As more workers work remotely in the wake of the global COVID-19 pandemic, salaries based on where they live in the US are showing signs of leveling off.
For example, a recent study by fintech startup Carta found that salaries for tech startup employees in Seattle now match those of employees in San Francisco, that is a leader in technology market salary.
“When remote work becomes a fact of life, [startup] founders are increasingly faced with an important decision: should they adjust the fee per location?” according to the Carta report. “The vast majority of companies (84%) do consider location when choosing compensation packages.”
In 2019, approximately 35% of new hires were located in a state other than the company’s headquarters. According to Carta, that number has risen to 62% so far by 2022.
Startups with a more modest market valuation are more likely to adjust the reward per location. About a quarter of companies worth more than $500 million choose to pay employees equally regardless of their current location, according to Carta, which makes business capital management software for startups.
“Within Carta’s dataset of venture-backed startups, we see median fees in many U.S. cities moving toward San Francisco’s fee rates,” said Peter Walker, director of Insights for Carta and author of the report.
Because Carta’s research focused on startups, it’s less surprising that the company found that compensation is more likely to equalize nationwide, according to Amy Stewart, senior content marketing manager at Payscale, a provider of cloud compensation management software.
“Technology startups are smaller and more agile, and there’s a lot more incentive for them to cut costs and find ways to attract top talent,” Stewart said. “Tech talent in particular is attracted by the possibility to work flexibly and work from home.”
As employees have become accustomed to remote working or hybrid constellations where some employees are in the office for at least part of the work week, they expect flexibility in the workplace.
In his 2021 Remote Working Status ReportOn average, Payscale found that 43% of employees expect more organizations to offer remote work after the pandemic is over. “And that number goes up to 75% for marketing and advertising professionals and 71% for technology workers,” Stewart said.
Payscale’s research also found that fully remote workers earn more than non-remote workers, even when controlling for job characteristics. And it turned out that homeworkers reported higher levels of satisfaction and job retention than non-remote workers.
“…That’s accommodated with varying amounts of employer accommodation,” Stewart said. “Overall, we’re actually seeing fewer companies than I initially thought remote working would change the competitive landscape.”
Earlier this year, another Payscale survey found that 73% of organizations feared remote working would disrupt the competitive landscape for talent. But those concerns have apparently cooled down: a second survey in Q4 2021 found that only 47% of organizations were concerned about disruptions.
Payscale saw similar changes in the way companies view remote work compared to hybrid work. By mid-2021, more companies worried that remote working would become the norm. Since then, companies have solved the problems associated with scheduling employees’ time in the office, but those fears have subsided, Stewart says.
As for whether wages are leveling out nationwide, as Carta seemed to find, Stewart said she doesn’t yet see tech workers making the same thing everywhere, and it would take time for market forces to drive this outcome.
Carta’s research recognizes that the number of companies offering the same pay regardless of location for certain positions (mainly engineering) is still small. But companies that offer geographic compensation often do so “as a perk to retain employees, who can choose to work remotely from cheaper locations, or as a strategy to attract new employees,” Carta said.
Tony Guadagni, a senior director of HR practice at research firm Gartner, noted that remote working trends have increased the number of organizations recruiting talent based on skills rather than proximity to an office location.
As part of that trend, Guadagni said a national leveling of salaries is underway, but it is happening slowly. The idea that wages in Seattle have overtaken San Francisco’s compensation levels — as Carta’s data showed — surprised Guadagni. But he said it’s understandable, given Seattle’s already large tech labor pool.
“That’s a lot more understandable than somewhere like… Albany overtaking San Francisco,” he said.
“I think eventually we expect the IT market to become more national, and that will equalize the compensation across geographies with traditionally higher labor costs and lower labor costs,” Guadagni continued. “There will be an equalization of the fees, at least more than is the case now. I don’t expect it to become fully national or a single market rate for all jobs, regardless of geographic location.”
One issue delaying the adoption of a nationalized pay standard is the need to cut the salaries of tech workers in traditionally expensive areas and increase them in cheaper areas, Guadagni said.
“Lowering wages leaves a really bad taste in employees’ mouths. So instead of cutting wages, they usually slow the pace of salary increases,” Guadagni said. “I think some people expected this to happen overnight, but it’s just something that’s going to happen over time.”
Another factor turning the tide? The IT labor market is the most in-demand, competitive labor market in recent decades.
“People may have had big ideas about trying to hire more national staff, but they feel they hire people where they can hire. And they’ve shown a willingness to pay a premium for critical talent, and often that means from traditional areas where the largest talent pools are already. It’s just easier to recruit from there,” Guadagni said.
More rural and less traditional market regions also lack things like employee referrals, which is a huge source of staff for companies with a reputation for paying high wages, Guadagni noted.
“And getting that total compensation offer right, trying to get that right in a new market, that can be a challenging process,” Guadagni said. “You’re not necessarily going to get it right the first time.
“The important thing to reiterate is that we expect labor markets to become more national,” he added. “It will take time.”
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