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How Do Remote Companies Set Salary and Compensation for a Global Team?

Setting compensation is something every employer has to consider and the decisions they make ultimately affect everyone they will go on to hire. This makes deciding how to approach compensation complicated no matter the makeup of your team, but with more companies embracing remote-friendly policies and expanding their hiring pool internationally, the layers of complexity naturally increase. In an effort to unpack all the competing arguments and intersecting elements, our Journalist, Bree Caggiati, is sharing a seven-part article series on Compensation for Global Teams.

One of the first conversations I ever had with our co-founder, Tim, centered the debate between global and local compensation models. 

It was during an early interview for my current role, and I asked his thoughts on the subject. At the time, I wasn’t even entirely aware of the scope of the issue, where I stood, or how passionate Tim would be. As someone who aims to live my life as ethically and thoughtfully as possible, it was merely something I was interested in learning about as it pertains to our industry.

At the time, Tim made a case for a localized approach, bringing up scenarios I’d never thought of and posing questions that made me curious to think more on the topic. 

Funnily enough, one of my first-ever features for the Shield site tackled the issue and gave me further insight into some of the pros and cons of each side. I found it wasn’t as simple as a global salary being the ethical choice and a local approach an economic one. In fact the implications of what is fair, and what isn’t are much more complex when you’re entering a new community different from your own. 

However, I still wasn’t entirely convinced I knew enough to take a stance myself.  

After the success of our podcast series earlier this year, we began brainstorming topics for a new series, and this idea to unpack the compensation debate kept cropping up. 

The series would allow me to hear from advocates from both points of view as well as multiple roles and, hopefully, different home countries too. Through interviews, research, and reading, I’d gain a fuller picture of the entire topic.

It would allow me to dig deep, ask the tough questions, and uncover the various layers involved. All while sharing my findings with you. 

We ultimately decided an article series would be better suited to this topic and will begin the rollout of our seven-part series this month. 

To launch our series, this article will provide an overview of the significant tenets involved in compensation models and the standard approaches. We’ll aim to answer our first question of the series — how are compensation models set? And introduce you to some of the key players in this space, including distributed companies at the forefront of these discussions, compensation consultants and remote work advocates. 

Compensation packages and the total cost to employers

Compensation, of course, covers more than just an employee’s take-home pay. Packages also take into account taxes and other deductions like retirement funds or employment insurance and benefits such as health care or equipment allowances. Depending on the role it should cover base pay as well as overtime pay, commissions where required, as well as any end of year bonuses, profit sharing, merit pay and stock options.

In some cases, you may even quantify the cost of adding extra users to your operation programs, or any annual gifts or regular staff lunches. For co-located companies that may include an extra parking space, the cost of extra keys or office snacks. In other words, it’s the total cost to the employer, not the total net pay to the employee. 

When companies hire worldwide, the structure of these packages often changes between employees due to differing local employment law and requirements. For example, in Canada, employers are responsible for paying employee insurance (EI) each month, designed to cover your employee in case of termination. In Australia, employers are required to deduct a portion of any employees salary who have offset their tertiary education fees through the Higher Education Contributions Scheme (HECS) once they reach a certain salary band. While these instances don’t necessarily have to affect the overall compensation package, they can change the employee’s net pay. In other words, what is required by law may mean employees living in different countries will receive differing salaries, even where they have the same total cost to the employer. 

While these aren’t the only ways compensation packages differ between employees in the same company, or even within the same role in a company, it’s important to acknowledge these differences are unavoidable when hiring globally. 

3 Types of compensation models

The more dominant reason for differences between employee salaries will, of course, have to do with the company’s compensation philosophy. 

There are three main compensation models that we will cover throughout this series. Each has its own merit, and I’ve spoken to people with strong cases for and against each of them.  

Global compensation approach

This model sets compensation packages based on the position — no matter where the employees live. That means anyone with the same job description is paid the same amount, globally. This approach aims for fairness in the dollar amount. 

Local compensation approach

This model adjusts the compensation package based on where the employees live. It takes into account factors such as cost of living and local salary expectations. This approach aims for fairness in purchasing power. 

Hybrid compensation approach 

As the name suggests, this approach takes on a combination of the two others. For example, you may wish to provide benefits on top of the localized salary expectations or provide a ‘company standard’ for initiatives like health insurance, annual leave, or other benefits that may differ from the local standard.  

