The Reason Paying Employees Based On Local Cost of Living Could Affect Retention

Today's workforce generally, and techies in particular, have been told they live in a global economy and they don't believe their value fluctuates depending on where they live. JL

The Hustle reports:

Facebook employees who move away from Silicon Valley might be in for a salary cut. The company will adjust its pay according to an employee’s new hometown. There are problems with the “pay the local rate” model. Tech workers might be able to stomach a small loss: according to one poll, 35% of Bay Area tech workers said they’d move out even with a salary reduction. But there are limits: Of the workers OK with a pay cut, only 6% said they’d accept a reduction above 30%.

You may have heard about the big catch in Mark Zuckerberg’s remote-work announcement last week: Facebook employees who move away from Silicon Valley might be in for a salary cut. 

The company will adjust its pay according to an employee’s new hometown.

After all, $10 in Rock Springs, Wyoming will get you a few more drip coffees than $10 in West Hollywood.

Sound tricky? It is

There’s some precedent for Facebook’s approach. Take the minimum wage: In general, companies only have to pay the minimum wage where an employee works -- so your accountant in Iowa City is paid the local minimum, not NYC’s.

But TechCrunch outlined a few potential problems with the “pay the local rate” model. A city’s cost of living can fluctuate quickly -- as any Miami resident will tell you -- and keeping up is not easy.

Let’s say you’re a company based in Chicago with a huge remote workforce. You could:

1. Base salaries on your HQ’s location. Everyone gets paid Chicago rates no matter where they live.
2. Localize the salaries. This is Facebook’s approach: Adjust employee pay according to the local cost of living.
3. Use national averages. Pay everyone according to a country’s trends, regardless of where they live. 

There are loopholes in all of these approaches. WordPress’s parent company, Automattic, doesn’t factor in location when it pays its global workforce -- but with national currencies in constant flux, it’s tough to get the equivalencies right.

Just a little off the top, please

Tech workers might be able to stomach a small loss if it means fulfilling their dreams of strapping on a cowboy hat and becoming a ranch hand. According to one poll, 35% of Bay Area tech workers said they’d move out even with a salary reduction.

But there are limits: Of the workers OK with a pay cut, only 6 percent said they’d accept a reduction above 30 percent.