The concept of "localized compensation" should be considered for your business.
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The pandemic has changed our lives and work – in some cases permanently. Many employers have chosen to keep remote working as an option for some workers. Predictably, many workers have seen the blessing on their finances by taking their big city salaries and moving to cheaper areas.
This trend puts employers in a pickle. Remote workers who move benefit from salaries that are designed to be competitive based on the regional cost of housing around the headquarters. Their salaries now have a higher value because of their move. In the meantime, workers who have to work at headquarters will continue to pay higher housing costs for the same salaries. Many companies respond by renegotiating the salaries of their remote employees who have been relocated.
A new term has emerged: localized compensation. Employers must take practical and ethical issues into account when negotiating salaries, some of which depend on where the employee lives. These questions are even more pressing for existing employees who have moved.
Employers have the right to know where their employees live, but do they have the right to know their employees' rent or mortgage payments? Localized compensation seeks to counteract this encroachment by setting salaries based on regional property prices rather than actual housing costs for workers. Fortunately, there are some helpful tools your HR department can use to determine housing costs for relocated workers. The National Association of Realtors' Housing Affordability Index divides housing costs into the levels of the statistical area of the county and metropolis. There are other similar tools offered by private companies and public agencies, such as the United States Census Bureau's American Housing Survey.
Once you know the relative difference in housing costs between your headquarters and the relocated worker, you can adjust salaries fairly. At least that's the simple expectation. The reality could be a lot more problematic.
Related: What To Do If Your Salary Was Cut During The Pandemic
What about commuters?
Of course, not everyone who works at headquarters lives near headquarters. What about long-distance commuters who are already taking advantage of the wage differentials? Should their salaries suddenly be subjected to localized compensation assessments? Many of them moved to the distant suburbs to take advantage of the lower cost of housing when they started their families. Should they be punished if they don't live in a cramped, expensive apartment in the city with their new families?
These are questions that every employer must consider from an ethical point of view. A good argument against adjusting commuter salaries is that commuting itself is a significant penalty. Unlike remote workers, commuters do not use remote work to take advantage of the difference in housing costs. What about the commuters who now work remotely? Again, they did not move to maximize their salary for a lower cost of living. Personally, I would leave my commuters alone.
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Guiding principles: transparency and collaboration
Determining localized compensation raises a number of ethical, financial, and managerial questions. Employers need to work with workers to establish a coherent and fair pay system. Workers need to know what metrics were used to determine their salaries. They should also know how their salaries might change if they move. Above all, localized remuneration must take into account the fact that those who are willing to live in cheaper areas always get some wage advantage. Setting a price for this benefit is the problem that can be solved through a transparent and collaborative localized compensation process.
Related: Why Young Professionals Don't Negotiate Salaries (And Why They Should)