The do’s and don’ts of location-based compensation

As an employer, you want to make sure you're compensating your employees equitably—after all, fair pay is the cornerstone of any compensation package. While it's great to provide benefits like stock options and health perks, at the end of the day, your workers need cash to pay their bills.

When deciding how much to pay your employees, one critical question to ask is whether it makes more sense to provide geo-based or location-agnostic compensation.

With salary-by-location pay models, companies adjust salaries according to where an employee lives. This allows companies to save on labor costs while still offering salaries that are locally competitive and capable of attracting top talent.

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The alternative to location-based pay is a location-agnostic pay model, in which every worker is paid the same rate for the same job, regardless of their location. Location-agnostic pay models can be national or global.

Why Is There a Debate About These Pay Models?

The location-based pay debate exists because remote work has forced companies to choose: pay everyone the same regardless of location, or adjust salaries based on where employees live. This question has become more prominent as companies like Google, Facebook, and Slack embrace distributed teams.

For example, Google gave employees the option to work from home permanently. At the same time, they announced a geographic pay differential: If an employee's work-from-home location was more than an hour from Google's offices, and that location had lower labor costs, the employee's pay would be lowered accordingly.

But not everybody has embraced the concept of salary based on location. Other companies, like Reddit and Zillow, have opted for location-agnostic pay.

The main takeaway? There's no right or wrong way to decide. There are pros and cons to both location-based and location-agnostic pay, which we discuss in greater detail in our podcast on the topic.

When deciding which option to use, your overall compensation philosophy will be the most important point to consider. Geography is just one factor to think about when designing a compensation plan.

While location-based pay isn't something every company adopts, it can be a useful tool to predict what salaries your employees expect in their respective locations. That said, it's important to get it right. By following the do's and don'ts of salary based on location, you can implement this approach effectively and fairly.

Choose Your Location-Based Pay Approach

Before you get into the weeds of salary data, you need to decide on a core approach. There isn't one right answer—it depends on your company's size, goals, and philosophy. Most companies choose from one of three common models:

• Pay based on a single national or global rate: You pay everyone in the same role the same salary, regardless of where they live. This model prioritizes internal equity but can be expensive and may not be competitive in high-cost-of-living areas.
• Pay based on local market rates: You adjust salaries for each employee based on the market data for their specific city or region. This is the most common approach for managing costs and staying competitive locally, but it requires more data and administrative effort.
• Pay based on geographic tiers or zones: You group locations into a handful of tiers (e.g., Tier 1: San Francisco, New York; Tier 2: Austin, Chicago; Tier 3: all other locations) and set a pay range for each tier. This model offers a balance between the simplicity of a single rate and the precision of local market rates.

The Do's

Here are some essential must-do's for location-based compensation.

Build an Overarching Compensation Plan

Money matters, but it's just one piece of your compensation strategy. Your approach to rewards reflects your company culture and should align with your values.

A complete compensation plan includes:

• Base pay: The foundation salary for each role
• Premiums and allowances: Location-specific adjustments and role-based bonuses
• Benefits: Health coverage, retirement planning, and wellness support

Don't forget about additional perks that employees value:

• Equity plans: Let employees share in company success
• Flexible benefits: Time off, flexible schedules, parental leave
• Growth opportunities: Learning programs and career development
• Wellness support: Health and wellness initiatives

Use the Latest Tools and Data to Stay Informed

A well-designed compensation package will allow you to take care of your employees and keep up with market demands. You want to make sure your compensation offering is competitive so you can continue to hire top talent. Otherwise, you risk losing quality job candidates and workers to competitors.

Make sure you have the latest data available regarding salary expectations according to region, level, and role. You can use tools like Oyster's Total Rewards, which provides self-serve insights and access to experts, to stay up-to-date on current economic conditions and make informed decisions about new job offers, promotions, and pay raises.

You also want to consider how you'll communicate your own compensation data. For inspiration, look at a company like Buffer, which is known for its strong background in pay transparency.

Consider Currencies, Inflation, and Global Trends That Affect Location-Based Pay

Salary expectations according to region, level, and role are a starting point when considering your compensation strategy. However, location-based pay models also need to consider larger macroeconomic trends—like inflation—which may hit certain regions more than others, impacting how far a remote worker's pay goes.

