As organizations chart out the future of their hybrid workforces, leaders are debating whether to adjust employee pay based on where they live or move to.
Some of the first companies to announce new flexible-work policies, including Facebook, Twitter, Microsoft and Google, were quick to remind workers of their existing policies that people who relocate to a less expensive market could see a pay cut — by up to 25% for some.
But for businesses still figuring out their new work and pay structures, HR expert Jason Walker sees the option of cutting pay for remote work as "an empty threat." And for leaders who've put salary adjustments on the table, he says they should expect employees to negotiate hard against them.
Walker, who is the cofounder of Thrive HR Consulting, has spent the pandemic advising companies ranging from tech to financial services to construction across the U.S. about how to set up and manage hybrid teams, as well as how to approach remote-work compensation in order to give them a competitive hiring advantage.
In today's tight labor market, where there are more open jobs than people to fill them and Americans quitting at record rates, Walker tells CNBC Make It that it doesn't make financial sense for employers to give workers any more reason to walk out the door.
"Chances are, if you you have to go out to market to replace them, you're going to have to pay [their replacement] more anyway," Walker says. Such policies, which could threaten employee engagement, show "a lack of understanding of what the talent market is really telling people."
The cost of replacing an employee, rather than continuing to pay them the same rate while they live elsewhere, is "crazy when you start looking at the numbers," adds Thrive HR Consulting cofounder Rey Ramirez. By his estimates, the cost of replacing someone is equivalent to six to 12 months of their pay between the cost of recruiting, the cost of the job not being filled and the cost of the replacement getting up to speed.
He gives an example of an employee earning $200,000 a year in Silicon Valley who could lose 20%, or $40,000, in pay if they move away. "Are you going to risk a $200,000 replacement cost to save 20% in their pay?" Ramirez says. By crunching the numbers, he believes organizations will realize quickly the financial and opportunity cost of cutting pay for remote work.
Even if a worker doesn't quit on the spot, a pay cut could make them feel less engaged with their work and could drive attrition later down the line, Ramirez adds. They may stick with an employer through the move and to keep other perks temporarily, like equity and benefits. "But will I give that extra effort because I'm engaged? Probably not."
"There are some definite consequences from using that big stick approach that's not going to end well for an organization," Ramirez says.
Meanwhile, given the talent crunch, disengaged workers are likely to be in a position to find a new job and negotiate to restore, if not exceed, their big-city salary.
Walker says employees are recognizing, "If the value I bring into the company is worth X amount of dollars, then where I am when I do that work shouldn't matter to you. I believe my services are worth this amount of money, and I'm going to do a great job for you regardless of where I live."
In a bid for talent and retention, Walker says as many as 60% to 75% of companies, especially smaller and mid-sized organizations, are re-evaluating how to pay their workforces, moving away from the traditional model of using different ranges based on employee location in favor of a national pay scale.
Already, a handful of companies with work-from-anywhere policies, including Reddit and Zillow, have said they will pay all workers based on their job, regardless of where they live.
Check out: Workers quitting en masse is 'a great thing,' says workplace happiness expert—here's why
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