The New Remote GEO Differential

It is time for a real change in pay. Like most real changes this is not a change driven by desire, it is a change driven by necessity. Less than ten years ago headlines crowed that working from home had failed at Yahoo and that everyone was being called back into traditional offices. Just a few months ago working remotely was usually viewed as a privilege of the few who had proven themselves worthy. Today we have entire companies working from their living rooms, and inlaws’ places in the country. Things have changed and will never go all the way back to the “old ways.” Our practices must adapt, quickly.

As soon as you have employees in disparate locations you have issues with pay. Geographic differential (GEO Diff) rates are the “go-to” solution to solve this problem. These rates show the differences in pay between two, or many locations. They allow us to confidently pay an engineer in Nashville, the home office location, less than an engineer in new San Francisco office. Lower cost marketplaces result in lower base pay. It just makes sense to pay what the market requires. We simply apply the GEO Diff and move on.

We have moved to a world where individuals, instead of employers, can choose their location. This is no longer a privilege for the unique few, but a reality for many successful businesses. If your employee chooses to move from Nashville to San Francisco should they get the same increase as if the company dictated that they needed to be in that location? It would seem that the correct answer is…no.  But that breaks the base pay paradigm that we used for decades. How do we adapt?

Most companies will operate with a blend of “in-office” and remote employees. For this purpose, “in-office” is any location that is dictated by the company (even if it is an office at home). Remote is any self-selected location (even if it is in a company location). I am suggesting the creation of an entirely new GEO Diff. The “Remote GEO Diff.”

The remote GEO Diff is a manufactured differential from your home office pay. It is designed to reflect your pay philosophy and the value (or discount) you place on a job that is being performed by employees at the location of their choice.

Example: Assume your home office location is exactly aligned with the national average for base pay. Your market data indicates that an Accountant 3 should be paid $100,000 at the 50^th percentile, your targeted level.

1) Let’s say your company wants more people to work remotely. You may set your Remote GEO Diff to 5% above the home-office location. You would pay people this amount even if they worked in the home office city, but NOT in the home office itself. If the person moved to San Francisco, you would also pay them based on the remote GEO Diff.

2) Your company offers amazing benefits and prefers people to work from the home office to reduce the complexity and costs of delivering these benefits. You may set your Remote GEO Diff to 10% below the home office rate (yes, even if the person is work from home in. the same city).

3) If you open a new office in San Francisco you would still apply a traditional GEO Diff to ensure your mandated location pays competitively. The same would be true if you opened an office in a less expensive location.

The New Remote GEO Diff is a way for you to have remote employees, pay people consistently, and reflect your company's approach for total rewards and compensation philosophy. It is already being done at some companies, so your time to get prepared is not before the 2020 compensation planning surge this coming Fall.

There will be more on compensation in the remote place to come in future posts.

Dan Walter is a CECP, CEP, and Fellow of Global Equity (FGE). He is a “Compensation Futurist” who works as Managing Consultant for FutureSense. Dan is also a leading expert on incentive plans and equity compensation issues. He has written several industry resources including the only resource dedicated to Performance-Based Equity Compensation. He has co-authored ”Everything You Do In Compensation is Communication”, “The Decision Makers Guide to Equity Compensation”, “Equity Alternatives” and other books. Connect with Dan on LinkedIn. Or, follow him on Twitter at @DanFutureSense.

Comments

[E. James (Jim) Brennan]

Hate to disagree, but basing geo diffs on HQ pay has proven either vaguely ineffective or highly destructive for decades. Sometimes it might work, but there are better and safer ways to pay in accord with local conditions, wherever you may operate.

Dave Thomsen PhD and I worked hard decades ago to (eventually) persuade the (then) Civil Service Commission of the US Federal Government to abolish the ridiculous practice of one single pay rate for every job in every American location. We got some plaques from the grateful agencies like the FBI, IRS, USMS, etc., while consultants like our friend Howard Risher PhD got the implementation gigs. But the original technical pay variations were based on differentials from the national pay at given levels rather than using the HQ location as the base.

Long before then it was still a rather well known approach, to have variable pay scales based on local deviations from "average normal" rates. Here is why.

A still-massive financial corporation based in NYC called me decades ago, upset about what happened when new updated geographic differential survey formulae suddenly seemed to show crazy results when they adjusted their geo diff structures in a new year. Their program used their NYC HQ as the base against which they applied geo diffs to adjust to local conditions. But over the past year at issue, pay in NYC had been flat while competitive pay in all their outlying US locations had risen "normally" for the times... but NOT in NYC.

Since the pay trend at virtually all levels in their base HQ city was totally out of line with the nationwide trends variously reflected in their outlying regions, the relative relationships derived from the false comparison fell completely out of alignment with all actual local and national pay practices elsewhere. Using HQ as your base forces your branch pay relationships to reflect HQ change patterns... but labor economics don't work that way. Each city has a different and often unique practice. The dramatic variances can only be minimized by aggregating results into a universal (national) scale less subject to wild swings than individual cities.

Base your center normative foundation rate on the national trend because it will adjust for localized aberrational trends which may change or reverse individually but balance out in the aggregate.

Another reason to remove the focus on HQ locations is simple credibility. It is very difficult to justify relationships based the current reality in one frequently unique pay marketplace. When it changes in a unique direction, all the inter-related geo diffs must be changed in a "new proper ratio" to it. That ain't easy to do and even harder to explain. MUCH easier to say, the US Average (although it's really a median) is 100% and SuperCity is 125% while Megaplex Center is 112%, Typical Town is 105%, Smallville is 93% and TinyTown is 85%. You can even use bracketed categories, if you have many locations, in which the members can vary over time, per consistent trend findings.

