Carta

As the pandemic eases, employers navigate remote pay

August 5, 2022
The Carta Team

During the pandemic, Yanni Davros was among the countless office workers who rethought where he was living. 

A senior designer at Flexport’s San Francisco office, Davros was tired of living in a two-bedroom apartment in densely populated Alameda, California. He wanted to buy a house. In October 2020, Davros and his partner settled on Rancho Cordova, a suburb of Sacramento that offered the amenities the two were seeking at a more accessible price point than in the Bay Area. 

“There’s more room for our dog to run around, and owning property was always a huge dream of ours,” Davros said. “I think it’s been good for our mental health, as well, just to get some fresh air. And I’ve been more productive at work.”

The best part? Flexport agreed to let him keep his San Francisco compensation level—as long as he would agree to commute to the office for important meetings. 

Davros’ situation reflects an important tension that employers are navigating in the post-pandemic economy: Remote work is here to stay, yet employers and employees alike continue to value offices—especially offices in tech hubs. As inflation persists and the venture capital fundraising environment grows more challenging, compensation decision makers are figuring out how to offer competitive remote work policies and deciding whether or not to make location-based pay adjustments. 

Carta spoke with three private company executives to learn more about how they’re thinking about location-based pay as they compete for talent in a tight labor market.

For OnlineMedEd, paying everyone Austin rates works—except for California candidates

In Austin, Texas, 95-person OnlineMedEd has found that going remote-first and paying all of its employees Austin rates works—except for candidates in the coastal tech hubs. 

“It’s very easy for us to explain why people are being paid the way they are, because we can always point to basically a single data set, which is Austin,” said Jamie Fitch, OnlineMedEd’s co-founder and chief executive officer. 

Prior to COVID-19, OnlineMedEd was based in Austin and expected its employees to work in person, explained Fitch.

Now, OnlineMedEd is a remote-first company and bases its employees’ compensation on the Austin job market.

“Like everyone else, we went entirely remote during COVID, and we used that opportunity to start hiring wherever you were,” Fitch said.

The shift to remote has helped OnlineMedEd stay competitive, due in no small part to the competitiveness of the Austin labor market.

In the six months from last October to this April, the gap between median salaries in Austin and salaries in San Francisco narrowed by nine percentage points. That means that the rate at which Austin salaries grew between last October and this April was higher than the salary growth rate in San Francisco over the same time period.

Still, OnlineMedEd’s Austin-based compensation standard hasn’t come without its challenges. “It’s really inhibited us in competing in San Francisco,” said Fitch. 

During the pandemic, several OnlineMedEd employees moved to San Francisco and Los Angeles and ultimately left the organization, Fitch said.  

“We lost roughly 10 percent of our workforce because we settled on Austin prices, despite some of our employees moving to higher-income areas,” said Fitch. “At the end of the day, the thing that really drove people’s decisions was family.” 

In some cases, OnlineMedEd employees who moved from Austin to San Francisco during the pandemic asked for a 40 percent salary increase to account for the higher cost of living in the Bay Area. Fitch had to explain that his company gives raises in response to performance, not cost of living. 

“It’s about your performance at your role at Austin’s prices,” said Fitch. “It’s not about where you’re living. We’re not just going to give you more money because you’re in a more expensive market.”

In response, all of the employees who relocated to California left the company, Fitch said.

Still, Fitch thinks the benefits of being a remote-first company that bases compensation on the Austin job market outweigh the challenges—so much so that even if the downturn continues, he thinks he’ll be able to keep the current compensation philosophy in place.

“I think we’re committed to being an Austin company,” said Fitch. “We’ve built our business to reflect the cost of Austin.”

For Nearside, supportive benefits are an advantage

Another startup emerging from the pandemic as a remote-first organization is Nearside. Founded and originally based in San Francisco, Nearside is a four-year-old Series B company that provides banking services to small businesses. 

As Nearside shifts its operations to remote-first, the company has been able to hire employees in unexpected locations, like Hawaii and Canada, said Laurel Coster, Nearside’s interim head of people.

Nearside is still evaluating its overall compensation plan, but doubling down on supportive employee benefits is helping the company navigate the downturn and retain its 88-person full-time workforce.  

“There is a broader sense of urgency in all companies right now to do more with less,” Coster said. “I think you have to craft that in a very specific way to your employee base.” 

Nearside’s benefits include 4% 401(k) matching, charitable donation and volunteer matching, and $400 per month to help employees pay down their student loans.

One of Nearside’s newest benefits is a sign of the times. In early May, days after news leaked that the Supreme Court was preparing to overturn Roe v. Wade, Nearside’s people operations team met with its benefits broker to figure out how to best support its employees. 

