3 approaches to location-based pay (and the pros and cons of each)
Today’s workforce is global and more remote than ever – a quarter of all working days are now done remotely, which is 5x more than in the pre-Covid days (Institute for Fiscal Studies, 2023).
In turn, this means that more companies than ever are hiring across multiple locations, with employees working across Europe and beyond.
Which brings with it the question of whether to localise compensation – and if so, how?
There are three approaches that companies take to location-based compensation:
- Fully localised pay: salaries are adjusted depending on the specific country or city an employee works from
- Location tiers: a tiered system to reflect how typical salaries differ across the globe
- Location-agnostic pay: all employees are paid the same way, based on the company’s HQ location.
Each has its own pros and cons, and different companies opt for different approaches depending on what’s right for them.
This variance is clear from Ravio's data too, with a fairly even split between companies who do (41%) and don't (39%) localise salaries for their remote employees (the remaining 20% do not have any remote employees).
Ravio data, September 2023
Whatever approach your company chooses, the most important thing is that you do have a considered, informed approach on location as part of your overall compensation framework.
Let’s take a look at these three approaches in closer detail.
“When it comes to choosing between global or local pay rates, both have their upsides and downsides. The question is: which one suits your organisation's setup, challenges and current phase the best? But here's the deal – don't just let it happen. Make a deliberate choice.”
Approach 1: fully localised salaries
Salaries can vary significantly across cities and countries.
Let’s take a look at a couple of examples.
For a P3 Software Engineer the market median salary (50th percentile) varies across different locations in Europe:
Ravio data, September 2023
And the same goes for a P3 Account Executive:
Ravio data, September 2023
There are many reasons that these variances can occur, like:
- Germany has a particularly strong, high-growth tech sector which could explain why the average salary for software engineers in the example above is higher
- Germany also has higher taxes than other European countries
- Rent in Sweden is 32% less than in the UK (numbeo) which may contribute to lower salary requirements.
And the list goes on.
A company with a location-based compensation approach would use this market data to adjust employee salaries based on their location – which might be at a country or a city-specific level.
In practice, that means using salary benchmarking tools and applying your salary band structure to all of the locations you hire in.
Stay up-to-date with the latest compensation trends and insights with our monthly newsletter 💌
The pros
There are two main arguments behind choosing to pay your employees in line with local market rates:
- Compensation fairness: the variances in global salaries are taken into account which means that people with similar roles and responsibilities are able to afford roughly comparable standards of living – ensuring your pay is competitive globally.
- Payroll costs: ensuring that the company doesn’t under or over pay for talent by paying all employees the same way regardless of local market rates.
“At Zivver we have chosen to pay based on location, as we want to be able to compete with the local market. We even go further than the base salary to localise benefits too. Some benefits are offered to all employees regardless of location, such as our unlimited holidays. However, some benefits are locally important, and you’ll miss out on the market if you don't offer them, such as pension in the Netherlands or PMI in the UK. It’s a continuous balance between setting up a standard set of benefits for everyone and offering local benefits to be an attractive employer to your employees.”
The cons
- A more complex compensation framework. All salary bands need to be location-specific, which increases the number of salary bands and so the complexity for the team. Plus, it can raise tricky questions e.g. should we reduce the salary of an employee relocating from London to Bucharest?
- Reliance on inaccurate cost of living calculators. Localising pay is hard, and many companies rely on cost of living adjustments. These are inherently inaccurate because of the number of nuanced factors that go into global salary variance on top of cost of living – global compensation benchmarks are more objective when accurately localising compensation.
- Fairness vs perceived fairness. Whilst fairness is an advantage of localised pay, it may not seem fair to an employee who has a significantly lower base salary than their peers because of where they live.
- Rewarding location over value. There can be a temptation to hire employees in locations with ‘cheap’ salaries e.g. hiring software engineers from emerging markets like the Philippines to cut costs, which can make it difficult to manage remote teams on different time zones and to build a strong company culture.
Approach 2: partly localised salaries – a tier system
Another approach to location-based compensation is a tiered system:
- Locations are grouped together into tiers based on market data on salary competitiveness
- A geographic pay differential is applied to the salary band for a role based on the location tier an employee is based on.
Let’s return to our earlier example of varying global salaries for a P3 software engineer to give an example of how this could be implemented:
Another common approach is a two tiered system to differentiate between salaries for employees based in an HQ location and those working elsewhere – regional offices and/or remotely.
The pros
- Balancing competitive compensation with complexity and cost. A tiered system reduces the complexity of location-specific salary bands, whilst still enabling a level of fair and competitive compensation across a global market.
- Compensation aligned with company culture. A tiered compensation system can help to reflect company values and culture on remote working e.g. Housing Anywhere use a HQ vs remote pay system to incentivise employees to be based in the company’s HQ location.
“We provide a local pay strategy as it incentivises remote working team members to relocate to the Netherlands. Although we work hybrid, there is a benefit when team members spend time with each other in person. Our data shows that local team members are more engaged, happier, and have a longer employee life cycle.”
The cons
The issues highlighted above under the cons for fully localised compensation still stand here (aside from the complexity): reliance on inaccurate cost of living calculators, perceived fairness for employees, rewarding location over value.
The other downside is that a tiered approach can reduce the fairness and competitiveness of salaries compared to a fully localised approach – there’s so much variance in salaries across different countries and cities that it’s difficult to capture that in a simplified tier system.
Approach 3: location-agnostic salaries
Some companies choose not to adjust salaries for different locations – often known as a location-agnostic approach.
Typically all employees are paid based on salaries in the company's HQ location.
But, a location-agnostic approach could also be used to maximise market competitiveness by paying all employees based on the location with the highest typical salaries – like Buffer, who are aiming to shift to paying all employees based on San Francisco salary benchmarks.
The pros
- Simplicity: a location-agnostic approach keeps compensation simple, with salary bands built for a single location only.
- Rewarding value over location: it can eliminate any location bias, helping companies to focus on salary offers based on business value-add rather than reducing costs by opting for a lower-salaried location.
Zillow, for instance, in 2021 announced that they were changing their approach to reduce the emphasis on location-based compensation, with a key reason to: “prioritise performance and scope ahead of location when setting salaries and not limit pay growth for any employee based on where they live.”
The cons
A location-agnostic approach means compromising either on cost or fairness.
If you pay all employees based on salaries in your HQ location then it’s likely some employees will be underpaid relative to salaries in their location – and your employees in locations with high costs of living will feel unfairly paid.
If you pay all employees based on the location with the highest salary then you will have an incredibly competitive proposition, but your payroll costs will skyrocket.
Which approach is right for your company?
As we’ve seen, there are arguments for and against each approach to localising (or not) compensation for a global workforce.
Ultimately, what’s right for your company will depend on your overarching compensation philosophy – how compensation aligns with company values and business priorities.
The most important thing is that you do have an agreed approach on location – to ensure that you’re prepared for all of those compensation decisions that arise when hiring talent globally and remotely.
Knowing how salaries currently vary across the locations that are relevant for your company is the best place to start – and Ravio can help with that.