Remote Working: An Additional Lens to View Compensation

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Remote Working: An Additional Lens to View Compensation
Remote working has presented an opportunity to view compensation through an additional lens that focuses on leveraging diminishing geographic pay differentials.

Remote Working: An Additional Lens to View Compensation

As economists continue to debate if the pandemic can be categorized as a black or a white swan event it’s clear that the future reward agenda cannot remain grey! With organizations trying to control costs and employees prioritizing job security over the customary annual raise the time is ripe to revisit the reward strategy blueprint. For decades the reaction to a business shock has been to axe jobs and compensation. Pay cuts, low or no bonus, cancellation, or deferment of salary increments have been the default actions across the global business landscape. 2020 was nothing different.

“As the pandemic started raging the role of the reward leader got catapulted to one of a strategic partner shaping the resilience plan or transformation agenda of the organization. Well-being as part of the reward offering assumed more importance than ever. Remote working started as a temporary fix to ensure business continuity while keeping employees safe.”

Organizations have since then realized the permanent advantages that these new ways of working offer to both the employer and the employee. The reward leader is now tasked with optimizing compensation spend when the workforce is moving away from high-cost locations, embracing new ways of working, and expresses a preference to continue working from home post the pandemic. Remote working has presented an opportunity to view compensation through an additional lens that focuses on leveraging diminishing geographic pay differentials.  It is however critical to combine the reward perspective with that of the employee and employer to understand the potential gains of this approach.

The Reward Perspective

  • A more evenly distributed workforce across locations will help homogenize pay levels and narrow geographic differentials
  • Base pay will not be artificially driven by location but will strongly correlate with the real worth of an employee’s skill set
  • As more organizations follow the trail the traditional melting pots will give way to emerging talent locations
  • Reverse migration from high-cost locations will slow down wage inflation leading to lower annual baseline cost increase for organizations
  • Cost of living adjustment typically makes up 40% – 70% of an organization’s salary increase budget. Savings on this front can be utilized to fund pay for performance initiatives that reward higher productivity of the remote worker
  • Fixed cash compensation will continue to increase albeit at a lower annual rate. This can be used as an opportunity to shift towards a compensation philosophy that makes variable pay a more relevant part of the total cash offering
  • Variable pay growth outpacing increase in base salary will lead to a stronger alignment of employee performance to business results. This has typically been important only for senior management
  • Compensation philosophy can also be further segmented based on remote and on-site jobs 
  • Organizations that do make this adjustment will eventually, see a decline in the ratio of compensation to revenue  
  • This will help build the resilience muscle to withstand future business shocks preventing knee jerk reactions related to employee compensation

The Employee Perspective

  • Employees have embraced new ways of working and a significant percentage would prefer to continue working remote post the pandemic
  • Employees across the generational curve have realized the importance of well-being and proximity to family
  • Controlling cost of living when pay increases are not a certainty is reason enough for many to prefer working from home
  • With remote working being location agnostic there is no longer a perception that only a few prominent cities can be catalysts for career advancement
  • Hot skill pay premium will continue to drive compensation for rare talent irrespective of location

The Employer Perspective

  • Planning for resilience is key as the next business shock will not announce its arrival in advance making pre-pandemic ways of working implausible
  • Contrary to expectations organizations have experienced productivity gains in certain functions forcing a rethink on operating models
  • The traditional supervisor role has changed from being a resource manager to one where process-driven meaningful interactions with the team drive results
  • Overheads have reduced enabling organizations to withstand the sudden economic downturn
  • Remote working widens the talent landscape with location no longer remaining a decisive factor

The matrix below shows the opportunity to homogenize base pay for jobs that may or may not be performed remotely. Rare talent will continue to force pay differentials irrespective of the job being performed remotely or not.




Illustrative

The sky is a silver lining of every cloud. An unanticipated event has made even the most successful organizations think about pandemic proofing their business. As operating models evolve to be future-ready reward needs to keep pace with the change. The geographic pay differential is one of the many parts of the compensation stack that needs to be tested. The multitude of interacting variables will enable informed decision-making on the path an organization eventually treads on.     

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