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Compensation Considerations for the New Year

While the pandemic forced most businesses into remote work arrangements in early 2020, many have discovered that the model proves to be sustainable in some fashion. Employers that have allowed employees to work remotely have also offered employees the opportunity to work from various geographic areas. This opened the door for employees to relocate to areas that might provide better cost-of-living or are closer to family or locales that boast better climate to promote better work/life balance.  The strategy broadened the talent pool since geographic diversity might not have been a traditional option for organizations in the past.

Now, many organizations are continuing to offer employees remote or hybrid options. At the same time, organizations are challenged with attracting and retaining employees, offering competitive salaries, and facing rising inflation. Along with hiring and retention issues, recent pay legislation has presented policy challenges, forcing organizations to consider how best to compensate employees and managing these issues poses business risks and potential exposures. But there are solutions to consider and put in place while planning for the new year.

Because of these challenges, organizations are compelled to develop alternative pay practices and might find themselves asking:

  • Are we going to use geographic pay differentials?
    • The most common challenge is how best to approach pay for employees who have moved or are considering a move.
    • Recent survey data (Deloitte 2021) found that 70% of companies use geographic differentials to adjust salaries based on the individual’s location, but even higher at 85% of technology companies.
  • Which jobs and why?
    • When organizations have identified the roles that will be work-from-home, hybrid or onsite, they should consider the physical locations from which employees would be permitted to work. Certain companies may permit a work from anywhere policy as long as it does not negatively impact customers or workflow. In making these decisions, it may be beneficial to limit the geographic pay differentials to particular job levels and salary levels while also being mindful of tax or legal implications.  Geographic pay differentials are often only provided up to a certain level (e.g., $150,000 and below).  Employers will also have to consider whether to lower pay when an employee moves from a higher cost of labor location to a lower cost of labor location.
  • How should employers adjust pay levels for hot jobs or difficult to fill positions?
    • Employers must resist the temptation to simply increase base compensation only for particular levels (e.g., entry level) as a desperate way to attract employees without considering the impact throughout the organization. Without full consideration, current employees may perceive new hires as being treated more favorably.  For certain hot jobs or difficult to fill positions, it is necessary to provide an adjustment in base compensation as a form of a temporary supplement.  In practice, this need should erode over time and base compensation differentials for similarly situated employees will then be smoothed out by slowing down subsequent increases in compensation for these specific positions.  Internal pay systems must reflect the existence of this supplement as a valid business reason for the pay differential, to protect pay equity concerns. All of this must be evaluated at the entire organization level in order to potentially avoid the unintended consequences of implementing new policies.
  • How should companies address inflation?
    • Inflation is currently at the highest level in nearly 40 years and companies will be forced to address this in the near term. Future budgets will have to reflect both merit and cost-of-living adjustments, provided employers can manage margins appropriately.  In the short-term, however, there are other options to consider when addressing this issue. For example, companies should consider the use of a one-time spot-bonus to offset some of the inflationary pressures.  This should be well received by employees as a short-term benefit without creating longer-term increases in employer costs.  This approach conveys that employers acknowledge the challenge by offering assistance while granting a buffer for developing alternate pay strategies.
  • How will employers handle new and pending legislation that requires providing wage ranges for specific positions to applicants or current employees?
    • The states of California, Connecticut, Colorado, Maryland, Nevada, Rhode Island and Washington, as well as the cities of Toledo and Cincinnati, Ohio have some form of pay transparency laws in an effort to provide employees with clear and valid information relating to compensation. For example, this could include providing existing employees with the wage range for a particular position upon the employee’s first request, during a change in position, or when a new job offer is extended to an applicant. A wage range is the array of compensation for what the employer anticipates paying for a specified position. This could include reference to a pay grade or scale, already established wage ranges for a position, the actual range of incumbents currently holding that position, or the budgeted amount for the position.  As such, employers will have to develop and document wage ranges, and implement a process for responding to request for information.
  • How will any of these changes impact an employer’s overriding concern about internal and external pay equity?
    • The only way to be certain that pay practices are fair/reasonable across the organization and not discriminatory, is to conduct a pay equity audit as part of any pay evaluation process. Internal systems will have to be adjusted to reflect any additional changes to support the valid business reasons for implementing changes.
  • How will this be communicated and implemented?
    • Once a decision is made regarding any of these items noted above, a formal policy is needed as this will serve as the operating document to ensure uniformity in application. The policy will also assist in making sure that implementing new pay strategies will not cause adverse consequences to pay equity.  In addition, the policy will provide the necessary communications to create and understanding of what and why changes are being made for current and future employees.

Employer Action Plan

Employers should create various models to evaluate the impact on their business as well as on a fair cross-section of employees. Costs are clearly part of this analysis but operational, customer, legal, compliance, reporting, cultural plus attraction and retention issues must also be considered.