Compensation for Remote Employees

16 minutes, 14 links
Common questions covered here
Does compensation for remote employees differ from other employees?
How should I pay remote employees in other states or countries?
Can I pay people different salaries based on where they live?
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Compensation for Remote Employees

controversyCompensation for remote employees is a controversial topic. What happens if someone changes locations as a remote worker, moving from an expensive city to a much cheaper location for a better cost of living? If another worker were already in that location, would you end up with two people doing the same relative job, but getting paid vastly different amounts? There’s no surer way of undermining the trust between distributed team members than having an inconsistent, unfair compensation structure.

Ultimately, there are two broadly consistent approaches to modeling compensation that you can use for distributed teams:

A global salary model for compensation of remote employees pays everyone the same fixed amount for the role and experience level.

A local salary model for compensation of remote employees pays people based on a calculation of local cost of living, and may also factor in the intensity of local labor market competition to adjust salary rates.

It’s also possible to have a hybrid: for example, you can have three broad global categories, where local factors affect which category an individual falls into. Buffer takes this approach with a transparent salary formula, which applies a cost of living multiplier to each employee’s base salary. This multiplier uses an employee’s location to determine one of three geographic bands: high, average, or low cost-of-living area (based on data from Numbeo). For high cost-of-living areas, the multiplier is 1x, so Buffer pays 100% of the San Francisco rate (at the 50th percentile). Average is 85% of the SF rate, and low is 75%.

Local vs. Global Based Salary: A Comparison

One of the main incentives to hire remotely is that you can hire very skilled people at a much lower wage than in U.S. tech hubs like the San Francisco Bay Area. This is the general principle behind a local salary model.

In this model, you’d set a base wage equal to that role in one location—usually a head office, or a place with a lot of reliable labor market data. San Francisco is a common baseline. Then you discount the salary for the remote employee based on either cost of living, how competitive local salaries are, or both. In general, remote employees outside large tech hubs still end up making significantly more money than they would working for a local company.

story“I live in the middle of nowhere, in northern Portugal. People that study here and graduate with a degree in computer science, if they go work for a local consultancy, they make probably about the equivalent of U.S. $1.5K per month. It’s enough to get around here, but it’s not a lot of money by most people’s measure. But if we hire those people, we triple their salary at least. What we see is that there’s a floor of sorts, where startups tend to pay significantly higher, especially in low-wage areas.” —Job van der Voort, CEO, Remote Employ

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The practical advantage of this approach is that it’s cheaper overall for the company. Many companies just can’t afford to compete with Bay Area salaries despite needing that talent density—and hire remotely for this reason.

Varying wages based on geography can help people to afford a similar standard of living for similar work, in different locations. Salary data shows wide variations people’s perception of how much compensation equates to emotional well-being, so pay based on geography can help even out living standard disparities.

story“A local pay model has the advantage of not creating “golden handcuffs,” where disillusioned employees remain in a role because the salary is many multiples of the local wage, when they might otherwise wish to leave. Emotionally, it’s very hard as a manager to dismiss someone when you know that their next best option, a local job, might pay them a tenth of their current salary. The impact on their lives of losing this job is significant, and being dismissed or quitting would be a major lifestyle change. This means that sometimes, for both a manager and a teammate, the employment relationship ends up continuing well beyond its healthy, mutually beneficial lifespan.” —Katie Womersley, VP of Engineering, Buffer

The disadvantages of varying pay by geography are that in a lot of places, there simply isn’t data on cost of living, labor markets, and other factors, and so approximations and estimates need to be made. It’s very difficult to be consistent when you’re guessing, and not to end up in a transitive crisis where town A is paid more than town B, town B is more than town C, but town C is well known for being more expensive than town A. The more fine-grained your formula, the harder it is to get accurate data and ensure each location is paid sensibly relative to other similar locations.

A way around this dilemma is to create bands, or buckets, such as “high,” “medium,” and “low” cost of living. The issue here is what to do with locations that fall on just one side of an arbitrary dividing line. There is no standard approach that we’re aware of for this situation, so companies are likely going to have to deal with this on a case-by-case basis.

Additionally, if your employees change locations, then you’re updating their salary, which could mean either less income for them, or more cost for you as the employer.

Moving is super tricky with local pay. It works out best if the employer and employee are very clear upfront of the entire employment about how they deal with this. Generally, they accept that pay is based on market forces and that if those change, pay might follow.Job van der Voort, CEO, Remote*

If people in your company are moving frequently, it can become administratively exhausting to continually calculate and update their pay.

We’ve talked to hundreds of companies about their compensation strategies for remote teams, most of which have hybrid structures. What we are seeing is that many companies with local pay models adjust for a new location if an employee moves, unless they ask the employee to relocate. If it’s the employee’s decision, they recalculate their compensation to be in line with the local market.bethanye McKinney Blount, founder and CEO, Compaas*

The main practical advantage of a global salary model is that it’s very simple to calculate. It’s also more likely to feel fair to employees: two-thirds of people who are in fact paid market rates still believe they’re underpaid. Making the market rate very clear can help employees who are paid market rates believe themselves to be fairly compensated. It also alleviates the issue that someone could be paid more or less than their peer for the same role. Most employees believe they deserve to be paid the same amount for the same level of work, regardless of where they live. While some people in areas with much lower salary options may still be happy to get paid better relative to other local employees, this may change over time as more local talent gets hired by remote companies.

