"Cutting Salary for Working from Home"... How Much Reduction Is Acceptable to You? [Jjinbit]

[Asia Economy Reporter Jeong Hyunjin] How would you react if a condition for working from home was a 'pay cut'? In some countries overseas, including the United States, this is actually happening after the COVID-19 pandemic. As remote work spreads, employees moving from notoriously expensive cities like Silicon Valley to regions with relatively lower living costs are facing salary reductions. When commuting to the office was the norm, companies compensated for the high living expenses of employees living near headquarters through their salaries, so this is a measure reflecting that consideration.

Google is a prime example at the center of this controversy. In August last year, a major foreign media outlet reported, citing Google employees, that the company cut salaries by up to 25% for employees who chose indefinite remote work. Employees working in expensive New York kept their salaries unchanged, but those living in Stamford, Connecticut, about an hour from Google's New York office, saw a 15% pay cut, and some employees who left Silicon Valley for Lake Tahoe, Nevada, faced salary reductions of up to 25%. This means salaries vary depending on the region.

According to BBC, global law firm Stevenson Harwood also offered a 20% pay cut to full-time employees in the first half of this year as a condition for remote work, allowing them to choose. Stevenson Harwood's headquarters is in London, UK. During the COVID-19 period, the company hired some employees who worked remotely while living in the outskirts to avoid the high cost of living in London, paying them less than those working in the office. ▶[Related Article] 'Jjinbit'

◆ How much pay cut is acceptable to accept remote work?

Such pay cuts cause dissatisfaction among employees. They argue it is unfair to reduce pay solely based on the place of residence while performing the same job. It is also difficult to track the exact location where employees actually work. Nevertheless, many employees are willing to accept some pay cuts because remote work offers advantages such as no commuting burden and flexible working styles.

According to a survey by US recruitment consulting firm GoodHire in October last year targeting 3,500 American workers, 61% of respondents said they were willing to lower their pay to maintain remote work. Seventy percent said they were willing to give up health insurance, paid leave, gym access, and retirement accounts. Around the same time, a survey by UK recruitment agency Reed found that 35% of about 2,000 UK workers were willing to accept a pay cut in exchange for permanent remote work.

Then, the important question is how much pay cut can be accepted for remote work? According to a November report by US daily USA Today based on a survey by consulting firm Global Workplace Analytics (GWA) and video conferencing solution company Owl Labs, among about 2,000 American respondents, 46% said they could accept a pay cut of 5% or less for remote work. Forty percent said they could accept a 10% pay cut, and 37% said they could accept more than a 10% cut. If the cut rate rises to around 20%, as mentioned by Google or Stevenson Harwood, the acceptance rate is expected to drop significantly.

◆ Not adjusting pay while working remotely is a ‘benefit’

The IT industry, especially startups, is the most active sector in adopting remote work. According to a report released on the 27th of last month (local time) by Carta, a US compensation management platform analyzing records of 127,000 employees working at about 2,000 startups, the proportion of new hires outside the state where the company headquarters is located was 35% until 2019 before COVID-19, but rapidly increased to 55% last year. This indicates that companies are hiring more employees working remotely far from headquarters.

In this rapidly expanding remote work environment, 84% of surveyed companies consider the employee's work location when determining pay for remote workers. Startups with lower company valuations are more likely to adjust pay based on location, while companies valued at over $500 million offer the same pay regardless of location in one out of four cases. Carta analyzed that "companies that do not adjust pay by location use this as a benefit to retain employees or attract new talent."

Global accommodation sharing platform Airbnb and US software company Okta declared no pay cuts based on work location when they fully adopted remote work. Airbnb announced this policy in April, allowing employees to work from anywhere in the world for up to 90 days per year. Okta stopped its policy of cutting salaries for employees working outside the Bay Area, including Silicon Valley, last year to attract talent.

◆ Academia: "Remote work adoption lowers wage growth rate by 2 percentage points"

Given this situation, academia has begun examining how remote work adoption affects wage growth. Nicholas Bloom, a Stanford University professor, and Brent Meyer, an economist at the Federal Reserve Bank of Atlanta, analyzed data from the past year in a paper released on the 23rd of last month, concluding that remote work adoption lowers wage growth by 2 percentage points over two years.

Based on a survey of about 500 US companies conducted in April-May, the researchers reported that the median estimate for "how much remote work expansion adjusted wage growth over the past 12 months" was 0.9 percentage points. For the additional question, "how much will it affect wages over the next 12 months," the median expectation was a 1.1 percentage point reduction. Cumulatively, this suggests that from April-May last year to April-May next year, remote work reduces wage growth by 2 percentage points over two years.

The researchers evaluated that this could have a positive effect by effectively reducing wage inflationary pressures, which is beneficial for the US currently experiencing the worst inflation in 40 years. It could assist monetary policy authorities like the US Federal Reserve (Fed) striving to lower prices. However, Professor Bloom emphasized, "This analysis does not provide grounds for reassurance about short-term inflation pressures; it is merely a factor that can slightly mitigate them."

Editor's Note[Jjinbit] is short for ‘Jeong Hyunjin’s Business Trend’ and ‘Real Business Trend,’ a corner that showcases trends in corporate management such as organizational culture and HR systems. We will deliver fresh and differentiated information and perspectives based on analyses from foreign media and major overseas institutions that have not received much attention so far.

This content was produced with the assistance of AI translation services.