Remote work opportunities have grown significantly: As companies adapted to the pandemic’s new realities, many shifted their workforce from in-office to fully remote, and are hiring remote workers in droves. But even before Covid-19, the tides were changing as more workers demanded perks such as remote work, flexible work schedules, and unlimited personal time off.
If you’re one of the many job seekers interested in a remote-work position, you’ll need to learn two terms in time for your next job negotiation: location-based pay and job-based pay. While technically all pay is based on the job you’re doing, remote positions can change the equation, paying you for the job you’re doing regardless of where you live or based on where you live.
What are the differences between location-based pay and job-based pay, and which might be right for you? Read on to learn everything you need to know before you negotiate a new job.
What Is Location-Based Pay?
Location-based pay is wages given to an employee based on the standard market rate for the employee’s location, such as his or her city, state, or even country – in addition to the company’s own pay philosophy and other factors, such as the employee’s experience level and expertise.
For example, if you’re offered an account executive role at a New York-based company but live in Little Rock, Arkansas, you might be offered a $56,000 salary – the average pay in that area – rather than $63,000, which is the average an account executive can expect to make in New York.
Alternatively, it would work in reverse: If you snag a job at a company based in Little Rock but are based in New York City, your salary should reflect the costs of living in the pricier city.
“The benefits to a company of using location-based pay is that employees are paid fairly for the work they do, relative to the market pay in their location,” explains Danny Speros, vice president of people operations at Zenefits. It also allows companies to tap into talent that might have not been available to them otherwise: “Small businesses, for example, may want to open a new location in a more expensive area or tap into top talent across the country regardless of location,” says Speros. “Location-based pay allows companies a way to compensate employees in a fair manner while also taking into account local wage expectations and competition in these areas.”
But Speros adds that there isn’t a “one-size-fits-all solution” to location-based pay, and adds that businesses’ pay philosophies still need to be guided by accurate market pay data “so that when it’s time to offer a job to a new employee, their pay matches their personal expectations.”
What Is Job-Based Pay?
Job-based pay, as opposed to location-based pay, is “the idea that employees’ wages are based on the role that they fill and the credentials, experience, and expertise of the employee,” says Speros, regardless of where the employee lives or works. So, with job-based pay, an employer would pay an employee the same wage whether they lived in New York City or Little Rock.
“For companies that are agnostic [on] where their employees live and work, job-based pay is a philosophy that makes it easy to forecast expenses related to hiring new employees,” Speros says, which is why many may favor job-based pay rather than location-based pay. But job-based pay can offer perks to workers too: It “also creates really attractive compensation rates for employees who are in or would like to move to low-cost parts of the country,” Speros explains.
The Advantages (and Disadvantages) of Location-Based Pay
The clearest advantage to location-based pay, says Jordan Lowry, co-founder of Resumoo, may be the most obvious: You’ll be paid “livable wages, no matter where you live,” he says, “workers in larger cities better access to basic necessities” and covering the cost of housing.
Employees who are given location-based pay can also reasonably expect cost-of-living increases. “As the cost of living in a worker’s location goes up, so does their pay,” says Lowry. “This can be beneficial as cost-of-living increases are often separate from performance-based increases.”
But location-based pay comes with some disadvantages, too. As Lowry points out, people who live in less costly areas – such as small cities or rural locations – can “make less for the same work,” he says. In fact, they may earn “much less than their big city-dwelling counterparts,” he says, despite having the same job title, responsibilities, and working for the same company.
Plus, employees who currently live in a high-cost area and move to a lower-cost area may find themselves facing a pay cut, Speros warns, depending on the company’s pay philosophy.
The Advantages (and Disadvantages) of Job-Based Pay
If you live in a lower-cost area, job-based pay can help you earn and save more money – and that may be its biggest advantage, Speros says. After all, if you are being paid $80,000 but you only need $50,000 to live in your area, you’ll have more money to save and spend outside of living costs.
Job-based pay has other advantages, too: Employees are “able to build knowledge and have the opportunity to explore specialized skills while being compensated for the role and the impact they have,” Speros says. And job-based pay also sets employees up for future success: If an employee changes jobs or receives a promotion, he or she will be paid based on that new role.
But while job-based pay can work to your advantage if you live in a low-cost area, the opposite is also true: It can work against you if you live in a high-cost area “where the market pay and cost of living are higher than the level at which the company pays for a particular job,” Speros says. “This can happen when a company uses average market rates for jobs across a variety of regions, instead of relying on the pay rates of the most expensive regions” in the country.
Another disadvantage to job-based pay? Speros says that “employees with specialized skills and expertise may not have as much room to negotiate their pay to match their expertise in a job-based pay environment if the company looks strictly at the job-based pay level they have set and do not take other factors into consideration.” That can affect an employee’s future too, making it “difficult to earn more as an employee grows their skills until they can secure a promotion, which sometimes requires that someone else leave the company or be promoted,” Speros says.
Which Type of Pay Is Best for You?
With both location-based and job-based pay offering advantages and disadvantages, how can you know which would be right for you? Here are a few things to consider:
- Consider where you live and where you want to live. “Job-based pay values the work and the worker themselves,” says Lowry, “but because pay is not tied to cost of living, it can be feast or famine, depending on where and how you live.” Use tools on Glassdoor to see what the average pay might be for your role, and consider if that’s enough to cover your costs – both for where you live now and where you might want to live in the future. Also think about whether you see yourself moving in the future. If you plan to move to a lower-cost area, then location-based pay may not be ideal for your future lifestyle.
- Ask: Where do I want to be in five years? This common interview question can help you think through the type of pay that would most benefit you, too. “As with any role, the employee should consider what kind of tasks, expectations and responsibilities are included in the position as well as the potential for development and growth that the role presents to the employee,” Speros says. If you expect to grow within the company, then there may be some benefits to negotiating location-based pay rather than job-based pay.
- Know your worth. No matter which type of pay you ultimately want to pursue, knowing your worth can make sure you’re not underpaid. “Employees negotiating a job offer should familiarize themselves with the market pay for the role, and they should look at that data for their own location, the nation-wide or regional average, as well as the company’s home location,” Speros recommends. “Being armed with that will help an employee negotiate a fair offer, regardless of which pay philosophy the company uses.” Luckily, Glassdoor has created a tool to help: Our Know Your Worth tool will help you discover what you should earn based on your title, company, location and experience. (Bonus: the results are totally customized to you, and totally private.)