Create a formulaic and scalable approach to paying in different locations

Intro

One of the biggest challenges global-first businesses face is salary benchmarking. In other words: how do you pay a globally distributed team fairly and cost-effectively?

For local-first teams (i.e., those based in just one location), this process is fairly straightforward. You simply gather market rate data for the local area by role type and decide how competitive your compensation packages should be.

In contrast, the process is much more complicated for global-first teams because you have to consider location as a variable. After all, what’s considered a good salary in one country or city isn’t in another.

There are 4️⃣ options when paying a global team

Learn more about each option, why choose one over the other and finally how to implement it.

If you’re working on a project with me then… ✅ I’ll run you through how each of these options work in your compensation calculator and make recommendations on which option is best for your organisation.

✅ I will pre-load location factors in the calculator for each of your locations based on what I see commonly used with my clients.

How many salary bands will you need to build and maintain?

Before delving into each option, it's important to recognise that they all come with their own advantages and disadvantages. A key consideration is the number of salary bands you'll need to create and manage. This factor significantly impacts the complexity and administrative burden of your compensation strategy.

See here for a spreadsheet you can use to understand these implications.

Option 1️⃣ - Pay individuals at the local market rate using pure market data

Employees receive their salary based on pure market date from the geographical area where they live.

Why do it?

• Cost effective - The main advantage of paying staff according to local rates is that it enables you to remain competitive in both high and low-wage areas. Even if your employees don’t receive equal wages, they can still enjoy a very similar standard of living. It also means you don’t overpay for talent in lower-wage areas, saving your business money and allowing you to hire more talent.
• Paying staff at local rates takes into account localised market rates for labor or for the cost of living - and often a combination of the two. This allows you to adapt to market changes as and when necessary.
• ‘Pair fairly, but not equally’

Why not do it?

• Should someone's pay be lower just because they live in a location that has a lower cost of labour / living? More reading on this here from Helpscout.
• Disadvantages of building separate salary structures for different locations using separate reports
1. Complexity in Data Management: Pulling market data reports for each job family in every location to determine the market rate can lead to significant complexity. The number of reports required increases exponentially with the number of job families and locations.
2. Inconsistency in Pay Progression: Managing separate salary structures for different locations often results in inconsistencies in pay progression. For instance, within a single team, such as Software Engineering, having five distinct salary structures across various locations can lead to non-uniform salary increases. This variation can cause confusion among employees and perceptions of unfairness.

Graph showing a non-uniform set of salary increases for one job family across 3 locations.


3. Employee Dissatisfaction and Perceived Inequity: Disparate salary structures can lead to dissatisfaction and perceived inequity among employees. For example, if an employee in the UK receives a promotion with a corresponding raise that reflects their increased responsibilities, but an employee in Germany receives a proportionally smaller raise for the same promotion, it creates a sense of unfairness. Despite having the same responsibilities, the compensation does not align, undermining the principle of equal pay for equal work.
4. Increased Administrative Burden: The administrative effort required to maintain multiple salary structures can be burdensome. Regularly updating and ensuring consistency across all these structures demands significant time and resources, which could be better spent on strategic HR initiatives.
5. Difficulty in Ensuring Compliance: Ensuring that each salary structure complies with local labour laws and market standards adds another layer of complexity. This becomes particularly challenging when dealing with numerous locations, each with its own legal and economic context.

How to implement this approach

• Gather market data reports from your chosen benchmarking provider for each job family in each location to determine the local market rates.
• This option doesn't require location factors or currency conversion rates, as it uses pure market data in local currencies.

Option 2️⃣ - Pay individuals at the local market rate using a location factor

Using a base market to anchor from, employees receive their salary adjusted to the geographical area where they live.

Why do it?

Adopting a unified global salary structure with location-specific adjustments is a pragmatic solution for several compelling reasons:

1. Ensures Consistency: Salary growth between levels (mid-point differentials) remains the same, which keeps compensation structures uniform across locations and job families, fostering trust and fairness (see graph below).
2. Simplifies Administration: Reduces complexity by managing one dataset, making it easier to implement, update, and communicate changes.
3. Enhances Transparency: Employees can understand salary adjustments better, improving satisfaction and minimising disputes.
4. Facilitates Scalability: Adaptable to new markets and job families, streamlining expansion efforts without redesigning compensation structures.
5. Control: Allows organisations to control their location factors, enabling them to adjust for market conditions, talent acquisition challenges, or strategic priorities in specific regions. This flexibility helps in maintaining competitiveness while ensuring internal equity across the global workforce.

