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.

Option 1️⃣ - Pay individuals at the local market rate (no location factor)

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’
• ‘Individual, market based approach’

Why not do it?

• Some people think this approach to salary benchmarking isn’t fair. They might say: “Should someone be “penalised” for working in a lower-wage area? What about equal pay for equal work?”.
• This brings up the challenging question of “what is fair?” Is it paying the same regardless of where someone lives?

How to do it

• You pull market data reports from your chosen benchmarking provider for each job family in each location in order to determine the market rate.

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. For example, a company with 8 job families across 5 locations would need to manage 40 different salary structures.
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.
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.

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

Option 2️⃣ - Pay individuals at the local market rate (location factor)

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

Why do it?

Instead of creating separate salary structures for each location as in Option 1, in Option 2 we’re adopting a unified global salary structure with location-specific adjustments.

• By standardising your compensation framework, you can provide clear and equitable career progression paths for all employees, regardless of their location. This not only fosters a sense of fairness and engagement but also strengthens your overall talent management strategy.
• Graph showing uniform salary increases for one job family across 3 locations.

Why not do it?

• In addition to the reasons outlined in Option 1, a unified global salary structure, while aiming for consistency, may result in salaries that are either too high or too low for certain regions compared to the local market data. It is important to monitor this and make case-by-case adjustments to the affected levels and job families.

How to do it

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 do it

• 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.
• Finally, convert the salary into the local currency. As currency fluctuates regularly, I recommend using a rolling 1 year average to avoid extreme lows or highs.

Option 4️⃣ - Pay individuals one global rate

Employees receive their salary adjusted to 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 do it

• 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.
• Finally, convert the salary into the local currency. As currency fluctuates regularly, I recommend using a rolling 1 year average to avoid extreme lows or highs.
• Currency conversions are calculated using GoogleFinance, which update every 20mins.
• You have a choice of using the following rates: ‘Live’, ‘1 year rolling average’ ‘2 year rolling average’.

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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