An increase in wages, salaries, or benefits known as a cost-of-living adjustment (COLA) is often based on an objective assessment that determines how much more money the average person or household would need to maintain their standard of living. Considering that many businesses will employ remote workers until 2021, COLA has recently been on HR directors’ minds.

Why COLA Matters Now We’re All Working From Home

Businesses in the US are not compelled to offer COLAs to their employees, but the majority do in order to compete in the talent market. Changes to the compensation structure normally take time because personnel costs are one of the top three costs for any business. Companies are analyzing compensation based not only on the cost of living, but also based on the cost of living by geographic area for a scattered workforce because so many businesses have been forced to decrease overhead costs and limit budgets as a result of COVID-19.

For example, in May Facebook CEO Mark Zuckerberg announced that the company’s workforce is likely to be 50% remote five years from now and its compensation structure will change to reflect it. Facebook already pays based on location, but Zuckerberg said employees working remotely must notify Facebook if they move to a new area before Jan. 1, 2021 and those who choose to work where the cost of living is less should expect to be paid less. “That means if you live in a location where the cost of living is dramatically lower, or the cost of labor is lower, then salaries do tend to be somewhat lower in those places,” Zuckerberg said, noting it will be necessary to take taxes into account. “There’ll be severe ramifications for people who are not honest about this.”

In a recent webinar with Compensation Consultant/Human Resources Strategist Melissa Bixby for UpskillHR, we talked about how COLA plays into working with remote employees – and why compensation data and research is essential for any company before making changes.

While we may want to be able to adjust salaries based on location, compensation is much more likely to be driven by our competitors. Because many companies, especially those in the tech sector like Facebook, have shifted to a remote work model, retaining and recruiting highly skilled employees is going to depend on what you have to offer. From an employee perspective, they’re performing their job just as well and just as productively as they did when in office. If their position becomes 100% remote and they choose to move to a location that has a lower cost of living, how will this be received? If early reaction to the Facebook decision is any indicator, the pandemic did not suddenly create a recruiter’s dream of endless talent funnels and candidates are still in the driver’s seat.

Marketwatch reported that Zuckerberg said that in a company survey, of the people who said they would want to work remotely full time, about 45% were “pretty confident” that they would move to another place if they had that opportunity, with an additional 30% saying they “might” move. About 60% of that total said they’d prefer to move to a smaller city or town. Unfortunately, the survey didn’t also ask if employees who would move to a smaller city or town are also willing to take a pay cut to do so, so Facebook skipped a crucial opportunity to gather more data before making the decision.

Before making any changes or announcements about changing compensation or COLA, Bixby advises taking into account how pay equity affects any changes in the compensation structure. Instead of asking applicants about their salary history or what they expect to make in the role, Bixby advises gathering the best data you can. There are many places to cut expenses, but if your salaries are below market, you’ll lose workers, and the effects of bad reviews and the impression of your talent brand take far longer to reverse than they do to enforce.