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Why Do Some Remote Companies Pay a Localized Salary?

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.

In the first article of our compensation series, I briefly outlined the three major compensation philosophies a company may hold. Namely a globalized approach, a localized approach, and a hybrid version that incorporates some elements of the previous two. I also mentioned some of the elements that affect how compensation is set, such as calculators, data sets, and particular company values. 

While this article can be read on its own, the series will make the most sense together so if you haven’t had a chance to read the previous article I recommend taking a look. 

Over the next few articles, I’ll be unpacking the arguments for (and against) each of the significant compensation philosophies and sharing the different perspectives of companies and advocates who hold each viewpoint. 

An ongoing argument for paying a localized salary

This year brought the argument over how to compensate employees to the forefront of HR dialogue as the coronavirus pandemic caused a mass uptake in working from home and remote work policies. Major companies like Facebook and Twitter publicly announced their permanent move to remote work. They shared how this would affect their compensation strategies—many advocate for localization. 

However, despite its recent presence in mainstream media, this isn’t a new concept. 

“This conversation has been going on for a very, very long time, it would be naive to say that we haven’t already seen companies going into new regions to build up things in less expensive labor regions,” says bethanye McKinney Blount, the Founder and CEO of Compaas, a compensation software and consultancy firm.  

“For example, there are companies that would build call centers in Arizona, in Utah, or in Montana, right? It’s not because Montana is the hotbed of call center eliteness it’s because they were looking for a less expensive place where they could build out that particular kind of work.”

So, if localization is already standard practice — why are people concerned now? 

“The thing that makes this complicated is the idea that in a call center, they expected people to come into that office. That’s why they were building it in that region,” bethanye says. “But what happens when people are not expected to physically come into an office?” 

Should working remotely change how we feel about compensation? And if so, how? Is a globalized approach really the only ethical position? And is saving money the only motivation for all those pro localizing?   

Lower cost of living 

Perhaps the first argument that you’ve heard for a localized approach is that cost of living and expenses vary from city to city and country to country. Earning the same salary as your Bay Area counterparts while living in a small town means teammates will have vastly different lived experiences because of their purchasing power in these disparate locations. 

“If everyone is paid a standard salary, those who live in high-income areas would have less discretionary income when compared to their counterparts in lower-income communities,” Gitlab’s CEO Sid Sijbrandij said in a post outlining Why GitLab pays local rates.

Rodolphe Dutel founder of Remotive, a remote job listing site and community agrees, “As far as I’m concerned, I feel like having a localized element in salary or compensation is probably fair,” he says. “Rentals are different, taxes are different, where you live is different.”

In other words, treating two scenarios that are inherently different, the same, isn’t actually fair even though it seems like it might be. 

“We had the case happening with Facebook, for instance, that said if you’re a Facebook engineer, and you make San Francisco money, and you decide to move out to another US State or another location altogether, your salary is going to be adjusted,” Rodolphe says. “It’s a way business has been done since maybe the 60s, if you are moving to a location where you incur a lower cost of living, we’re going to be adjusting your base salary down, it’s been true in large IT companies and most Fortune 500 [companies]. As far as I can tell, your geolocation is sort of always tied to your salary.”

Amy Stewart, the Senior Content Marketing Manager at Payscale, confirms this in a recent blog post.

“Cost of living adjustments are nothing new in the world of compensation management,” she says.

“Many compensation professionals are proponents of reviewing employee salaries regularly against cost of living and making adjustments in salaries that align to changes in inflation based on the Consumer Price Index of a particular region or geographical area.” 

But just because it’s the norm doesn’t have to mean it’s what we’ll continue doing. There has been some push back to this approach, where employees and remote advocates ask questions like shouldn’t all workers get paid the same amount for the same amount of work? Shouldn’t the value they bring to the company be considered more than where they choose to live? Wasn’t that why remote work was such a perk, to begin with? 

But these questions lose their potency when using examples outside of the Bay area. What happens when a company is based in India or the Philippines or The US Midwest? Would a global approach still be appropriate in those cases? It seems far more beneficial to use a localized approach if companies are hoping to hire in more expensive areas, as sticking to the going rate of an engineer in India might not even cover the rent in Sydney or London. 

“If there’s a place where people pay high wages, it tends to attract people. And then the rents, almost by force of nature, start rising,” Sid says.

“It’s not that we want to pay you based on your rent or compensate your cost of living. We want to make sure that we pay at or above market. We found that the rent was a great way to calculate that, and it’s why there’s a rent index as part of our global compensation formula.”

Local market rate 

Market rate describes how much other employers in the same city or country are paying for the same or similar roles. It’s affected by things like cost of living as well as how niche or oversaturated the market is, in other words, how many roles need filling vs how much available talent there is. 

Most companies who employ a localized compensation approach match their salaries to the market rate (or a specific percentage above it). 

Phil Haack has an excellent example of how the market rate affects compensation.

“Imagine you’re a company in a city where the average compensation for a developer is $100,000 a year. You decide to pay $75,000 for developers. All other things being equal™, you will have a hard time hiring developers,” he says. “Good developers will flock to the companies that pay $100,000 or more.”

If you were to employ a global approach, which market rate would you choose? Is it automatically the market where your company is headquartered? Or do you select the market rate where a specific role is paid the highest to cover all bases? 

