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The question of whether companies can or should pay remote workers less than their counterparts in the office is not a new one. But the debate is boiling up again after a survey published by the spend management platform Pleo in February 2024. Their survey of small and medium-sized enterprises (SMEs) in Europe found that one in five of these businesses are considering reducing the salaries of remote workers.
SMEs make up 99% of employers in Europe, and around 30% of European workers are in remote or hybrid positions, compared to just 13% in the United States. So, should European remote workers be worried?
First, let’s be clear, we believe that remote workers should be paid a fair salary consummate with their in-office counterparts in similar roles. But let’s look at some of the key factors that make up part of the debate.
Location-Based Salaries
First, the location of employees has played a role in salary structures for a long time. Employees required to live in expensive cities and contend with a higher cost of living due to their job have always received a higher salary than counterparts in more affordable locations.
This meant that in the early days of the remote work revolution, employees at leading companies like Google and Facebook did have pay cuts as high as 25% when they decided to relocate away from expensive cities like San Francisco and New York and left the premium pay scale. It has always been accepted that a software developer living in Kansas City would be paid less than a software developer in New York.
But the debate over remote workers isn’t just that they forfeit their cost-of-living bonus, but that they are paid less than they would be if they were in the office somewhere else in the country.
The justification is that the employee has reduced their cost of living by eliminating their commute and choosing to live somewhere more affordable. But again, while this might be a justification for taking away the cost-of-living bonus, it should not be used to justify any further reduction in salary. Will businesses start assessing the commute and accommodation costs of all employees and reduce payment for those who spend less? Clearly this would be overstepping the mark, but this is essentially what businesses are suggesting when they propose to pay remote worker less.
Moreover, while some costs are reduced for remote workers, others are increased as they must maintain their remote workspace, whether that is in their home or somewhere like a coworking space. There are additional electricity, internet, and equipment costs. How are those being factored in when employers suggest reducing pay?
It should also be clear that while the removal of the cost-of-living bonus could reasonably be applied to fully remote workers, the same is not true for hybrid workers, as they still need to be close to the office due to their required in-person days.
Equal Pay for Equal Work
In theory, workers are compensated for their contribution to the company. So, if a remote worker and an on-site worker in the same role are making the same contribution, they should be paid the same.
Also, in theory, employers should have a minimal say on “how” the work gets done. Of course, there is a job description, company values, code of conduct, and other expectations in place. But when a company starts dictating things such as where employees need to live and how they need to commute, they are taking on a paternal role that is beyond their scope.
But the real question that employers are raising is whether remote workers are making the same contribution as their counterparts in the office. For years we have seen survey after survey stating that remote workers are more productive than workers in the office. But now employers are pointing to a new paper by the Standford Institute for Economic Policy Research, which is suggesting that remote workers are 10%-20% less productive than their counterparts in the office.
It is unclear how this figure has been determined and why this new paper is coming up with such different results They site communication challenges, motivation, and self-control as the main factors.
But the Los Angeles Times, which sites this new research, also shared findings from a survey of 500 public companies conducted by the Boston Consulting Group. It found that those that offered remote work flexibility grew an average of 21% between 2020 and 2022, which is four times as much as less flexible firms.
It is fair to say that all this data is hard to reconcile as we struggle to find an unbiased measure for productivity. It is understandable that some managers say that they “feel” their teams are less productive when they are accustomed to seeing team members working in person. But while this is understandable, it does not mean that this feeling is accurate, or a justification for paying remote workers less. As we are changing the way we work we need to find better measures for productivity.
Remote Working Saves Business Money
One argument made in favor of businesses paying remote workers on par with those in office workers is that businesses with largely remote teams can save money. Maintaining smaller office premises saves money, plus they can sometimes find cheaper talent elsewhere in the world. Nicholas Bloom of Stanford University estimates that remote working saves companies around 10% of office costs.
However, the argument that businesses can afford to pay remote workers more because they are saving them on operating costs is unlikely to sway many CEOs. For most businesses, maximizing profits by minimizing costs is just standard working practice and means better returns for investors, and not higher salaries for staff.
Salaries have always been a result of market forces, as companies pay what they must to attract and retain the talent that they need.
Market Forces and Benefits
While business leaders and economists are debating these points, are they really the factors that are going to dictate what remote workers get paid in the future?
The truth is that if companies want in-house employees in expensive cities like San Francisco, they will have to pay them more to make the role attractive. No one will want to move to such an expensive city for work if they are not being compensated to cover their cost of living.
But remote workers also have the expectation of being paid fairly, and companies will lose talent if they offer compensation below the market rate.
There are companies that sell the ability to work flexibility as a perk in salary negotiations. Some workers may be willing to accept less pay in return for this flexibility, just as some people choose to accept less pay in return for a greater holiday allowance. But it is very hard to put a dollar figure on what that flexibility is worth. This is especially true as younger generations start to see flexibility as the norm, rather than an “aberration”, as Goldman Sachs CEO David Solomon called it.
What Does the Future Hold?
So, what does the future hold for remote workers and their salaries? While the debate between moralists and economists about appropriate pay for remote workers is likely to rage on, it is market forces that will likely decide whether companies can really get away with paying remote workers less.
But changes in cultural norms will be a major driving factor. If, as a community, we see remote workers as making an equal contribution, those looking for flexibility are more likely to value their talent and demand equal pay. But if this does not enter the public mind, we might be talking about the “remote work pay gap” in years to come.
