Let’s talk about WFH salaries, the pay cuts and the evolving compensation strategies

As remote work becomes increasingly common, many large companies are rapidly changing their compensation models, which includes the location-based pay model. Recently Google announced its new strategy, which led to an intense debate on how remote work was affecting salaries.

Let’s talk about WFH salary, pay cut and evolving compensation strategies

Let’s face the reality… and talk about this trend. The corporate sector has been talking a lot about pay cuts in the remote work scenario and the location agnostic pay model.

It’s a compensation strategy based on where an employee lives and chooses to work from.

Google, in its announcement said that they have designed a pay calculator which calculates salary estimates based on the distance and location from where their employees work in the USA.

The following example can throw more light on this subject. An anonymous Google employee, who typically commutes to the Seattle office from a nearby county, were likely to see their pay cut by about 10 per cent if they adopted WFH full-time, as estimated by the company’s Work Location Tool launched in June.

This particular employee was considering the remote work option but decided to keep going to the office – despite the two-hour commute. “It’s as high of a pay cut as I got for my most recent promotion. I didn’t do all that hard work to get promoted and to then take a pay cut,” they said.

According to a Reuters report, screenshots of Google’s internal salary calculator show that an employee living in Stamford, Connecticut – which is an hour from New York City by train – would be paid 15 per cent less if they opted to work from home. While a colleague from the same office living in New York City would face no pay cuts if they did the same. Screenshots showed a 5 per cent and a 10 per cent difference in the Seattle, Boston and San Francisco areas.

This model will cut as high as 25 per cent of the salaries of those employees of Google who choose to work from home permanently.

The other companies following or experimenting with this trend in Silicon Valley are Facebook and Twitter. They too have opted to cut the salaries of their employees if they choose to work remotely and move to less expensive areas. VMware Inc. is letting its employees become permanent remote workers, but they, too, will receive a pay cut if they move away from Silicon Valley. While smaller companies including Reddit and Zillow have shifted to location-agnostic pay models, citing advantages when it comes to hiring, retention and diversity.

This implies that working from home, which became convenient for us in 2020, will not be as convenient on the pockets of some corporate employees.

Now, the important question is whether the Indian corporates too are going to incorporate and follow this trend? It is also relevant to understand how the remote and hybrid work culture has impacted the HR strategies around remunerations.

How the salaries got affected

It was a downturn for all employees on a global scale, when the pandemic and the lockdowns brought many enterprises to a grinding halt and even pushed some into bankruptcy. Corporates, organisations or SMEs in general adopted various methods to survive, including job cuts and temporary wage subsidies or salary cuts.

In India too, people witnessed the same sequence of events.

Nishigandha Shendge, HR Manager at Fynd, an omnichannel services platform for retail businesses says that the pay cuts in 2020 happened due to two reasons.

“Firstly, businesses lost customers due to the lockdowns and they suffered financial losses. The second reason for the salary cuts was survival. The businesses projected their losses based on the state of the global economy,” she says.

Documenting the effect of the pandemic on wages, Grant Thornton’s Human Capital survey found out that 40 per cent of Indian employees witnessed salary cuts as an impact of COVID-19. This survey was done among 16,700 respondents from various sectors.

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Of these, over 59 per cent experienced a reduction of more than 10 per cent in their total pay. This impact was more pronounced in the mid-size companies in sectors such as hospitality or real estate.

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While only 16 per cent of them experienced a temporary reduction in fixed pay. However, the survey said that there was a trend of a decrease in the variable pay or performance pay component with over 31 per cent of employees receiving no variable pay and 33 per cent experiencing a decrease in variable pay.

Commenting on the survey findings, GT Bharat Partner-Human Capital Consulting, Amit Jaiswal said, “While one-third of the respondents experienced a reduction of over 20 per cent in their fixed pay, 40 per cent did not see any change in fixed pay despite an overall decrease in their earnings. This highlighted the fact that the variable pay component of salaries took a major hit. There is an increased expectation to change the current pay mix and reduce the pay-at-risk part of the compensation, specifically amidst the younger workforce of mid-size organisations.”

At the same time, appraisals got affected too.

A 2020 workforce and increment trend survey by Deloitte Touche Tohmatsu India LLP estimates that increments in India fell to 3.6 per cent last year. Which was less than half the average increment of 8.6 per cent that employees received in 2019.

Fynd’s for instance didn’t have any pay cuts last year, but they did not roll out any increments either. “This decision was taken to prioritise and safeguard jobs and re-stabilize business operations,” Shendge avers.

“We didn’t cut salaries. We were rapidly innovating to cater to new demands, and we had a positive outlook for the future that turned into a reality. But we didn’t roll out any appraisals in the month of April 2020. I think as an HR, it is essential to be transparent about what the company is doing and how they plan to overcome this adversity in the coming months. Not only does this help keep the spirits up, but it also builds trust. It gives employees an accurate picture of the company’s finances and future goals,” she confesses.

Salaries are getting delayed

Payroll struggles during the crisis period are a real issue.