• Graph showing uniform salary increases for one job family across 3 locations

Why not do it?

• While aiming for consistency and simplification, applying the same location factor to all job families in one location, may result in salaries that are either too high or too low when compared to the local market data.
• For example the location factor for Software Engineers is 0.95x, however the location factor for Customer Support is 0.83x. By taking an average location factor, you may end up underpaying for Software Engineers and overpaying for Customer Support.

How to implement this approach

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3. Analyse the data and determine your location factors

• In this step, the objective is to understand how each location compares to your baseline location i.e. is it more or less expensive to hire in a given location when compared to your baseline market.

• This analysis will allow you to create a location multipliers aka location factors.
• When analysing the location factors, you may well want to adjust them up or down based on certain circumstances:
• Where you are having challenges with talent acquisition and retention.
• What you feel is ‘fair’ or the ‘right thing to do’.
• Insufficient data points are available to render the location analysis as significant.
• Once you have your location factors signed off, they can be applied to the baseline market data set to calculate pay across the various locations.

Pave has a good summary of the location factors aka ‘geographic differentials’ here.

Examples of companies taking this approach

• GitLab’s compensation philosophy is one of the most well-known examples of this.

Option 3️⃣ - Pay individuals based on a location band or tier

Employees receive their salary adjusted to a group of geographical areas defined by the organisation to be similar

This approach again uses localised data but then groups similar location costs into bands.

• ‘Time zone approach’
• ‘Hybrid approach’
• ‘Grouping locations into tiers’ or bands’

Examples of companies taking this approach

• Buffer 2022
• Slite

Why do it?

• Using a banded approach helps close the gap found in traditional compensation approaches where multiple location multipliers result in a fragmented approach to pay. For example, without a banded approach, you may have two people on two marginally different salaries even though one is based in Spain and the other in Portugal.
• However, one of the disadvantages of using this approach is that you may end up “overpaying” some people when compared to the local market rate approach.
• This gets you closer to the ‘equal work, equal pay approach’.

Why not do it?

• However, one of the disadvantages of using this approach is that you may end up “overpaying” some people when compared to the local market rate approach.

How to implement this approach

• First, carry out all steps from Option 2 for each location where your employees are based.
• Then, decide how many location cost bands you would like, as well as the location multipliers for each band.
• Below is an example using five bands. Your approach to choosing a location multipliers for each band can be both “scientific” and based on what you feel is right (i.e., your company goals, values, and beliefs). Read more about how Buffer eliminated the ‘Low’ and ‘Average’ bands in 2022.

• Each location you add to the Justly calculator is automatically categorised into one of the four bands based on their location multiplier e.g. a location with a location multiplier of 0.67 would fall into the ‘Low’ band.
• The Low band is the ‘floor’ and enables you to create a minimum location multiplier i.e. no one will be paid less than 0.7x of the baseline market even if the market data you gather indicates it should be lower. The cost implications of this approach are modelled out in the calculator.
• Final step - convert salaries to the local currency - more on this here.

Using Pave?

See here to view the cities that make up the 3 US tiers in Pave.

Option 4️⃣ - Pay individuals one global rate

Employees receive their salary based on the location of their organisations HQ

• ‘Equal pay for equal work’
• ‘Location agnostic pay’
• ‘Everyone in the same role at the same level is paid the same regardless of location’

Examples of companies taking this approach

• Basecamp
• Helpscout
• Gumroad

Why do it?

• Easiest salary calculation e.g. a Snr Account Manager in the UK is paid the same as a Snr Account Manager in Spain.
• Everyone has the freedom to pick where they want to live, and there’s no penalty for relocating to a cheaper cost-of-living area.
• Geography plays no role whatsoever in determining the intrinsic value of the work. All work has a fixed value to the business, irrespective of geography i.e. work carried out in India has the same value as the same work delivered in San Francisco (when looking at two people with exactly the same role and level).
• It helps solve the challenges around figuring out what a ‘fair’ location factor is. Keeping salaries consistent means you don't need to do very small adjustments which makes implementing and running it a very attractive.
• If you are moving towards remote working, a global approach may be more appealing to attract and retain international applicants.

Why not do it?

