As employees at a number of Silicon Valley companies have worked remotely during the pandemic, some of these companies are making permanent changes to their remote-work policies. They are giving employees the freedom to flee the exorbitant rents of the Bay Area and other expensive cities. But for many employees, that flexibility can come at a price.
Tech companies including Facebook, Twitter, Microsoft, and VMWare are requiring workers to take pay cuts if they choose to go remote permanently and move to cheaper locations. Stripe, meanwhile, offered employees who were relocating out of San Francisco, New York, or Seattle a one-time moving allowance of $20,000—but with a pay cut of up to 10%.
These policies might not seem so outlandish; after all, location is a factor that most companies take into account when determining the wages they pay employees. But there are a number of reasons why companies that dock remote workers’ pay might come to regret it.
It doesn’t make economic sense
Economists tend to be a bit flummoxed about the idea of tying remote workers’ pay to their location. That’s because it goes against the way market forces are supposed to work.
“In the long run, we as economists expect wages to reach an equilibrium where you’re paid based on productivity,” says Paul Oyer, a professor of economics at the Stanford Graduate School of Business. “So if a worker in Oklahoma is literally doing the same job as effectively for Facebook as someone in its Menlo Park offices, we would expect they’re going to get paid the same amount.” Otherwise, the equally productive but lower-paid Oklahoma worker would presumably take a job at a company willing to offer a higher salary.
Companies like Facebook, however, seem to think employees will want to stick with them even if their salaries take a hit. “Facebook says, ‘We’re accommodating you, you can go work in Oklahoma City, but we want something in return,'” Oyer says.
Employees will (probably) still be productive
It’s possible that productivity could dip among remote workers, Oyer points out, in which case a pay differential could make sense. He points to onboarding new employees and innovation as two possible pitfalls of remote work that could impact productivity. “Why did Facebook and Google have these campuses with snacks and lunch and whatever?” he says. “Partially to keep people tied to their desks, but it also allowed for serendipitous discussions that led to good ideas.” Former Yahoo CEO Marissa Meyer famously called remote workers back to the office in 2013 using these justifications, arguing that “speed and quality are often sacrificed when we work from home.” IBM did the same in 2017 over concerns about innovation.
But Raj Choudhury, a professor at the Harvard Business School who studies the future of work, has reason to believe that productivity won’t be hurt by remote work. He studied productivity at the US Patent and Trademark Office after it transitioned to a work-from-anywhere policy, and found that it actually went up by 4.4%. Other research has also shown that remote workers tend to be more productive than their in-person counterparts.
One reason Choudhury thinks that happens is that once workers are free to move to cheaper places, they can make decisions that maximize their productivity. “I interviewed a woman who said that her move from Alexandria, Virginia, to a cheaper location allowed her to hire someone to look after her kid or put the kid in daycare for the first time ever, which would make anyone more productive,” he explains. By that logic, Choudhury says, companies could be “risking your employees being less productive by adjusting salaries,” since doing so limits workers’ ability to make their money go further in a location of their choosing.
The picture can be a little more complicated for companies with remote workers hoping to move out of the country in which they’re based, but Choudhury still leans toward the idea of taking geography out of the equation. “I think the low-risk strategy for the company would be to say, ‘We allow that, we’ll just not increase your wages, which are constant.’ And now you figure out if you want to become a digital nomad.”
Companies risk losing talent to competitors who can pay better
Adjusting pay to geography seems to be an outmoded idea operating on a “mid-20th century model of capitalism,” says Jake Rosenfeld, professor of sociology at Washington University in St Louis and the author of You’re Paid What You’re Worth: And Other Myths of the Modern Economy. In the previous century, workers may have been willing to put up with pay cuts if they relocated because there was an “implicit contract between the employee and employer that the company would take care of the worker for the duration of their career.”
That model is largely dead, Rosenfeld says; workers, aware that companies see them as expendable, now think of themselves as free agents. “And that’s why companies that think they can just institute differential pay structures without pushback are probably in for a harsh lesson.” That harsh lesson is likely losing out on top talent to competitors who allow employees to live wherever they want while still paying them a competitive wage.
“I don’t see it as an ethical issue,” says Cheryl Johnson, the chief human resources officer at HR software company Paylocity. “It’s a retention issue.”
Pay cuts will be a hit for morale
It’s one thing to hire workers at a local salary, quite another to say they’ll earn less money while doing the same job they always did. Companies risk employee morale taking a hit if they’re forced to take a pay cut, according to Rosenfeld.
“I would proceed cautiously on companies’ part,” Rosenfeld says. Research shows that people react very negatively to pay cuts, and that’s likely to remain true even if the underlying reason has to do with location. “It’s taken as a form of insult and moral injury,” he says.
