Work from Home Pay Cuts – Will They Last?

The pandemic is far from over, but businesses can no longer afford to operate in a temporary or contingency mode. Despite the Delta variant, the economy is rebounding, and to keep up, organizations must define adapted workplace policies to include where employees will work.

For Part 1 in our two-part update on the current work environment, we’ll look at proposed pay cuts for those who work from home and discuss the impact on employee satisfaction – and retention – long term.

Justifying Pay Cuts to Work From Home

There are many benefits of remote work: flexible hours, no commuting time, and potentially, the ability to live anywhere. Reports show that white collar employees are fleeing higher-priced geographies – New York and Silicon Valley for example – for suburbs and smaller towns with lower property prices, and presumably, a slower pace (i.e., higher quality) of life. There are even towns or regions in Kansas, Arkansas, Mississippi, Iowa, and more that are offering cash to individuals to move to (and work remotely from) these places.

Where the cost of living is high, salaries traditionally include premiums to entice employees to live and work there. But should employers still pay these premiums when employees no longer bear that cost? Several high-profile companies have answered with a resounding “No!” Morgan Stanley’s CEO stated, “If you want to get paid New York rates, you work in New York.” Less traditional companies like Google, Facebook, and Twitter are also going to a location-based salary model.

Are Location-Based Salaries Fair?

Companies are actively discussing, and implementing, policies to reduce salary premiums when employees choose to work from home. Instead, they are basing salary on the location of that home. While premiums may no longer be justified, some question this basis for work from home pay cuts.

Google recently implemented a salary calculator that factors an employee’s home location relative to their assigned office. Using Google’s New York office as an example, an employee living in Manhattan will earn more than an employee living in Connecticut, even if both work at home doing identical work. Facebook has a similar approach, with options for at-home work but pay cuts for relocation outside of their Silicon Valley geography. Is this really fair? Some believe where an employee chooses to live is up to the employee, and when working from home, the location of that home office has no bearing on the quality of work. As such, salary should only reflect work performance, not personal life choices.

As a note, organizations should approach any type of differentiated pay with caution. Women are more likely to choose working from home, and pay cuts may disproportionately impact women in the organization. Bottom line, for all employees, equal work deserves equal pay and employers need to remain true to this standard.

Other companies are responding to this dilemma by allowing all employees to work remotely with equal pay rates, regardless of location. This approach, called value-based pay, seems more palatable to employees working from home and more aligned with projections about the future of work.

Can Employers Afford to Cut Pay for Remote Workers?

Cutting location-based salaries for remote employees may seem like a good way for companies to save costs. But this approach may increase costs in other ways, especially in the current job market. We’ve recently written several articles about the tight labor market, the U.S. skills gap, and the high demand for technology professionals. Is now really the time for companies to cut pay for employees working from home? Making employees choose between salary and flexible work has the potential to backfire: flexible work environments are a bargaining chip in the hiring process and companies in need of talent won’t be afraid to use it.

As employers complain about costs, employees working from home are asking about the money companies save on office space. The question remains if companies will truly sell their buildings and break their leases to commit to the work-from-home model. Until then, very little material savings will result.

If employers really want to keep offices and have their employees present, some experts suggest incentives rather than penalties. Taking away pay creates a negative psychological impact and sullies the employee’s perspective of being in the office. If employees receive incentives for coming to the workplace – free lunch, commuting reimbursement, or even just a cash bonus – the action has a much more positive association. Of course, incentives cost even more money.

Hybrid work continues to come up as a compromise approach that retains flexibility but gives organizations the in-person interaction they want from their employees. Hybrid models do require time-consuming coordination to establish schedules and ensure that teams working together are present together. Companies also have the potential issue of under-utilized assets – empty buildings and unused office equipment – during off hours.

If in-person work is truly better for the organization, companies will have to find ways to entice their employees back to the office. Check-out Part 2 of our series for a deeper dive on this topic.