For employees’ late payments have become a major problem, as this negatively impacts their ability to meet their targets. According to a new study by the ADP Research Institute titled People at Work 2021: A Global Workforce View, today, nearly seven in 10 workers (69 per cent) say that they have been paid late at some point, up from six in 10 (60 per cent) in the pre-pandemic times.

Late payments are much more likely to happen to workers in APAC, more so in India than anywhere else (76 per cent, up from 67 per cent pre COVID-19).

And, according to the experts, the negative ramifications of this can be significant, ranging from stress to non-payment of bills, to having to borrow money from family and friends to incurring overdraft charges.

Remote work to adjust salaries!

Until very recently, remote work was not an option. If one wanted to work in a big tech company, one had to be based out of metro cities such as Bengaluru or Gurugram.

But it’s not the case anymore. Workers now have realised the value of and seized the opportunities being offered to them in this regard. As long as they have a phone and an internet connection, they can work from anywhere. Remote work has also increased due to online education. Now employees with families can take extended trips and continue to work while doing so.

The success of remote working has further led to a significant number of people relocating from high-cost areas to the less expensive ones, as they don’t need to be near their offices to do their jobs anymore.

With the growing inclination towards remote work on the part of most workers, there has been a whopping rise of 966 per cent in the ‘remote work’ search in April 2021, according to job search platform, Indeed. Also, Gartner predicts that by the end of 2021, 51 per cent of all knowledge workers worldwide are expected to be working remotely, up from 27 per cent in 2019.

Ranjit Atwal, Senior Research Director at Gartner quoted, “A hybrid workforce is the future of work, with both remote and on-site part of the same solution to optimise employers’ workforce needs.”

There is no doubt that the people who are planning their next work move are finding those jobs more lucrative which offer remote work and flexibility in their office hours. Considering this scenario, there has been a visible shift in HR strategies as well. They are now able to hire beyond geographical boundaries, which in turn influences remuneration as well on account of mainly the cost-of-living argument.

In other words, geographical pay policies that set and adjust pay for workers based on local compensation factors are becoming more common among employers.

The WorldatWork’s geographic pay policies study, based on over 1000 organizations, substantiates this observation. According to the research, out of the 62 per cent of firms with existing geographic pay policies, 44 per cent are considering modifying or have recently modified their policies due to the increase in full-time remote work.

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What do the HR professionals have to say about it

Cutting out a relevant pay packet cannot just be like putting two and two together anymore, believes the HR community.

There could be different sets of employees working in the same organization, at the same position or even in the same team, yet their tasks, their hours spent in office and their respective screen times could differ markedly.

Dr S M Gupta, Global Chief People Officer, Startek, in a white paper by TalentAhead says, “There will definitely be a change in the compensation landscape and location-based pay differentials will take a backseat. With a significant proportion of people expected to continue working remotely, the location-based pay differentials will become insignificant and that will definitely affect compensation scales.”

The compensation package offered to someone who has to come to the office five days a week and can partake of the substantial meal, which is provided there, would be up for comparison against another employee, who would be working remotely for three days a week but would get a food stipend as well.

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As Dipy Sachdeva, CEO – Weikfield Foods Pvt Ltd, enumerates in the report, “The physical employees are the current staff engaged in e-sales, marketing, finance and research & development. The new breed of virtual employees, who bring specific domain knowledge are in the digital space handling the e-commerce channel, digital marketing, and CRM. The compensation and benefit of the virtual creed will also be different in terms of the remuneration and policies on leave etc.”

But there is another side to it as well

There is no doubt that geography will have a large role in determining the salary structure of employees in these changed circumstances.

But for any working idea, there are always two sides to it.

There are a set of organisations that have spelt out that if their employees are shifting to smaller towns, then their pay packets would be reduced to reflect the same, observes Dr. S M Gupta, Chief People Officer at StarTek, an outsourcing service provider, in the TalentAhead report.

“With the hybrid working model in place and the COVID-19 pandemic starting a reverse migration, many working professionals are now leaving urban cities and returning to their homes in the smaller towns. With thousands of people entering the talent market from smaller towns owing to the hybrid working model, this will increase talent supply as well as level off the salaries,” he says.

But base salary apart, several variations will be seen in the specific allowances offered to employees, based on the areas that they are working from and the number of days that they must report to the office. The feel-good offers that would be missing for these remote employees would have to be compensated for by providing them with special support services and allowances.

Not a fair game!

It’s reasonable to ask if it’s fair to cut the pay of those employees who choose to move to a less expensive city.

Kara Alaimo, an associate professor of communications at New York City’s Hofstra University thinks the same. In one of her opinion columns, she wrote, “I understand why geography plays a role in salary. But the problem is that staffers who once opted for long commutes and lived outside the cities where their offices were located could be subject to pay cuts if they go 100 per cent remote—even if they haven’t moved. That’s not fair.”

And interestingly, even the employees feel that this is not fair. In a survey by international firm, Craftjet, when this question was asked, the answer from the workers was a resounding no—87 per cent believe that they should be paid the same amount that they’re currently being paid, irrespective of where they move to.

Alaimo opines, “As Google and other tech companies cut salaries in a competitive job market, they may soon find that their staffers’ search terms include new jobs.”