In a survey of 2,300 tech workers around the world by job recruitment site Hired, 55% of tech workers said they wouldn’t take a pay cut in order to work remotely, while one-third were willing. Another anonymous survey of more than 5,900 respondents on the professional networking site Blind found that 49% of respondents were opposed to the idea of adjusting pay to location, while 44% were amenable to the idea, according to Bloomberg.
The idea of equal pay for equal work is deeply ingrained among contemporary workers, Rosenfeld says. “And paying workers in the same company differently for doing the same work could be seen as violating that principle.”
In a sense, the announcements from elite employers are introducing a new set of people to the problems that less privileged workers have long struggled with, says Bryce Goodman, a doctoral candidate in ethics at the University of Oxford.
“A lot of these people have been more than happy to work for companies that routinely offshore labor, like the moderation of offensive content, like the manufacture of their goods, and never cared that there were people who were being paid subsistence wages that were contributing to the value of their stock price,” Goodman says.
But that reality won’t make pay cuts any less upsetting for remote workers. And it’s possible that the companies could implement wage-adjustment policies in ways that hurt marginalized groups. “There’s a lot of really interesting research being done on how having the option for remote work can exacerbate existing gender inequalities,” Rosenfeld notes. One scenario: If women (often the primary caretakers in their families) opt for remote work at rates higher than their male colleagues, they could also wind up taking more pay cuts, exacerbating the gender pay gap at their companies.
The solution: borderless pay for borderless work
Some companies have taken a stand against geographic salary adjustments: Reddit and Spotify, for example, have introduced work-from-anywhere policies that will continue paying employees the amounts they’d make in San Francisco and New York.
Help Scout is another. The customer-support software company has 115 employees, of whom about 60% are based in North America, with 40% in the rest of the world. Help Scout, based in Boulder, Colorado, used to adjust wages according to where workers lived. Its reasons for changing that policy may be instructive to other companies contemplating what path to take.
Help Scout has been “remote-first from day one” since its founding 10 years ago, says Nick Francis, co-founder and CEO of the company—a decision made to give the company access to a bigger pool of talent. Up until 2018, the company adjusted pay to the geographic location where its employees worked.
“The reason we initially did it is because it’s intuitive,” Francis says. “However, we found that there were a number of flaws. And the most important thing for us is that, in a software business, the intrinsic value of the work is the same no matter where you live. So for someone to be paid less for writing code in Thailand relative to San Francisco just didn’t sit right with me. And a number of employees had brought it up.”
And the more Francis himself thought about it, the more he thought the policy contradicted Help Scout’s globalist remote-work principles. “I felt like I was speaking out of both sides of my mouth,” he says. “If we say that we are borderless as a company, then why exactly does our compensation strategy still have borders?”
A survey of Help Scout’s employees found that they overwhelmingly supported keeping wages the same regardless of location. And Francis saw practical benefits to that, too. “It’s endlessly complex to be the arbiter of localized living expenses and/or market rates,” he says.
Since 2018, Help Scout has paid its workers based on the market rates in what he calls “second-tier cities” including New York, Seattle, and Boston. (“First-tier” is San Francisco.) “Whether you live in Ukraine or New York City,” Francis says, “you’re going to get paid the same because we value the intrinsic work that you’re doing and has the same intrinsic value to us.”
If companies do decide to make pay cuts
Any company that does adjust salaries for remote workers should err on the side of generosity, says Johnson of Paylocity. For example, if someone moves from a city where the range for their position is $100,000-$200,000 to an area where the range is $80,000-$180,000, “they may just be at the super-high end of the market, but they’re still within the range,” Johnson says. “There isn’t really a need to make a change.”
Second, she says, “for the companies that decide that they are going to adjust your pay, they need to be just as willing to adjust your pay up as they are to adjust your pay down.” If a company isn’t willing to increase pay when a remote employee relocates from Oklahoma City to Los Angeles, Johnson says, it’s effectively admitting that the issue isn’t really geography, but finding ways to save money. “The organizations where [adjusting pay] becomes unethical is when you’re only willing to do things that advance you as a company, not the employee,” Johnson says.
Any company that does decide to go forward with pay adjustments should also prioritize transparency, Rosenfeld says. “One thing that I don’t think employers take enough advantage of is running the idea by the employees and seeing what they say.” If workers have strong objections to the idea, it may be wise to back off. After all, Rosenfeld points out, “I know not all of the firms are making the same move. And so that could be a comparative advantage for the firm that decides to keep salaries even, regardless of where they are.”