Geo diffs are "simple" yet remain just as technical as the tricks of Executive Remuneration Packages. And they affect a whole lot MORE employees, so treat them like dynamite!

[Craig Matthews]

It will be interesting to see what happens as more employees available for each job would tend to push wages down, but more companies competing for those employees would tend to push wages up. Couple that with the fact that companies have long established geo diffs in place. I think there will be a gradual move towards the middle but it will take years to be realized.

[E. James (Jim) Brennan]

I'll jump back in, Craig, before Dan has a chance. (Brennan is arrogant, that way...)

It's already happened. Movement to the norm has continued re geo difs. Not so much as the increasingly accurate relationships between executive pay and organization size, but still meaningfully... and differently.

Two separate geo pay trends are involved.

1. High-paying enterprises have increasingly clustered into bigger cities or metroplexes, driving up the cost of labor in "industry centers". Both Silicon Valley and the Boston Beltway are super-high paying regions where employers vie incestuously to drive up competitive rates in such regions. Of course, that also draws in universities to teach those trades and graduates and/or imported hires who now populate those areas to softly moderate the supply/demand dynamics thereof. VERY few really high-paying enterprises are located in the increasingly isolated tiny villages of "flyover country" where wages and costs remain quite low.

2. New operational technologies (remote workers, virtual meetings, gig economy) combined to ease the requirements for actual in-person physical meetings where everyone must live near work for effective access. New political realities also justified steady occasionally massive minimum wage increase legislation in the high-pay regions. Nevertheless, folks with the critical skills that draw impressive salaries/bonuses now rarely find themselves forced to relocate to find that better higher paying job. That greener grass is usually somewhere already close by, or they just buy another home (with handsome relocation packages, of course) within their industry's central employment region where more job options exist.

The most important variable might just be the bifurcation to the US economy's wage and salary practices that occurred in 2002. The "business as usual" lockstep payroll increase trends ended forever after the economic freeze of 9/11/2001. While small employers all froze wages and salaries for 2002 and even 2003, big companies and government agencies continued with their budget-driven plans to expend the cash in their pipelines, ignoring the panic of the little firms.

Since the small employers never made their workers whole, the absolute differences in pay practices between the Bigs and the Littles widened. The size of employers became far more significant than their physical locations. The Bigs were already deeply embedded in the major (high paying) cities and regions, of course, while the Littles languished in the sticks, employing folks lacking the skills to attract big-city high pay. Those with STEM and other scarce skills continued to get the relocation offers, of course.

Bottom line, however, is that pay is ALWAYS based on supply and demand economics.

[Dan Walter]

So let me jump in here. I understand everything you are saying and respectfully argue that I am right. Here's why...

I am not arguing for the abolishment of GEO differentials. I am arguing for the addition of ONE NEW Geodifferential.

When a company dictates the pay for a worker, the company is also dictating the proximate talent pool and market cost for that 0osiution. Why pay an accountant in Des Moines that same as an accountant in New York City? The location and talent pool drive the cost of talent, based on supply and demand, and somewhat on cost of living. The GEO-Diffs for this type of position make sense.

But there will not be an increasingly large group of professionals who will be allowed to work from nearly anywhere (we won't get into the international piece until my next post).

Let's say you that the above-mentioned accountant is worth $100,000 to the company (based on whatever factors that want to use to determine fair value). If the person HAS to work in the New York City office, the company HAS to pay them a competitive wage to that market. Let's say that it requires %130,000. If the company decides to save costs and move accounting to Des Moines the may be able to pay $90,000 for the same value delivered. If the person WAS working in NYC, but decided to work elsewhere (because the company expressly allowed it for that job); then the company would need to determine a rate for that job that did not include a "local market". The market would instead be all of the people who had the right skill set, and were willing to work from wherever they wanted to. The company does not dictate the location so they also do not need to adhere to a specific competitive market rate or GEO diff.

This is where things get fuzzy. For a job like a basic accountant, there may be no reason to allow this, or the rate may be the lowest rate in the country based on reasonable availability for accountants. This may mean the company determines there are enough accountants to fill all available positions from just the pool in North Platte Nebraska. They may set the rate for the job to the rate for that area. People from other areas may have to take a pay cut if they want to live elsewhere and take that job. BUT

For roles that are highly difficult to fill the pool may never be big enough anywhere. The company has then dictated that the "market place" is the entire country, or every location with 30 miles of a list of specific universities. The goal for these companies is to hire the best talent, but not overspend. Where the legacy model often found the company paying a premium for talent in a highly desired location (like those with offices in the SF Bay Area), they could now hire people from anywhere, and/or pay their employees a fair rate regardless of where they wanted to live. If that individual chose North Platte, the company would still need to pay them a rate that is competitive with other companies offering remote work. It is a free market and the best companies will pay what they need to get great talent.

One view of this is that this would increase the wages for North Platte and impact the GEO Diff there. Another is to look at these individuals as outliers. They are not competing in the local North Platte market, try are competing in the broader "remote" market. Where they live no longer drives their value.

This is happening. It will evolve over the next 12-18 months. It will become a common practice in some industries and nearly unheard of in others. It will become as big a changes as the explosion of stock options in the early and mid-1990s.