By the time the Supreme Court decision became official, Nearside had amended its health reimbursement arrangement (HRA) benefit to allow employees to apply funds to abortion-related care, lodging, and transportation costs, Coster explained. Nearside employees can also use their HRA benefit—up to $25,000—for infertility and family planning expenses, gender-affirming surgeries, and mental healthcare. 

“Our current benefits were selected to be as equitable and inclusive as possible,” Coster added. “We also don’t think of designing our benefits packages each year as a rinse-and-repeat exercise. We try to be rigorous, creative, and acutely aware of employee desires and needs as things change.”

Most employers geo-adjust unless they can’t

The compensation professionals that Carta spoke with all agreed that location-based pay (also called “geo-adjustment” or “geo-differentiation”) is more often the rule than the exception. Carta data shows that, too: More than 80 percent of companies on Carta Total Comp geo-adjust, and that’s especially true of earlier-stage companies with lower post-money valuations. 

“If we’re hiring someone in a remote-eligible role, we would pay them more if they were working in our Bay Area headquarters than in Dubuque, Iowa, because the cost of labor is higher in the Bay Area,” said Marc Schoenen, vice president of total rewards and people operations at Impossible Foods. 

Companies don’t just geo-adjust their remote workers. Policies around location-based pay can also reflect the reality of talent centers for specific types of in-person work. 

“Practically, we do geo-adjust a significant portion of our employee base, particularly on our science side and our manufacturing side,” said Shoenen. “Those roles can’t be done remotely, so we need to pay competitively where we have those roles.” 

“There are a handful of companies that use one labor rate across all of the U.S.,” Schoenen added. “Currently, they’re largely the exception, and tend to be more likely in the software, consulting, or professional services industries.”

Remote is easier in theory than in practice

Whether or not they decide to geo-adjust, remote-friendly and remote-first employers often face an additional challenge: allocating resources so they can comply with legal requirements across different states. 

In some cases, the costs of compliance could erase the potential savings from geo-adjusting compensation. A remote approach often requires a bigger people team than a predominantly in-person company would need, Fitch added. 

Still, hiring the right people can take priority over avoiding compliance requirements. That was true for OnlineMedEd when it decided to hire an Illinois-based employee. The company wanted to hire the best person for the job, regardless of the added costs, Fitch explained.

Where you’re headquartered still matters 

The compensation professionals Carta interviewed agreed that cities known for certain industries or job functions will continue to matter—and so will up-and-coming tech hubs. 

For OnlineMedEd, being based in Austin has its perks.

“Being an Austin company, a San Francisco company, a New York company, is going to be a lot stronger than being a Tulsa, Oklahoma company,” Fitch said. “[That] doesn’t mean that the Tulsa company can’t fundraise, but they have another barrier, another hurdle that they have to leap that maybe I don’t.”

Austin is also one of a number of cities with compensation levels that are rapidly catching up to U.S. cities at the top of the market, including San Francisco, New York, and Seattle.

Employees in the Washington, D.C.; Boston; Chicago; Los Angeles; Portland; San Diego; Denver; Boulder; Austin; and Miami areas can all make 90 percent or more of what they would otherwise earn in San Francisco, data from Carta Total Comp shows. 

Between 2021 and 2022, the fastest-moving compensation markets on Carta were Detroit, Charlotte, St. Louis, and Nashville. Over that time period, the differential between salaries in San Francisco and those four cities closed between 15 and 20 percentage points each.

How compensation professionals are thinking about the downturn

As start-up leaders navigate a lagging economy, they’re figuring out how to strike a balance between tightening their belts and maintaining competitive compensation levels.

“There seems to be a lot of talk about a recession,” said Schoenen. “In that sort of environment, I think a lot of finance professionals, compensation professionals, rewards leaders, [and] executive teams are thinking about, ’How do we consider the funding that we currently have, to make sure that it is enough to maintain operations until there’s a more favorable market climate to raise money in?’”

Fitch shared that investors are asking startup founders to engage in cash planning exercises. 

“Every investor on the planet is currently having their startups run through exercises to show cash planning and cash management,” Fitch said. “We’re not excluded from that. We’re doing that, as well.” 

“I’m not concerned because those exercises should be happening anyways,” Fitch continued. “That’s how you run a business effectively. You need to be always thinking about cash optimization, what you’re working on short term versus long term to have a nice balance. But the market is definitely freezing, at least for now, because there’s just so much uncertainty with the war, with inflation, with politics.”

When it comes to saving money around remote work, Fitch’s answer isn’t to pay remote employees less—it’s to cut back on real estate costs.

“If you’re looking at it from a cash savings, it’s around not having an office,” Fitch said. “You don’t want to save money on your employees. You want to get the best employees, you want to pay them what they’re worth, and you want them to [deliver] a return on your investment.”

 

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