Other HR experts strongly feel that the differences in compensation based on a person’s ability to come to the office are divisive in nature and can prove to be counter-productive for companies.

“Companies that are basing a person’s salary on the city that they reside in, are limiting the individual’s ability to progress in their career. The same person might move back to a big city after the pandemic, and that would put them at a very big financial disadvantage. Therefore, we don’t look at a person’s city, just their ability, and potential,” asserts Shendge.

On a broader level, it would be demoralising for an employee to be paid less for doing the same work, depending on whether they are sitting in an office in their company’s HQ or are 500 kilometres away in their native place. Furthermore, lowering the pay of remote workers will have a domino effect, resulting in wider pay disparity. Which is a challenge for India, and something that its leaders are currently attempting to mitigate.

Employees are letting go of their free time

While pay cuts reigned in 2020 for cost optimisation, remote work gave rise to a trend of unpaid overtime as well.

According to a new study by the ADP Research Institute, titled People at Work 2021: A Global Workforce View, the average amount of ‘free time’ utilized for work has increased by almost two hours per person per week since COVID-19 hit.

Here free time denotes working through breaks and starting early or staying late or regularly putting in extra work for no additional pay.

Globally, the average amount of free overtime being done each week is now 9.2 hours per person – up from 7.3 hours pre-pandemic, according to the ADP survey, in which more than 32,000 workers from 17 countries participated.

In India, workers believe that they work an extra 11.1 hours per week for free. More than 82 per cent of the respondents surveyed in India believe that they have been underpaid at some point in time.

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“Workers are now routinely clocking up what amounts to more than a working days’ worth of unpaid overtime every single week,” comments Rahul Goyal, Managing Director (India & Southeast Asia) of ADP, a global leader in payroll and HCM solutions.

The arrival of COVID-19 has spurred many people to work harder than ever. Essential workers have been struggling to keep up with the extra workload that COVID-19 has created. While non-essential workers may be going the extra mile due to concerns about their job security, or to compensate when colleagues have lost their jobs, or because the boundaries between work and home life have become blurred due to working remotely, he further said.

Cognizance of rewards

There has been much talk about rewarding productive employees, and the HR community agrees that it should be done.

With the evolving remote work culture, they opine that the compensation strategies will evolve too.

“If we take the effort, commitment and number of hours being put in by employees into consideration – it is equal or in some cases even more. Projects are being delivered on time and in many cases ahead of deadlines as well. This clearly demonstrates the employee’s commitment to goals, OKRs and organizational success. Given all of this, I think organizations should think of reviewing compensations to make it more rewarding for employees and for their efforts,”

says Lakshmi S, Director – Talent Management and Business Partner at Morningstar India, as quoted in the TalentAhead report.

According to the HR experts, to reward employees in the remote work scenario where formal physical engagements are less, the HR personnel must tweak the performance management processes.

Traditionally, we are used to an annual performance analysis system, but the HR leaders think that this will change. Waiting for a whole year to analyse and discuss the productivity of an employee would not be suitable anymore. The frequency of performance reviews should be increased.

Human resource professionals agree that they will need to revisit the criteria which differentiate between the average and high performers. Skill sets like agility, self-initiative, problem solving, resourcefulness and collaboration will have a stronger impact than ever before due to WFH. This will also impact how they will reward and compensate their employees going forward.

For instance, Shendge claims that Fynd rewards its employees by conducting performance reviews every 6 months, awarding stock options (ESOP) after an employee finishes 1 year in the company & Staff Track benefits for employees who complete 3 years. “With Staff Track, employees have a chance to earn stock options equal to or more than their annual package based on their contributions to building Fynd,” she adds.

Work has changed

As mentioned earlier, large enterprises including Google, Facebook, Twitter and others are already experimenting with compensation strategies involving pay cuts. Whether this should be considered a fair move or not is open to discussion.

But given the fact that due to such strategies, companies are saving money, more firms might choose to implement the location-based compensation model.

On the other hand, despite calling these moves unjustifiable or unfair, what’s much more interesting, however is the reaction of the employees who are concerned about their prospective pay cuts.

Many reports suggest that remote workers are willing to accept lower pay in order to be allowed to work remotely. When questioned about this in the Indeed India’s job market survey, 32 per cent of the workers stated that they would accept any form of pay cut even if it meant finding a job in their native place. The survey was conducted among 1200 employees and 600 employers in India.

However, the perspective changes with the size of the company.

The Indeed survey shows that a majority (90 per cent) of employers from digitally agile start-ups and SMEs were unwilling to continue with the remote work option. More than 45 per cent employees also said that reverse migration was temporary and 50 per cent of them said that they were willing to shift back to a metro from their native place if their job demanded it.

These sorts of conclusions further question the feasibility of the location-based pay model and whether it will work for India. However, as many businesses have demonstrated during the pandemic, remote work hasn’t diminished productivity; in fact, it has increased it. The strategies around it should be spelt out more clearly and distinctly. Going ahead, constantly evaluating and adjusting will be key for both employers and their employees. And most importantly, communication is crucial for building trust. A one-size-fits-all approach rarely works when it comes to people operations.