Paying for performance or paying for location

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A recent Wall Street Journal article “Relocation Pay Cuts Ruffle Silicon Valley” by Katherine Bindley and Eliot Brown highlight the changing nature of the employee / employer relationship.  The article discusses the logic behind reducing pay for people who choose to work remotely.  If you chose to move from San Jose to Montana, then the company would reduce your pay based on cost of living regardless of the value you create for the company. That is what led me to write this post.  Why does your location matter as much a 30% to your pay, if you can be equally productive from anywhere? If I follow the ideas in Reed Hastings book “No Rules Rules, NETFLIX and the Culture of Reinvention,” then location should not matter – only contribution.  So, if I extend NETFLIX’s mantra of building high talent density, hiring well and paying at the top of the personal market, then all of those things happen regardless of location. The question is this, has technology advanced far enough that it breaks long standing views and policies related to people, compensation and location? Here is what I mean …. When you pay based on where you play, talent is just another input The logic of cost of living  reenforces the view that people are assets with an associated costs.  Companies group similar jobs or positions, into pay scales.  They compensated employees in part based on their cost of living rather than their individual contribution.  People move to high cost areas in part due to higher salaries, creating greater congestion, competition and higher cost of living. Cost of living is an important part of a compensation package.  We should recognize that some parts of the country carry higher costs.  The point I am trying to make is that, cost of living concerns distort our view of employees, their value and their compensation. When a company requires someone to work in a specific location, it is reasonable to base part of their compensation package on an index of cost of living.  But when that cost of living dominates the pay package, it reduces the likelihood that people will be paid for performance.  Here is an example. According to Glassdoor, the average salary for a software engineer in Chicago IL is $87,097.  That same job title in San Francisco, CA is paid $115,822.  The 32% difference in salaries is close to the 39% difference in cost of living according to NerdWallet.  In this case, one third of your compensation has nothing to do with how good you are or the value you create.  It is based on where you live and what on people think it will take to keep you alive.  Below is a table based on data provided in the WSJ article from Mercer regarding pay scales.  I have added NerdWallet data on cost of living to enhance the chart. According to the Wall Street Journal article, Silicon Valley employers are planning to reduce the salaries of those leaving Silicon Valley by 15% or more. The chart above indicates that at companies are partially aligning salaries with the cost of living.  If cost of living and salary were fully aligned, then the bars would be the size.  The data shows that in most markets the technology workforce is paid a premium based on cost of living.  The blue bar is shorter than the grey one.  Based on the data above and depending on where the person relocates, they could effectively double their real incomes (salary minus cost of living).  Likewise, companies could seek to cut their payroll costs by locating substantial portions of their workforce in lower cost cities and regions.  Want a job, then move to this area. When companies bury the cost of living in total compensation, it anchors employee pay expectations. Obscuring the portion of compensation based on where you live with the compensation for the value you create complicates the employment equation. It distorts pay histories that are too often used in hiring decisions and setting pay. Is it time for a new compensation structure? Compensation is a perennial topic and the subject of significant experimentation and renegotiation.  There is no one right answer for all situations.  Greater transparency in the cost of living component maybe a start. Making cost of living components of the pay package transparent lets employees decide for themselves.  If you want to live in a high cost of living area, this is what we will pay.  Living in another area, then this is what we will pay. All as part of a total compensation package not blended together. Greater cost of living transparency may support efforts to improve local affordability by highlighting discrepancies within and between companies. If we want to encourage greater pay equity, then the cost of living premium should be a base amount tied to a cost estimate, not a percentage of the salary.  Such moves could help reduce a source of pay inequity. Paving the way to paying for the value you create Enabling 'work from anywhere' and the reevaluation of cost of living adjustments paves the way to further transform compensation structures.  Current pay practices fit people into salary bands with limited ability to recognize the differences in contribution and value created.  Everyone with similar seniority, job title, etc. should be paid within the range. Creating such cost equity (cost of employment, wage of the employee) provides some legal protections. Those protections cost of high performers as the value they create exceeds the boundaries of the pay ranges.  These performers are dragged back to the mean either to await promotion – after meeting other standards – or to look elsewhere to get compensation more in line with contribution.  Practices that work against attracting and retaining the best people to build talent density. As technology makes location less relevant to contribution and raises the ability of people to thrive anywhere, then the compensation system should change. Greater transparency between the allocation of cost of living and value created in the compensation discussion is a start.  That way employers and employees could make informed decisions regarding where they live and work. Just a thought, interested in your view.

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