“If you’re a Silicon Valley tech company, and you say, ‘Silicon Valley is the place where tech gets paid the highest. So we’re going to set all the salaries [to a Silicon Valley market rate]’,” says Shield GEO co-founder and Director Tim Burgess.

“I wonder what that means, for example, for an accountant or a lawyer. Because if you’re an accountant, or a lawyer in New York City, or in Geneva, or in Hong Kong, you might be getting paid significantly better than a California company pays.”

However, if you increase the rate, you’re no longer tied to the market or an equitable global approach. 

“Do you just pick the highest salary anywhere in the world? Is that how you do it?” Tim wonders. 

“I guess the point I’m making is it’s not that simple. It seems simple. But if you scratch the surface, I think there are still some challenges.”

The impact on the local community and avoiding a US-centric worldview 

“For me, it has to align with our worldview,” Tim says. “Some of the decisions that we’ve made, or some of the ways that we’ve tried to evaluate it, are really sort of fundamental to how we want to interact with [our wider] community and the way we want to see the world.”

He sees his role as a leader of a company as an opportunity to have an impact. 

“It would be negligent to avoid that, or to pretend it’s not the case.”

This impact can be both positive and negative, often without realizing it, and Tim feels it’s imperative to think through potential scenarios before making any affecting decisions.

“One of the decisions that we’ve made is that we want to try to engage with countries and people in a way that is sympathetic to their local circumstances,” he says.

“That means, for example, we don’t want to go into a country and try and enforce a totally different way of thinking or acting on that country. And so fundamentally, I view paying an American salary to somebody in Sri Lanka, as imposing a different worldview on that person in that society.”

He’s quick to admit the complexity of these situations and that he doesn’t assume this has to be the only way of thinking but ultimately believes localization makes sense. 

“I think if we go into a community where there’s a big income disparity and say, ‘I’m going to pay somebody 75,000 US dollars a year to do customer support in this community. And that’s three times as much as you get to be a brain surgeon. And it’s five times as much as you get to be a doctor or a lawyer, and it’s 20 times as much as you get to be a teacher. Then what does it mean for that society?” he argues. 

“What’s the impact that you have on it? You make one person really rich, and maybe that money trickles down, maybe it filters through, and they spend it in the community, and it lifts up the community but you don’t really know.”

I absolutely agree that thinking about community impact is a vital step before entering any new market. It’s something I’d like to spend more time unpacking later in this series. But for now, I’ll just say it’s complicated. Any time a company enters a foreign market, they have the potential to disrupt the community whether they’re paying global or localized salaries. By offering income far above the local market rate, it’s much more likely that you’ll attract talent away from local jobs which could lead to loss of local competitors or an influx into your industry and away from essential roles like doctors and teachers. But to say this absolutely won’t happen if you pay a local salary isn’t exactly fair either. Especially if you’re offering perks like working from home (which is almost a given in these situations) or an international standard on benefits. 

I asked Tim if this was his motivation, why he entered international markets to begin with? Why even risk it? 

“I think there’s a baseline where we believe that globalization is generally a force for good,” he said. “I think interacting with other cultures, and understanding the wide variety of people that we have in the world is overwhelmingly positive. And being an employer who is employing internationally, I think, is a really positive thing. I also think that overwhelmingly for those communities, jobs are something which has a positive impact.”

Affordability and reduced operational costs

Of course, one of the main reasons why someone would choose a localized approach is because it costs less. 

“The entire concept of remote work started because people wanted to cut down on operational costs,” says Lawyer and Founder of All Remotely, a remote work consulting firm, Bhagyashree Pancholy.

“So, regardless of what the companies say. I think that’s one of the main reasons why they hire globally and would continue to remain that.”

By no means is it the only reason, and I think we’ve seen that there can be some ethical arguments for localizing compensation. However, it would be naive not to state its significance. 

“Of course, there are advantages to it because, you know, people in these emerging economies get to work with really good, progressive, diverse teams,” Bhagyashree says. “But as far as this question is concerned, a lot of startups that have sprung up in the last couple of years are hiring from these emerging economies primarily because of the low hiring cost.”

This reasoning is confirmed in GitLab’s compensation outline

“If we pay everyone the San Francisco wage for their respective roles, our compensation costs would increase greatly, and we would be forced to hire a lot fewer people. Then we wouldn’t be able to produce as much as we would like. If we started paying everyone the lowest rate possible, we would not be able to retain the people we want to keep.

Funds that would be reserved for salaries — necessary to compete in hot labor markets — can be redirected to areas such as research and development (R&D), acquisitions, and hiring more people.

These additional investments can be made simply by lowering a company’s overall spend on compensation, but only if a company is willing to hire in locales where a dollar goes farther than the SF Benchmark.”

Should you choose a localized compensation approach?

“I definitely don’t think that there’s a right or wrong,” Tim says of the struggle in choosing an approach. For him, and many of the others quoted here, the importance is in treating this issue responsibly. “The decisions you make here not only impact your company but individuals, the kinds of lives they lead, the kinds of houses they live in.” 

It’s clear that taking the time to carefully consider the pros and cons of each approach and the intersecting issues involved in compensation are essential in the journey towards a final decision.  

— Bree Caggiati

 

Looking for more information on how to compensate your remote employees? Catch up with the full series here!

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