Geographic pay differentials: Issues and solutions for employers
Offering the ability to work remotely has benefits and challenges for employers. One of which is geographic pay differentials or compensation based on location. Paying employees based on where they live, not the headquarters location, allows companies to offer salaries that vary based on the cost of living for the area in which the employee resides. There are many benefits to using geographic pay differentials, including lower compensation costs overall and the ability to cast a wider net for recruitment. As organizations expand further into a remote workforce, there are some issues to keep in mind when using location-based pay.
Geographic based pay issues and solutions
In the past, we have discussed how organizations can go about implementing geographic pay, but today, let’s look at a few of the issues that may arise with this strategy and how to address them:
State and Local taxes (and compliance) – An organization must pay state and local taxes for the location an employee resides and works, not just the taxes for where an organization has an office. For companies new to offering remote work, tax season often brings about some surprises. Taxes and compliance vary by state. Research each area you are considering hiring or offering employment opportunities.
Bottom line: Understanding taxes and compliances of different states will help direct where you will be willing to have workers reside.
Benefits packages – When considering increasing your remote workforce, understand how different locations impact your group insurance packages and other benefits. Your HR team may need to address things like enrollment differently for remote workers. In addition, speak with your health insurance provider to understand if or how employees in different locations will impact your group plan. There may be adjustments that are needed to ensure the best rates and plan options for all employees.
Bottom line: Consult your benefits administrators before expanding your remote workforce to eliminate surprises during open enrollment.
Concerns over fairness – Employees talk, and they often talk salary. While there’s no way to stop this, you can take steps to prevent feelings of unfairness or favoritism when using geographic pay differentials. So how does an employer ensure fairness and employee satisfaction when offering different salaries for the same position? Ensure your geographic pay model starts with base pay but takes into consideration other factors, such as salary ranges and opportunities for growth. Be transparent with employees upfront about your approach to geographic pay differentials.
Bottom line: Open communication helps employees understand location-based pay.
How to get started with geographic pay differentials
Before implementing geographic pay differentials in your compensation plan, consult a compensation professional. Experience with understanding the legal and compliance issues involved in location-based pay, as well as knowing the best way to roll out a plan, is key to your overall success.
At Compensation Works, we have helped many organizations create geographic-based compensation plans that grow with their organization. Contact us today to learn more and schedule a consultation.