According to salary data for August 2023, companies headquartered in Munich are paying their remote workers up to 7.6% less compared to on-site teams. For Paris-headquartered businesses, it’s up to 5.33% less, whilst in London it is up to 1.79% less on average. 

Remote workers often don’t have to bear the expense of living in a major or capital city, in which case they can justify the lower salary. And whilst this may help companies with their balance sheet, it can be risky to pull off. Here’s why. 

A rise in resentment, a drop in engagement 

Paying team members less because of location can be difficult to justify, not least because it can cause resentment and a drop in engagement if you don’t handle it correctly. Remote workers who know they’re being paid less than their office-based counterparts might feel that they’re valued less — which can lead to retention issues over time. A survey last year found that 1 in 20 workers in the US would quit if they found out they’re making less than a co-worker for the same job. Ultimately, this could badly hurt your employer brand, making it more difficult to find and attract the right candidates going forward.

The productivity issue

Businesses may choose to pay on-site employees more because they are more visible, so it appears that more work is being done. In fact, a study from Slack’s think tank, Future Forum, found that remote and hybrid workers are 4% more productive than those who work in the office full-time. And employees themselves agree: 35% of respondents who prefer working from home say they feel more productive, according to a Gallup poll. If companies are paying remote workers less on the basis that they are less productive or the business derives less value from them than on-site workers, the data can make it hard to justify. 

Keeping costs low 

Remote employees simply cost less when compared to onsite workers, irrespective of salaries. Employees working on a premise involve costs from electricity, internet, other utilities, toilet roll, hand soap and even coffee pods. Of course, some employers do offer remote work stipends to help employees with the cost of office equipment — but these still tend to be much less expensive than the cost of having someone in the office full-time. 

What’s the right thing to do? 

When deciding on compensation, it comes back to a company’s core beliefs and culture. If a core belief is that everyone should be paid the same, regardless of location, that’s what works for them. If a core belief is that it should be based on the cost of living in locations, then they should choose that.

The important thing is to align compensation across the organization. Decide what your company considers to be a fair system and stick to it because when things do become unfair is when a company doesn’t have a policy in place at all and just ad hoc each decision.

In these situations, any worker’s salary might vary depending on how well the employee negotiated or what a particular hiring manager thought was best, which can cause resentment and problems with retention. This gets particularly tricky when coupled with the rise in pay transparency legislation in the EU and US which requires companies to disclose information that makes it easier for workers to compare salaries. 
A compliant, robust compensation process means you don’t have to deal with these headaches. Start by benchmarking different salary roles across the country and company sizes to ensure you’re being competitive in the market, whilst also working out what your gender pay gap is and applying it to budget planning. It’s an investment that will deliver in the long run. After all, an employee who feels undervalued will look to jump ship and with the jobs market still increasingly tight for specialist skills, unfair compensation will cost you more in the future.