The move towards remote work

With extended social distancing and shelter in place mandates the world over, 2020 has completely changed the operation structure of many businesses globally. Working from home quickly became the new norm, and companies including Twitter, Facebook, and Slack have all recently adopted a more permanent remote work policy.

The move towards remote brings with it a slew of questions around how companies should be structured including where employees can live, what hours they should work, and, importantly for this series, how compensation should be set.

When Facebook CEO Mark Zuckerberg announced their shift towards remote, he also revealed the company’s change to localized pay from January 1, 2021.

“[Employees] can do whatever they want through the rest of the year, but by the end of the year they should either come back to the Bay Area, or they need to tell us where they are,” he said during the Facebook Live announcement. 

Localized compensation isn’t a new concept, but the statement has certainly brought the debate to a more mainstream focus. 

“A lot of HR folks are asking me, ‘Should we do the same?'” says Lola Han, CEO and Founder of CultivatePeople, a compensation consultancy and software firm. 

But just as the move to remote-friendly or remote first should be determined by your company values and goals, so too should your decision around how to compensate. 

“If you’re going to let people work remote, [ask yourself] why am I doing that?,” says bethanye McKinney Blount, the Founder and CEO of Compaas, a compensation software and consultancy firm. 

“I may want to be able to keep all the people I have, and there’s going to be competition for them. I may want to have better business continuity, in the event that something catastrophic happens in the Bay Area, so I need people to start to disperse. I may want to figure out how to make my cash run longer. What do you really want to get out of it? What’s your goal? You have to answer that first before you decide what your comp[ensation] strategy is going to be instead of trying to do it the other way around.”

If your concern is attraction and retention, you might choose to implement a global approach to be more appealing to international applicants. In contrast, if your goal is to lower hiring costs, a localized model may work better. 

“Your compensation philosophy needs to follow and support your goals and values as a company, not the other way around,” bethanye says. “So [you should ask yourself] why are you doing this in the first place.”

For some companies who have always negotiated salaries with each individual new hire, this move towards remote may allow the chance to develop a compensation philosophy for the first time. 

“Companies that are now having a mass employee transition to a different comp[ensation] factor are in an extraordinary and unique and once in a lifetime position to make significant changes and improvements to their pay equity position by being more consistent in how they apply their pay principles throughout,” bethanye says. 

“When someone transitions from an expensive region to a less expensive region, [you can] reevaluate not just keeping them in the exact spot where they were, but [improving] their position, especially if they didn’t negotiate well on their way in or had other disadvantages coming in. This is the best time ever to make sure that people are not being left behind.”

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Choosing a compensation model 

Whether you’re in a transition period, moving towards remote, or just starting to build out a company, Tim Burgess, co-founder and Director of Shield GEO, makes a case for thinking about compensation as soon as you can. 

“I look back, and I’m like, ‘This is so important!’ You definitely need to make time for it and really as early as possible,” he says. 

“[Once the operation of Shield GEO began] there were times that I couldn’t even breathe, this was the furthest thing from my mind. So I think, at the very beginning when you first start a company, it’s probably worth having a think about it then.”

Compensation is complex, and Tim argues that if your approach seems simple, you may not have thought about it enough. Remote only adds to the complexity leading to questions like, should employees be compensated according to where the company is headquartered or where they are located? What happens if there isn’t a centralized headquarters? Should the pay rate adjust according to the cost of living or market rates? Does it depend on the industry or role?  

 “I think when we’re making these sort of decisions, and it’s not just about compensation, it’s also about the sort of customers that you want, the way that you’re going to frame things, how you are going to protect people’s privacy, how you want to interact with people, the culture you want to build… It never hurts to take those thoughts a little further down the pipe than you might normally be comfortable with,” he says. 

The solution or strategy you come up with will likely vary from company to company depending on what aligns with your own value system. 

“It’s a super challenging topic to explore, it forces you to make hard decisions and really evaluate what you believe and why,” Tim says. “But I think our company values have been really helpful [in the decision-making process].” 

Gitlab, the world’s largest remote company, shares a similar sentiment.  

