Working from home is quickly becoming the new normal across the world.
As we covered in our remote work trends for 2021, it’s estimated that nearly 42% of employees in the US are working remotely full-time, and with companies like Facebook now offering employees the opportunity to request to work at home permanently, it’s clear that the modern workplace is drastically changing.
A major benefit when becoming a remote company is the ability to hire from anywhere in the world, however, this also means to make the necessary changes to effectively recruit, set remote friendly employee benefits, salaries and on-boarding protocols.
One of the biggest challenges is establishing the best way to pay remote employees in a way that’s fair for everyone independently of their location, and helps to retain a happy remote workforce.
We’ve already seen how Facebook and Twitter have said they will cut the pay of employees who choose to relocate away from their head offices, while other tech companies also located in the expensive Bay Area, like Reddit announced that they would not cut the pay of their employees regardless of where they choose to live.
As Montse Cano, digital marketer says, cutting the pay of employees all of the sudden due to their new remote working reality, can be demoralising to employees:
“What I have learnt not to replicate is paying/ threatening with paying less, bc travel isn’t going to be part of the daily routine. That literally says: I don’t care about your skillset nor how well you adapt to our culture.”
Given that salaries and benefits are traditionally based on data surrounding a company’s local area, how can you make sure that you’re paying your employees a fair wage? We wish we could say that there was an easy answer to this question, but as with most salary discussions, there’s not.
In this article we go through the different approaches, the criteria and the advantages and disadvantages based on different circumstances, to help you to set the best way for you in your particular scenario.
- Why Remote Salaries Are Complicated
- 3 Primary Approaches to Remote Salaries
- Remote Salaries Approaches Pro’s and Con’s In Summary
Why Remote Salaries are Complicated
As we mentioned earlier, salary calculations are typically based on a ton of data surrounding a company’s home location, with the cost of living in a certain area being a major part of this. While factors like a professional’s experience, level of responsibility, and education don’t change based on location, others do.
For example, entry-level software development positions might be more competitive in a city where there’s a university that’s world-famous for its teaching in that field. However, these positions might be less competitive elsewhere.
In the labour market, the supply and demand of skilled professionals will always affect salaries. When employees are more at risk of finding employment with another firm, salaries will undoubtedly become more competitive to reduce the risk of losing skilled employees.
The problem that remote working introduces to the salary equation isn’t just that the cost of living differs drastically depending on the employee’s location. Rather, it’s that the supply and demand of skilled labour on the labour market is significantly more competitive when you open the doors to remote employees.
One of the biggest reasons why remote salaries can vary so much relates to an economic theory known as “urban productivity”, or how productivity can vary depending on location. This doesn’t just come down to the cost of living, but other factors like access to high-speed broadband, the quality of that infrastructure, and even local laws and weather conditions. So, for example, an employee based in the centre of London is more likely to be productive than someone based in rural Derbyshire.
That, of course, all changes when you factor in international workers, which we’ll touch more on shortly.
3 Primary Approaches to Remote Salaries
With all of that in mind, there are three main options when it comes to paying a fair salary to remote employees, and all of which have their advantages and disadvantages.
Again, there’s no simple solution to this problem, and there’s no real one-size-fits-all approach that every company should adopt. Instead, you should carefully consider the options in front of you and how these align with your company’s pay philosophy and employee retention strategy.
So, let’s go over these three approaches and what they bring to the table.
1. Universal Salary
A universal salary is a popular approach to remote salaries for good reason. It follows one extremely simple concept – if your work is location independent, your salary should be, too. This is how the team at Basecamp pay their employees because they believe that equal work should receive equal pay.
David Heinemeier Hansson, co-founder of Basecamp says:
“Our target is to pay everyone at the company in the 90th percentile, or top 10%, of the San Francisco market rates, regardless of their role or where they live. So whether you work in customer support or ops or programming or design, you’ll be paid in the top 10% for that position.”
This means that when you set salaries for your remote workers, every job title is paid the same amount, regardless of if they live in a high or low cost-of-living area.
