Companies are being forced to rethink how they attract and retain talent, where to locate workers, and how to maintain and develop culture as Covid keeps employees away from their offices.
As I wrote in The Real Work From Home Winner is the Shareholder, there are a number of drivers for why many firms are advocating for a future in which remote work is the norm, and not the exception.
Though some CEOs, like Netflix’s Reed Hastings “don’t see any positives,” many others corporate leaders – and shareholders – understand that remote work affords valuable benefits.
Remote work can enable companies to source and access new pools of human capital.
Firms can place workers closer to their clients.
And lastly, firms can cater to workers who find remote work more conducive to productivity.
But an important and large driver behind why companies are advocating for remote work is a reason that is all too often overlooked: it will save these firms money.
These savings will yield bottom line improvements that management can use to increase retained earnings.
How will this work?
Firms have costs that need to be managed. These costs largely fall into three buckets: Property Plant and Equipment (PP&E), operating expenses, and Selling, General and Administrative (SG&A) expenses.
PP&E and operating expenses are harder to cut or adjust on the fly. The plant or building that a firm owns (or has leased) will likely remain on its book for years to come. Likewise, the operating expenses – taxes, insurance, utilities – are long term costs and therefore less susceptible to rapid change.
What is easier to alter, however, are wages.
The SG&A category is very flexible.
Firms can reduce salaries, cut bonuses, or slash other forms of compensation overnight.
The post-Covid workplace will see firms allow employees (or some large percentage of staff) to work wherever they want.
I predict that staff will embrace these more open policies and the flexibility that comes with this new era of work.
However, I also predict that firms will quickly index compensation to local markets, thereby greatly decreasing the salaries of workers who establish domicile in cheaper areas.
Recently Facebook Founder and CEO Mark Zuckerberg said that as much as 50% of Facebook’s workforce could be working remotely in the next five to ten years. He also noted that Facebook “will adjust salaries to your location…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.”
Remote workers should consider this a warning.
Many companies will follow suit.
A software engineer in New Mexico or Idaho or India will cost Facebook less to employ than that same engineer located in San Francisco or London.
Finance provides a useful reference point. It is axiomatic in economics that long run profits go to zero.
Imagine you have two markets. The firms in Industry A are earning less than they could in Industry B. Firms in Industry A are experiencing economic losses as a result. What happens? The process of firms leaving Industry A and entering B will continue until firms in both industries are earning zero economic profit.
The same is true in human capital markets.
As the engineer in a non-urban area starts competing for traditionally urban-based jobs, one should expect that this increased competition will drive down wages. Who wins?
The firm, of course.
They get to fill the role at a cheaper price point.
Companies won’t need to invest as much capital to hire and retain staff, which will lead directly to higher cash flow. This will lead to higher expected growth and higher stock prices over time.
Additionally, companies can decrease salaries and decrease corporate administrative costs (i.e. lower SG&A), which will lead to higher net income to equity holders.
Again: the firm (and its shareholders) will view this trend favorably.
What data supports this policy?
Firstly, look at the explosion of Facebook’s SG&A costs in the last three years.
- In 2019 Facebook’s annual SG&A increased 80% from 2018.
- In 2018 Facebook’s annual SG&A increased 56% from 2017.
- In 2017 Facebook’s annual SG&A increased 32% from 2016.
Next, look at Facebook’s increase in operating expenses.
- Facebook’s annual operating expenses for 2019 increased 51.05% from 2018.
- Facebook’s annual operating expenses for 2018 increased 51.22% from 2017.
- Facebook’s annual operating expenses for 2017 increased 34% from 2016.
Lastly, note that even as Facebook’s revenue has increased, the rate of growth is slowing.
- Facebook’s annual revenue for 2019 increased by 27% from 2018.
- Facebook’s annual revenue for 2018 increased 37% from 2017.
- Facebook’s annual revenue for 2017 increased 47% from 2016.
Facebook’s SG&A and operating expenses are increasing faster than Facebook’s rate of revenue. To increase profitability, Facebook will need to find ways to decrease its costs. It has a few obvious buckets to target and expanding its remote workforce can reduce PP&E, SG&A, and other operating costs in one fell swoop.
Facebook is not alone.
Airbnb extended its work-from-home policy until the end of August 2021. They are offering a $500 quarterly credit to use specifically on Airbnbs. It sounds generous until you look under the hood. Airbnb can use the credits as a tax expense while generating revenues when its staff spends money.
Google originally said employees would return to its San Francisco Bay Area HQ in July 2020, then pushed that date to October. Now, Google is extending its employee work-from-home policy through June 2021. Look for them to change their compensation model for remote workers before they bring people back.
I would expect that their compensation team is working on this already.
What do these changes mean for you and the future of remote work?
Here are some more ideas.
- Companies will increasingly make “remote” a job location in their job description.
- Job boards, like Indeed and ZipRecruiter, will allow jobs to be “full time work from home,” a category of job that these sites previously did not allow.
- Having remote positions will increase the talent pool companies have access to fill roles. This increased competition by workers for openings will drive down wages.
- Many, if not all, firms will index salaries to local market rates. Some firms have announced these changes publicly, like Facebook, and others have not. It is impossible to think that a firm like Google, which relies heavily on data to make informed HR decisions, will not implement the same framework. If you were hired in Mountain View but want to relocate to Oregon for example, you should expect to see your compensation decrease considerably.
- Companies will increasingly rely on cloud computing to trade capital expenditures for variable expenses. This is already happening. Pro sports leagues, for example, have had to change their IT system architectures. Instead of hosting scoring applications on-premise in stadiums, they’ve moved their systems into the cloud. This is because certain scorekeepers, due to COVID protocols, are scoring games from broadcast streams instead of being live at stadiums. Covid has accelerated a shift to “all things remote”. This includes where people work and the IT infrastructure used by firms for storage, computation, and database management. Expect cloud vendors – Google, Microsoft, and Amazon – to be winners from this shift.
- Home workers are generating record quantities of data. Startups will arise that leverage AI and machine learning services to generate models of worker efficiency, creativity, and productivity from home. These models will help larger Enterprises measure output for remote workers and measure their impact in new ways.