• If you value engaging with people in a way that is sympathetic to their local circumstances, paying well above rate for roles in a low-wage area could be seen as imposing a US/UK-centric view on a community.
• Entering a foreign market has the potential to disrupt the community. For example, offering above market rate may attract talent away from essential local jobs.
• To quote GitLab directly:

“Paying the same wage in different regions would lead to:

1. If we start paying everyone the highest wage our compensation costs would increase greatly, we can hire fewer people, and we would get less results.
2. A concentration of team members in low-wage regions, since it is a better deal for them, while we want a geographically diverse team.
3. Team members in high-wage regions having much less discretionary income than ones in low-wage countries with the same role.
4. Team members in low-wage regions being in golden handcuffs and sticking around because of the compensation even when they are unhappy, we believe that it is healthy for the company when unhappy people leave.
5. If we start paying everyone the lowest wage we would not be able to attract and retain people in high-wage regions, we want the largest pool to recruit from as practical.”

How to implement this approach

• Companies will take one geographical benchmark and align to that. Which geographical market depends on their financial position. For example Basecamp takes San Francisco (super expensive), where as HelpScout takes an average of cheaper locations (Boston, New York, and Seattle).
• In the Justly calculator all locations and their location indexes would equal 1.00 for the baseline market you choose.
• Final step - convert salaries to the local currency - more on this below.

Currency conversion

• The final step in Options 2, 3 & 4 requires converting salaries into the local currency.
• Based on numerous projects, most companies use a 1-year average exchange rate, typically set on January 1st, and lock this rate into their compensation calculator.
• Using live rates or rolling averages is not recommended since Google Finance updates automatically every 20 minutes. Locking in a fixed rate prevents both system slowdowns and unwanted salary fluctuations due to currency changes.
• If exchange rates move drastically during the year (by more than 10%), this warrants an out-of-cycle review to ensure salary package values aren't eroded.

How does this template help you?

The template allows you to carry out a cost of market evaluation compared to your desired reference market in a matter of minutes and quickly create location multipliers for new locations where you may have a blind spot.

✅ Visualise and understand how compensation differentials vary globally from your data sources

✅ Understand the cost implications for adopting one of the 3 pay strategies above so you can make a data informed decision on how to pay in each location, while taking into consideration your organisation's values and philosophical beliefs

✅ Model the salary costs in any currency, and in any location in the world, in order to build salary ranges that align to your organisations philosophical beliefs.

✅ Build out a local salary structure for a new location (city, country or region) in a matter of minutes

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Step 2: Compare location differentials (table)

• In Step 2 we compare salaries across the different locations entered in Step 1 and calculate location differentials i.e. whether pay is higher, lower or the same in different locations versus your reference market (aka base market).

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Step 4: Compare pay strategy costs

• Now we have our location differentials, we can plug them into the model to understand the cost implications of paying employees using the 3 strategies described earlier in this guide.
• N.B. In order to compare apples to apples across each location and pay strategy, you’ll only enter salary data for one level.

Conversion rates

• When normalising salaries in this step, you have the following options:
1. Live
2. 1 year average
3. 2 year average
4. Manual input

Creating your bands

• You can choose between 3 or 4 bands.
• 4 bands gives you greater granularity on the groupings and thus allow you to create a wider set of multipliers.
• 3 bands, moves you closer to the ‘equal work for equal pay’ philosophy as you’re eliminating the lower band and bringing employees who would otherwise sit in a lower band into a higher paying bracket. This will obviously cost you more.
• You can set the width of your pay bands and the location multiplier of each band by modifying the blue cells in the tables that sit below Option 2.

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Step 5: Set your pay strategy for all levels across all your locations

In this final step, you’ll have the opportunity to create a salary range for all the levels in one job family, across all of the locations you entered in Step 4.

How:

1. Select a pay strategy
2. Enter a job family name
3. Enter salary data from your reference market for the job family

The template will then calculate local market salaries using:

• The location multiplier associated with the pay strategy you’ve chosen
• Conversion rate you chose in step 4.

FAQs

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Do you have any extra reading on this topic?

• Below are some articles which I think are a great read.

Should you earn less because you live somewhere cheaper?

Employee compensation has always been a headache for companies - and the rise of remote work has added a whole new layer of complexity. The idea of paying workers based on the city, region or country they're based in, regardless of their role, isn't new; many of the world's biggest tech companies - from Google to Apple - already had location-specific compensation policies prior to the pandemic.

sifted.eu

The Argument for Location-Based Salaries Is Falling Apart

Faced with unfair pay disparities, tech workers are finding ways to game the system. Isaac, a social media team lead at a sports tech startup, is looking to hire a senior social media manager to join his team.

www.wired.co.uk

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