard to truly differentiate between say Leeds or Manchester, and even if you can, the difference can be marginal making it hard to justify the complexity of managing numerous pay ranges. Equally, some people have taken the opportunity to move away from the city in the hope that they can put up with a longer commute for a couple of days a week. If more people do this, the current regional differentials across the UK may reduce further as rural locations become more popular. 

I suspect what will happen is a gradual simplification of pay, particularly for more senior-level roles where mobility is less of an issue than for junior roles. Having an approach that pays people the same no matter where they are is good for diversity, opening talent pools and ensuring consistency in pay. And it doesn’t have to stop in the UK – talent is global, so to attract and retain the best you might need to consider a global strategy. 

The tricky part will be unravelling historical pay practice, particularly where they are significant differentials in London pay ranges vs national pay ranges. Will big business, keen to hold on to the best or attract key talent, go for an approach that levels up previous differentials so all are on a higher rate? For now, whilst hybrid working remains an ongoing test, it's simply too early to tell and many companies are holding fast to wait and see what others do.  

We are having more and more conversations with our Innecto community on this topic, and if this is something that is weighing on your mind also, please do get in touch. I can be reached by email (justine.woolf@innecto.com) or call our office on +44 (0)20 3457 0894.

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