This, of course, has a ton of benefits for you as a company. By setting a single wage, it saves you a lot of time in figuring out adjustments for the cost of living and tracking your employee’s locations. This means that you’ll be able to attract employees who live a nomadic lifestyle or tend to move home frequently, without the hassle of having to update their salary every time they do.
It’s also one of the fairest ways to pay your employees as their salary isn’t based on their location. Because salaries are often seen as a representation of how much an employee is worth to a company, paying employees less solely because of their location can be demoralising and come across as unfair. If everyone with the same job role is paid the same, it also minimises awkwardness between employees.
“We go with roughly London rates regardless of where they (or we) are based – on average, high, and fair for everyone. Our people are our biggest asset after all.”
A universal salary is also a good strategy for improving the diversity of your workforce. Given that people may not be able to change location, whether that’s to another city or to another country, you can still hire top talent regardless of where they come from.
However, the one major downside of a universal salary is that it can be also unfair in some circumstances. If someone’s living in a low cost of living area, but are paid at the same rate as someone in a more expensive location, it can end up with two employees on the same salary having varying different living conditions.
For companies based in low cost of living countries, it’s also extremely difficult to set universal salaries that are competitive in high cost of living countries. In these cases, they may find they struggle to attract top-level remote talent because those employees can be paid more closer to home.
2. Cost of Living Salary
So, is the option of a cost of living salary any better? Well, in some instances, it can be.
A cost of living salary is where employees are paid based on their location which, we admit, is a controversial notion. However, that’s not to say that it can’t work well in certain circumstances.
First of all, as we discussed above, a company based in a low cost of living area will struggle to attract talent from more expensive locations if they set salaries based on their local area. However, by adjusting for the cost of living, you get the same amount of “purchasing” power in the local labour market as you do anywhere else.
Adjusting for the cost of living also means that, in cheaper areas, you can make savings on employee salaries without their quality of life suffering. In most cases, this can balance the books between salary differences based on location.
“Researching the cost of living for the candidate’s geographic area – not just paying based on the salary standards for company “headquarters.” $60k in Tennessee is much different than $60k in California!”
However, adjusting salaries can also come with some downsides in certain circumstances. Employees who live in cheaper areas may feel like they’re not as valued as those who live in more expensive countries or cities, which can lead to them being less engaged at work and harbouring negative feelings towards their team, their manager, and you as a company.
Plus, are you going to cut someone’s salary because they move to a cheaper area? Because, if that’s the case, then you can expect employees to have a less than favourable relationship with you and your company if you do.
This option for remote salaries also means that you’ll need to spend a significant amount of time and resources to adjust salaries for the cost of living individually.
However, this can be done: Buffer follows this approach and have a calculator on their website that shows interested candidates how much they would earn as an employee, and they break that information down by the base salary and cost of living adjustments.
Buffer adds a “Cost of Living Multiplier” in their salary formula:
“We use data from Numbeo to figure out which band applies for each teammate. For high cost of living areas we pay 100% of the San Francisco 50th percentile, average is 85%, and low is 75%. We figure out each teammate’s geographic band by comparing the cost of living index of a teammate’s location to the cost of living index in San Francisco.”
It’s important to note that it’s not simply a case of adjusting your employees’ salary for their cost of living based on a certain location but also based on their profession. Each area, whether that’s a town, city, or district, has its own labour market and conditions where some vacancies may be easier to fill than others. If you’re working from a simple cost of living adjustment calculator, then you can end up in a situation where you’re offering significantly less than a local company because you haven’t adjusted your salary offer dependent on what else is available for candidates.
So, you’ll need to have a system in place where you consider the market data for each location holistically and adjust salaries accordingly. This can take a lot of time and labour to do correctly, particularly if your company has hundreds of employees.
The other challenge you have is tracking employee location and adjusting salaries when they move. The question becomes when is a salary change triggered, and why? How far does an employee have to move before their salary changes? If you get this wrong, again, you could end up underpaying your employees because you don’t understand the conditions of the area.
