Tech companies keep asking employees to take pay cuts to work remotely, but workers are rejecting the idea they should be paid differently based on where they live

The pay-by-location model may be diverting our attention from a more interesting shift taking hold. Hybrid and remote work for tech workers seems to be a durable trend, and within that concept, companies are looking for new pay-for-performance models tied more closely to output and experience — without the overlay of location.

The tech sector will need to innovate in how it manages talent, especially since the market for technologists has long been tight, with unemployment in the sector hovering at just about 1.5%.

Companies are searching for tech workers nationwide — and globally — with a growing preference for candidates in countries with the same or similar time zones, and candidates increasingly demand compensation based on their output, not where they choose to sleep at night. The smartest companies are using this trend as a tool to hire talent, regardless of where technologists are "based."

As one recruiter told us in response to our survey: "It's a tough market. Everyone wants remote. Our company is having a hard time filling roles that refuse to allow remote, and losing those candidates to the competition that will allow 100% remote."

Not surprisingly, already employed professionals are put off by salary cuts based on location as well. Our latest survey of technologists found that four in 10 respondents said they would refuse to take a pay cut based on geography. In fact, in three separate surveys spanning the second quarter of 2020, only 3% of respondents said they'd be willing to take a 15% salary cut to be allowed to work remotely, while just 1% would take a 25% cut for such an arrangement.

Technologists do not buy into the idea of geography-based wages, and they are helping to shift the pay conversation from where they work to how they work.

Location-based compensation is a thing of the past

In the 20th century, companies with national footprints paid employees based on the cost of living where they were, and countless employers throughout the economy began to tether compensation to a particular region's cost of living.

But the pandemic and the surge in remote work turned these policies on their heads.

The debate about location-based compensation intensified this summer as financial-services companies summoned employees back to the office.

"If you want to get paid New York rates, you work in New York," Morgan Stanley CEO James Gorman said. Penalizing remote work became the proverbial stick amid concerns about team collaboration in all-remote and hybrid work environments.

Results may suffer when knowledge transfer and moment-to-moment collaboration rest heavily on physically working together, such as on trading floors. There are concerns about maintaining organizational culture when employees are remote as well.

But team dynamics in the technology industry are very different. A developer's key interaction with a team is often as streamlined as a quick 10-minute morning meeting — something that is often over video, followed up with periodic direct messages when needed. These technologists will typically work at their screen for most of their day. All that to say, a developer sitting in Des Moines, Iowa, can be as productive as one sitting in Silicon Valley. 

How should tech companies evaluate compensation? 

The challenge is that there has never been a great set of metrics to evaluate technologists' output. The industry has been through several iterations in search of the ideal way to measure job performance. ​​More than a decade ago, managers would look at the total number of lines of code to measure productivity. But no modern-day chief technology officer would measure it that way because, nowadays, more lines often mean less-efficient code.  

The next evolution in measuring performance was focused on story points, which are how technology teams measure the effort needed to solve a specific requirement. This idea is being questioned because effort can be put toward projects of less business value than those that generate revenue and customer loyalty. 

One theory — popularized by Google since it was founded in the late 1990s — tracks objectives and key results, giving technologists and teams credit for achieving set goals. An overarching sticking point, though, is that there is no consistency in how the industry determines experience. Job titles and salary bands at Microsoft are different from Oracle's or Geico's. While results can be measured objectively, there is no uniform way to determine experience levels. 

We've observed that the industry is moving toward solving this dilemma by creating a certification path to assess technologists' skills and paying them accordingly. The thinking is that standardized tests are a smart option because most programming challenges are essentially math problems. Just as we assess high-school students using the SAT or the ACT, we may be able to determine where technologists stand compared with their peers. 

It is unclear if other professions and industries could adopt a similar approach. Standardizing softer skills — creativity, communication, critical thinking, people management — may be difficult, if not impossible. But in the past few decades, the tech industry has driven change for the broader economy by disrupting traditional systems and introducing new business models and organizational practices.

Now, as more and more industries grapple with adapting traditional compensation structures to a new world of work, tech is once again disrupting traditional practices and leading the way toward what comes next.