“Deciding how much we pay people who live and work in a multitude of regions across the globe is a continual process,” they wrote on their All-Remote Compensation page. “Iteration and Transparency are values at GitLab, and both apply to compensation calculations.”

Ultimately, choosing an approach should reflect who you are as a company and who you want to become. You should also be open to change, as even Gitlab reveals it’s a “continual process.” 

“I guess the point that we’ve got to, is trying to find a position where we feel comfortable with the decisions that we’ve made,” Tim says. “It’s not to say that we’re right, I definitely don’t think that there’s a right or wrong solution. But we’re comfortable with the decisions that we’ve made. And we believe that it supports us in the way that we want to go forward.”

Using market data to decide how to compensate employees

Whether you choose a localized or global approach or some mix of the two, you’ll need access to market data to help set your specific salaries and subsequent compensation packages. But even this isn’t as simple as it should be. 

“Unfortunately, market data doesn’t seem very good for global data, and it’s really expensive,” Lola says. “Radford, for example, probably has the best tech industry global data, but it costs thousands and thousands of dollars.”

And once you get the data, you may not know how to accurately analyze it for your situation. 

“You’re kind of like, ‘Okay, well thanks for the data, but now what do I do with this?'” Lola says.

“That is just one of the things that was so painful being in-house as a comp[ensation] person, having to do all that meanwhile recruiters are asking me for ranges, hiring managers are asking me for ranges, and I still need to analyze the data.”

Tim is familiar with the struggle.

“I looked at a ton of different models and places of pulling data,” he says. “There are recruiters who publish data — it’s a bit biased because it’s generally based on their placements. They don’t factor in the whole market, so it’s only a sample. There are companies like Mercer, Radford, Culpepper, there are tons of them that survey companies, but they don’t survey everybody.”

He says the data is aimed at larger companies who can afford it, and for whom it’s a focus. But once again, having the data doesn’t always mean everything. 

“There’s huge variation by industry. If you’re a tech person working in a tech company, like Facebook, you’re going to get paid more than if you’re a tech person working in a food and beverage company. And then there’s huge regional variation as well.”

It means that you can’t easily match salary ranges for your own employees and their local peers. 

“Job leveling is a common pain point for a lot of organizations,” Lola admits. “A Senior Engineer at one company is different from a Senior Engineer in another company. Even though it kind of sounds simple, ‘I just need a job level across the organization’, it is actually very time-consuming. It can take months.”

Creating a salary formula and calculator 

Many remote-first companies will use a salary formula to help determine appropriate salaries in certain locations. 

“All-remote companies should consider a public compensation calculator to remove guesswork. When you open roles to a global talent pool, this allows candidates to get familiar with compensation expectations prior to applying, which creates efficiencies in the hiring process,” Gitlab says of their process on their compensation page.

Their compensation calculator follows this rule: 

Your salary = SF benchmark x Location Factor x Level Factor x Compa Ratio x Contract Factor x Exchange Rate

Compensation reviews are run once a year in the fourth quarter to determine any market changes. 

While a calculator can be a useful tool in simplifying your ongoing process and communicating with your team and any future recruits transparently, it can be problematic if there isn’t sufficient fidelity to it. 

Help Scout use a salary calculator too, but as they offer a set globalized approach, it’s tied to one specific location. 

“At Help Scout, our formula pays between the top 10-25% depending on the role,” Help Scout‘s CEO Nick Francis shared in a recent blog post.

“We align with the “second-tier” markets such as Boston, New York, and Seattle.”

Nick is skeptical of a philosophy tied to market rate as he sees it reinforcing the norms that were meant to be made irrelevant by remote work.

“We say that remote work has no borders, but the compensation philosophy still ties people to the most expensive geographies if they want to be compensated equitably alongside their peers.”

How do you know you’re making the right choice for your company? 

Like much of your business decisions, the compensation model you choose will depend on your company, the makeup of your employees and your individual values. As you’ll see in the following articles, there are many layers to this subject, and it’s not as simple as one is right, and one is wrong. As we continue to unpack this together, we hope you’ll be able to use this information to make the right decision for you. 

 

As I continue on this journey to deeper understanding, I’d love to hear your thoughts and opinions, and if you have anything you’d like to contribute to the debate, please reach out to me at bcaggiati@shieldgeo.com.

–Bree Caggiati

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