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 competitive and capable of attracting top talent.
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 question of location-based versus location-agnostic pay has evolved and become more prominent as companies increasingly shift to remote work. Big names like Google, Facebook, and Slack have embraced remote—and, with it, location-based compensation.
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.
Here are some essential must-do's for location-based compensation.
Build an overarching compensation plan
Money is important, but it’s just one part of your company's compensation strategy. When considering how to take care of your employees and reward their hard work, there's a lot more to think about than salaries alone.
How you want to reward your employees speaks to your company culture. Your compensation philosophy should be tailored accordingly. In addition to base pay, a total compensation strategy should also consider premiums and allowances, health coverage, and retirement planning support.
There are also extra perks to consider. For example, you might allow employees to take part in the company's success with an equity plan. Other extras that employees value include flexible leave and working hours, learning and development opportunities, parental leave, and wellness support.
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.
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 forget to communicate your vision
Transparency has become an increasingly hot-button topic when it comes to compensation conversations. In the past, the societal norm (at least in the U.S.) has been to avoid discussing money matters at work. Now, workers have realized that secrecy around pay tends to disadvantage them.
It's likely in your interests to embrace transparency surrounding compensation and benefits. Buffer is just one example of a company that's reaping the rewards of a transparent pay policy. Others include Whole Foods and SumAll.
Be transparent with your team and wider company regarding compensation. Your openness will win your colleagues’ trust. Explaining your reasons for location-based pay with local labor market data on wages, for example, can help justify a geographic pay differential. Be honest with your company across locations.
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.
Location-based pay is tricky to get right
Location-based compensation is complex to implement, especially on a global level. Even seasoned companies can struggle to implement a worldwide geo pay scale fairly. Luckily, there are tools available to help when implementing salary by location.
For example, Oyster’s Total Rewards program helps you take care of employees around the world. We provide access to experts to help you align compensation with local economic conditions. Our total rewards solution also helps you proactively address comp and benefits gaps, improve compliance, and enhance competitiveness.
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.
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