If you're hiring globally, you also need to consider the value of different currencies and how this impacts the value of an employee's paycheck. Plus, there are national laws and customs regarding practical details, like payroll cycles, which may differ between countries.

Finally, you want to make sure that you aren't running afoul of any local labor laws as you design a global location-based compensation and benefits package. For instance, you want to confirm where you can distribute certain rewards—like equity—and where you can't. Our guide to compliance issues can help.

The Don'ts

Successful location-based compensation isn't just about doing certain things right. It also means avoiding the mistakes outlined below.

Don't Stray From Your Own Compensation Philosophy

The most important point in all of this is to make sure you've taken the time to develop a unique compensation philosophy that's true to your brand values—and to then stay true to that philosophy.

Analyzing data and scoping out what the competition is doing can help inform compensation decisions, but shouldn't lead them. Your pay philosophy should take priority. The same goes for external consultants and advisors. Stick to your guns and don't let trends in compensation—like crypto-based compensation—sway you.

For example, Google's decision to embrace location-based pay may not have been met with joy from all workers. However, the company is still recognized for top-tier benefits, including flexible work schedules and, for those who are on-site, massages and free food. The tech giant has refused to compromise on compensation.

Don't Ignore Geographical Inequities

Transparency isn't just about making data available—you also have to think about how people will perceive and internalize that information, especially in the case of salary inequity. Certain regions may command higher or lower salaries. You don't want to ignore this or try to sweep it under the rug. Be clear about the differences and address them directly.

This is why it's so important to have a clear, comprehensive compensation policy and philosophy in place and to communicate it. Again, this means considering more than salary alone. There are also benefits and perks to consider, from health and wellness plans to retirement support.

For instance, local laws might prevent you from offering certain perks, like equity, in all regions. As a result, you may choose to award workers in those regions annual cash bonuses. This helps ensure a more equitable geographically based pay scale.

At first glance, workers may wonder why some get a cash bonus, and others don't. It's on you to explain how what seems like unfair treatment at first is actually part of an equitable compensation plan that doesn't leave anyone out. This is just one example of how geographic pay differentials for remote employees can be explained.

Communicate Your Location-Based Pay Strategy

Here's the thing about compensation strategy: how you communicate it matters as much as the strategy itself. Secrecy breeds mistrust, so transparency should be your goal.

Your communication should cover:

• Your philosophy: Why you chose this approach and how it aligns with company values
• Your data sources: What market information guides your decisions
• The business case: How this approach helps the company and employees

When employees understand the logic, they're more likely to see location-based adjustments as fair.

Pay transparency isn't just trendy—it's smart business. Workers have realized that secrecy around pay tends to disadvantage them, and companies like Buffer, Whole Foods and SumAll are seeing the benefits of transparent pay policies.

Be open about your compensation decisions across all locations. When you explain your reasoning with actual market data, geographic pay differentials become easier to understand and accept.

Address Fairness and Equity Concerns

Let's be honest: location-based pay can feel unfair if not handled carefully. An employee in a lower-cost area might feel penalized for where they live. It's your job to address this head-on.

Fairness in a global team isn't about paying everyone the exact same number. It's about providing equitable opportunity and a consistent standard of living relative to location. Frame your compensation strategy around this principle. Explain how adjusting for local markets allows you to offer competitive pay everywhere, rather than being over-market in some places and uncompetitively low in others. Reinforce that total rewards—including benefits, equity, and growth opportunities—are designed to create a fair experience for everyone, regardless of their address.

Getting Location-Based Compensation Right

Implementing location-based compensation is a strategic decision that requires a clear philosophy, reliable data, and transparent communication. It's not just about managing costs—it's about building a sustainable and equitable framework for a distributed team. By following these do's and avoiding the don'ts, you can create a policy that supports your business goals while treating your team members fairly.

Navigating global compensation doesn't have to be a source of anxiety. With the right tools and expertise, you can build a competitive total rewards package with confidence. If you're ready to design and deliver fair, localized compensation without the guesswork, you can start hiring globally with a partner who understands the complexities.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.