Finally, you’ll also have to have a system in place to adjust employee salaries. GitLab has done this with an employee salary calculator too, which takes into account factors like cost of living and whether someone is a contractor rather than an employee:
However, this will need to be rigorously designed, consistently maintained, and ideally have a team of employees to keep it running.
3. Headquarters Salary
A headquarters salary, or national average salary, is where you set your company’s salary by your local area or the national average cost of living.
If your employees live in locations with a similar cost of living, this process certainly simplifies having to make adjustments based on it, and also means that all of your employees are being paid fairly.
“So I think we are lucky in that we get to blend the benefits of universal pay and headquarters pay being based in California while eliminating much of their downside. We specifically don’t want to pay SF prices for a physical location and talent. But we do want to pay highly competitive salaries nationally. We can’t compete with free VC money, but do want to attract the top talent we can with higher than market wages for an agency. In fact we have several people who make it a point to take advantage of that to their financial success by living in low cost areas because it allows them other important things in their lives. But now I’m just preaching to the choir about remote first SEO agency work :)”
However, the issue you will come across with this strategy is that your local area can restrict your access to remote talent. This is less of an issue if your company is based in London, but if you have employees living somewhere cheaper like Barcelona, but you might struggle to attract employees who live in more expensive locations, like New York.
So, this leaves you with two options. You can either hope you find talent in less expensive areas, which is entirely possible, or you can make cost of living adjustments for people living in higher cost of living areas. But, then you’re back at the same problem you’d be facing with a full cost of living salary – do you cut their salary if they move somewhere cheaper? Will that come across as unfair to your other employees?
How to Pay Fair Salaries for Remote Employees: In Summary
We can’t end this article by telling you which option is the best way forward in all scenarios, since as you have seen they have all advantages as well as disadvantages in certain situations, and at the end, the best thing for your company will depend on your pay philosophy, the size of your company, and many other factors.
“Before switching to remote working, we spent a few years learning from the way both Buffer and Basecamp run their businesses. When the day came, we chose to follow Buffer’s approach to remote salaries because we felt it was fair to everyone. On top of salaries, we also cover health insurance, contribute to everyone’s pension and offer unlimited maternity/paternity leave, regardless of location. Our goal is for everyone to be able to live the life they want to live without worrying about their money, their health or their future.”
As Gisele mentions above, beyond salaries you should also think about a full remote friendly compensation package, that includes benefits and perks. We’ve covered this before in a guide featuring top benefits & perks to offer to employees in a remote work era that you might want to take a look to identify those that would better fit to your own scenario too.
To wrap up and help you with the decision, here’s a summary of the different options you’ve got available so you can assess for yourself what’s the best approach in your case:
- Equal pay, equal work independently of location
- Allows employees to move location without fearing pay changes
- Opens the door for a more diverse workforce
- Minimises awkward conversations with employees who move to cheaper locations
- However, it’s likely that you will end up under-paying and over-paying in some cases
Cost of living salary
- Gives employees the same purchasing power regardless of location
- You can potentially hire from a more diverse workforce
- Cheaper salaries for some areas balance more expensive ones in others
- However, it can leave employees feeling less valued and it’s time-intensive to calculate
- The salary is set based on the headquarters location, so equal pay, equal work
- Simpler and good if most of your employees work from within the same country or locations with the same or similar cost of living
- However, you might struggle to attract talent from areas with a higher cost of living than yours
We recommend that you take the time to look over these options and don’t make any snap decisions. As with anything involving salary changes, the wrong decision can easily cost you the respect of your employees, and can even result in top talent leaving your company.
So, make sure you understand all of the pros and cons of each option in front of you and, if you’re in any doubt, take your time.
Did you find this article useful? Take a look at:
- A Guide to Asynchronous Communication: What it is, How it Works and Why it’s Key for Remote Work Success
- How to Recruit and Hire a Remote Based Team For the First time
- How to Organize Remote Team Building Activities
- How to Insure a Remote Based Team
- How to Establish Successful Remote Work Policies as a New Remote Company
- Work From Home Productivity – 10 Tips, Methods and Apps to Improve your Remote Productivity
- How to Avoid Work From Home Fatigue: Causes & How to Overcome It