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Where a Remote Employee Lives Shouldn’t Affect Their Pay

4 minute read
Bloom is the William Eberle Professor of Economics at Stanford University. His research focuses on working from home, management practices and uncertainty.

I was teaching an executive group and a manager raised a dilemma that initiated a soul-searching debate. The manager explained she ran a large fully remote team in Europe. The firm operated a local pay scheme for fully remote workers. London based remote workers were paid on a London scale, Glasgow based remote workers on a Glasgow scale and so on. The problem was one of the team reported that another team member was being paid for living in an expensive Northern city but had moved to a cheaper Southern resort. The manager asked should she discipline the employee? Probably yes. But this employee was a star performer continuing to deliver outstanding results. So maybe she should look the other way? But this would upset the reporting team member and breach company protocol?

My view is that highly localized pay schemes are problematic from the outset. This manager was put in an impossible situation. There was no good solution.

Before discussing the bigger case, it is worth first noting that for jobs that are partly or fully in person you clearly want to pay local rates. If you hire a shift-manager in New York you have to pay New York wages. If hire a shift-manager in Memphis you pay Memphis wages. But for fully remote employees who can live and work anywhere in the world things are more flexible. Indeed, I think firms may want to pay a national or even global rate for four reasons.

First, it avoids managers having to police HR pay policies. The manager in my group was stressed because she was having to discipline an outstanding employee for not being truthful on their residential location. But managers should not be policing where their employees live. As we know from decades of research managing large teams is extremely challenging. Adding the task of snooping into their employees’ lives is making their roles almost impossible.

Second, it lets employees move location without having to worry about changing pay. Indeed, one of the great allures of fully remote work is the flexibility you gain. This post-pandemic surge of “Digital Nomads” who pair work with extensive travel has been a resounding success. Moreover, employees often need to move for family, health, or personal reasons. Maybe your spouse gets a promotion and needs to move city. Any remote worker would feel angry if their employer used this as an excuse to cut their pay for shifting to a lower cost location.

Third, global pay makes life a lot simpler for HR departments. One of the lessons of the pandemic is managing hybrid and remote employees is hard. In the old fully-in-person world managers could manage employee’s inputs by simply desk watching them. This was poetically called “managing by walking around.” Managers could see if a team member was at their desk typing away on Word or Excel, suggesting they were (probably) working. Or you see if their team member was endlessly flirting with their colleague or making excessively long trips to the bathroom carrying their cell phone. But with home-based employees this kind of input monitoring is impossible. Managers instead need to focus on output monitoring. They need to evaluate employees’ performance on objectives outcomes like sales targets, customer numbers or product deliveries. But rigorous performance evaluation is hard and requires hard work by both managers and HR. So, this is exactly when you don’t want them regularly updating localized pay schedules. Don’t tie up your key personal in their time of challenge with pay bureaucracy.

Finally, the most profitable way to run a firm is to source the cheapest person to perform a task. For fully remote work that likely means posting this globally and accepting the best qualified candidate for the wage. If somebody in Texas is happy to code-up the same app or create the same marketing campaign at half the rate as somebody in San Francisco they should get the job. Profitable firms source out the best talent per dollar, and for remote jobs that means moving to global hiring.

There are challenges of course. One is legal and regulatory, and these barriers may take time to work around. Another is the pre-pandemic legacy. Many firms sent employees home in a hurry in 2020, deciding to keep them on the same pay rate. This meant remote employees ended up being tethered to the pay-scales of their former offices as they migrated around. But as time goes by these legacy issues are slowly fading.

The pandemic highlights how globally connected we are, both for good and bad. For firms and employees operating in a remote world this increasingly means dropping localized pay-schemes and moving towards global pay. We should be paying employees for what they achieve, not where they claim to live.

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