Tech workers and employers alike are beginning to question location-focused pay scales. A handful of companies are moving to abandon them altogether.
In setting pay without regard for location, tech companies including Reddit Inc. and Zillow Group Inc. are making a potentially expensive gamble to retain talent and gain a hiring edge. The move can entail maintaining relatively high salaries of employees who are relocating, and adopting a revised scale for new hires. Though it is early, the move challenges a long-held, but not universal, notion that where people live should determine what they make.
Some big tech firms including Facebook Inc. were clear early on in the pandemic that people moving away from the Bay Area to less expensive cities would see a pay cut. Payment platform Stripe Inc. offered one-time bonuses for workers who moved out of San Francisco, Seattle or New York — and agreed to a pay cut of up to 10%.
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But a pay cut for any reason can be bad for worker morale, said Jake Rosenfeld, a sociology professor at Washington University in St. Louis who researches pay determination. “Employers really have to do a bit of a dance to justify it to workers,” he said.
Workers considering more flexible work scenarios are themselves divided. A November survey of 600 tech workers by the job-search platform Indeed found that 60% of respondents would be willing to take a pay cut to work remotely permanently while 40% said they wouldn’t.
Zillow, the Seattle-based real-estate search firm, told its 5,600 employees in October that if they chose to relocate from their current city, their pay wouldn’t be adjusted. “We’re not making this change to save money,” said Dan Spaulding, chief people officer of Zillow. “We’re making this change to retain our employees.”
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Since the announcement, around 50 employees have decided to move to a different state. The company has decided to try this pay model through at least the end of 2021. With new hires, Zillow plans to work toward a nationalized pay scale over time.
“If people think the world is going to snap back to where it was 18 months after the pandemic starts, I don’t think that’s realistic,” said Mr. Spaulding. “Your best talent is going to have options coming out of this.”
The social-media platform Reddit, which employs about 700 people, made a similar move to get rid of geographically based salaries in the U.S. at the end of October after seeing productivity remain high while people were fully remote.
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The company wanted to “eliminate the trade-off that employees would have to make if we lowered their compensation if they moved to a lower-cost area,” said Nellie Peshkov, Reddit’s chief people and culture officer.
Reddit previously had three zones of pay in the U.S., with the great majority of its employees — those based in New York and San Francisco — making the most. Some of Reddit’s employees in other cities are getting pay raises as part of the shift, said Ms. Peshkov.
In addition to retaining current talent, Ms. Peshkov said the company anticipates the move will help develop a more diverse workforce.
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Employers tend to conflate cost of living with the market rate for labor in a given area, said Peter Cappelli, a professor of management at the Wharton School of the University of Pennsylvania. “The reason that they’re making a lot of money is because that’s where the competition is, ” he said. “If you didn’t pay them that much at Facebook, somebody down the street at LinkedIn is going to hire them.”
While keeping salaries the same might help retain employees, Mr. Cappelli said, you can’t have the people who moved sitting next to colleagues doing the same exact work while making less. Alternatively, the people who remain in a high-cost area might resent those who have moved while keeping their pay.
“Employees might say, ‘Hey you’re paying me similar to someone who is living in a cheaper place,'” he said. “Their salary goes further than it does for me.”
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Ms. Peshkov with Reddit said she hasn’t yet heard of complaints from San Francisco workers calling the move unfair, due to the Bay Area’s high cost of living.
“There was actually no negative reaction,” she said. “They appreciate this overarching philosophy to pay people for impact and not where they live.”
Employee sentiment aside, paying workers without taking into account where they live can add significant cost, according to Tauseef Rahman, a partner in workforce strategy and analytics with Mercer.
“Because you are paying national rates, you are arguably paying more than what the local labor market would have required,” he said. Businesses will have to determine whether there is a financial upside to being nationally competitive on pay, he added. He thinks one outcome is that companies localize pay for only some roles, and not others.
“The extent to which geography impacts pay isn’t equal across all types of jobs,” he said. “If you think about really in-demand sorts of roles where there’s just not a lot of people who can do something, you’re going to pay that going rate.”
So far those getting rid of geographic pay scales seem to be in the minority. Some are doing the opposite: In June, Slack Technologies Inc. went from two nationwide pay tiers to five as the company expects more of its employees to be based outside of San Francisco and New York, a company spokesman said.
“We created these bands in order to provide transparency and fairness to our employees,” said Slack Chief People Officer Nadia Rawlinson. The company decided that adjusting pay based on workers’ local cost of living would help it avoid inequities.
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Sahil Lavingia, founder of the 24-person e-commerce startup Gumroad, heard from hundreds of job seekers after tweeting that he would no longer consider geography when determining wages.
Yet even within his relatively tiny team — which has been fully remote since 2016 — the move wasn’t without complications. He said he removed the highest pay tier for hires going forward, grandfathering in one employee, and imposed caps on weekly hours worked in order to offset some employees’ salary increases.
Mr. Lavingia said many of the tech workers he has heard from are based outside the U.S. — in India, Nigeria, Singapore and Eastern Europe. He anticipates that as more people compete for fully remote jobs, the going rate for tech work will eventually come down.
“Long term, this actually leads to better rates for almost everybody in the world but for a select few,” he said.