We’ve had many employees over the years who’ve moved around. I can’t imagine telling someone they’re getting a pay cut because they moved.David Heinemeier Hansson, co-founder and CTO, Basecamp*

Paying global salaries can also attract top talent who are specifically experienced in remote work, and who consider their labor market to be global. When hiring these candidates, companies are competing with other remote companies, and not with the candidate’s other local options.

Further, the higher expense for the company of paying global salaries rather than local ones sends a credible signal that remote workers are equally valued by the company, and incentivizes managers to support them and treat them as a full part of the team. This can help remote workers be more successful.

Establish Your Compensation Philosophy

importantMany compensation considerations are seemingly practical. But compensation is not just a set of practical choices; it’s ambiguous, emotional, and symbolic. People will interpret their value at work based on how much you pay them and on how the company evaluates that pay in comparison to others. It’s not wise to choose a framework based only on what is most practical or what is cheaper. It’s critical for your compensation policies to be aligned with your company’s philosophy and values, and hold up to principled inquiry. That is what will gain you the loyalty and trust of your staff, who after all just want to be paid fairly for their work.

controversyWhat fair pay means in the context of remote work is unclear, and experts disagree.

Juan Pablo Buriticá argues that remote and office jobs come with different expectations and challenges, and that this should be a consideration when it comes to pay:

I believe compensation should consider responsibilities and effort over location. A remote worker and an office one may have the same job, while requiring them to do different tasks to meet their expectations; and this should be factored into how they’re compensated. This doesn’t mean one mode is worth less than the other. If you require me to commute to an office, I may have higher compensation expectations because it’s additional effort. The same works if you ask me as a remote worker to adapt to HQ’s core hours over my local one. A one-dimensional approach to compensation can disadvantage some workers over others if the efforts are different, and this should be considered to build an equitable workplace.*

GitLab pays local salaries, using a fairly complex formula. Basecamp and Zapier state that they don’t “use remote as an excuse to pay less.” Both companies pay global salaries, independent of location.

Some people interpret this as equal amounts for equal contributions: all level 1 engineers are paid $90K. Another interpretation is that people are paid equal “lifestyle amounts” for equal work since $1 goes much further in Sri Lanka than in the Bay Area. In practice, it appears that this means that all level 1 engineers are paid the purchasing parity equivalent of $90K per year so that all level 1 engineers can maintain a similar lifestyle.

Philosophically, if you are a fully remote company or have a “remote-first” attitude, and you consider yourself as operating exclusively in the remote job market, then paying the same fixed amount may be more aligned with your overall approach.

On the other hand, if you believe that a remote job and an in-office job are fundamentally different types of jobs (even for the same role), then you might not choose to pay the same amount in each location.

story “I strongly suspect we’ll see something emerge along the lines of a remote pay band. It might sit somewhere in between local and global pay models. Instead of ’your’ geography and ’their’ geography, there is a ’remote’ geography, which stipulates what the remote-based pay is for people in a certain field, title, and level. For example, if you’re in San Francisco for a company that pays local salaries, you might not make as much as you could just working locally. But if you’re really good—if you’re at a high level—you should be able to still command a high salary while living in a Tier 1 market but working for a company elsewhere.” —Greg Caplan, CEO, Remote Year

importantWhichever approach you take, it’s wise to take the time to think through how to structure compensation and to develop a consistent formula, guideline, or salary band guidance. The next step is to be prepared to share your reasoning with your staff.

Remoter has an excellent breakdown of how to determine the best compensation model for your remote team. You can also visit our Guide to Technical Recruiting and Hiring for more on developing a compensation philosophy.

Have A Plan For Benefits

As you hire remote employees in more locations, you’ll begin to run into variations in local laws pertaining to benefits like paid vacation, parental leave, and more. This can lead to similar forms of inequity, where some employees have more extensive benefits than others. Take family leave in the U.S., for example. Many states have or are enacting more comprehensive Family and Medical Leave Act (FMLA) laws than what is currently mandated at the federal level (which requires up to 12 weeks leave, unpaid, for anyone who has been working longer than a year at a company with more than 20 employees). As we cover in detail in Legal, Tax, and Operational Concerns, any company that employs someone in a different state has to comply with local employment laws. So an employee in Washington must receive at least 12 weeks of paid FMLA leave, whereas someone in say, Alabama, isn’t required to get paid for any time off due to FMLA.

As a company grows, these variations will both become harder to keep track of and lead to more instances of different coverage across the workforce. Here also, your company philosophy and values will guide how you proceed. Tim Burgess, co-founder of ShieldGeo, notes these pressures that he sees with companies they work with:

Most distributed companies start with comp and benefits inspired by their home-country norms. Then they try to globalise policies to be generous in most locations. As they grow, there is increasing localisation. It’s complex to shoehorn global policies into many different countries.*

Basecamp provides what they call “global PTO” (paid time off), which offers the same set of benefits, including vacation and parental leave, regardless of location. They feel their benefits are generous enough to cover both U.S. and international employees. Remote Employ, a new global PEO startup, has the same philosophy.

contributeDoes your remote company approach compensation differently? If so, we’d love to hear from you!

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