December 19, 2022
Many companies that give their employees the freedom to work from anywhere in the world are faced with the same question: How much should they pay these professionals who will work remotely from other countries?
Maria is the CTO of a Spanish technology company based in Barcelona. Yesterday, one of her programmers, Julian, announced to her that he is leaving the company to work for a California company. He will do so without moving from Barcelona, but he will be paid a US salary. This is not the first case. Since the beginning of the year, it is rare for a month to go by where she does not face a similar situation, although those who steal her workers are not always American companies. There have been programmers who have gone to Swedish, German, and Swiss companies. In some cases, like Julian’s, they go while earning the same salary that these companies pay their programmers in their countries of origin, while in other cases the offers are halfway between the salaries they currently earn in Barcelona and what they would earn in the countries where the companies that hire them have their headquarters. The problem is that, even in these cases, Maria’s company is unable to match the offers received by its engineers, resulting in a surge in turnover in the development department.
Meanwhile, in another neighborhood of the city, Ernesto, also a software engineer, is amazed at how quickly he has found a job he can do 100% remotely. In two weeks, he will start working for a Canadian company that, like the company that hired Julian, follows the policy of applying the same salary scales to all its employees regardless of where they reside. Ernesto took his time, but it was just a matter of registering on three websites specialized in remote work, RemoteOK, Remotive, and We Work Remotely, and the next day he was already participating in selection processes with two companies. Finally, he will be able to fulfill his dream of moving to the Canary Islands to enjoy his two passions: technology and surfing. Because why do we have to choose between the jobs we love and the places we love if now we can combine both?
These two stories are inspired by real events. They illustrate how the market for certain professional profiles is globalizing due to the combined effect of the difficulties many companies in their countries of origin have in finding the professionals they need and the generalization of remote work among certain categories of workers.
The fact that there are now jobs that people can do from anywhere as long as they have a good connection is an opportunity not only for qualified people to do these jobs, like Julian and Ernesto, but also for many employers who discover that they no longer have to limit themselves to looking in their city, region, or country to find people with the skills profile they need, but rather their “hunting ground” is now the world.
Although all companies that come to this conclusion face the same question: how much will they pay these professionals who are going to work remotely from other countries? Do they avoid headaches and pay them the same as they would pay people with similar jobs and profiles in the country where their headquarters are located? Do they try to find out what the market salary is for such a profile in the country where the person resides? Or do they start from the salaries they already pay in the country where their headquarters are located and adjust them based on the difference in cost of living between the two countries? What is the best solution?
What we see in the market is that companies have very diverse opinions on this matter. And it is normal, because although the proportion of companies that opt for not complicating their lives and paying people based on the value their work brings to the company regardless of where they reside is growing, there are arguments for and against the three alternatives.
Even the opinions of the workers are very divided. For example, in the 2022 State of Remote Work report produced by Buffer, we find that 46% of the remote workers surveyed are in favor of their remuneration being linked to their city of residence, while 54% are against it. Although the truth is that not all workers are clear on what practices their companies follow. To the question of whether their company’s remuneration is linked to the city or place of residence, 40% respond yes and 38% no, but the remaining 22% say they are not sure.
Back to the arguments companies use to justify their decisions one way or another, the first thing is to put aside the argument of avoiding comparisons. There will always be comparisons. People will compare their net salaries, their gross salaries, what they pay in taxes at the end of the year, the house one person lives in compared to the apartment where the other person lives, the price of their children’s school, a car, or a bottle of wine…
Option 1: Salaries based on the cost of living in the country of residence
That said, some companies that adjust the salaries they pay their employees based on the cost of living in their place of residence justify this practice because doing otherwise would be unfair to people who must work from the office, especially if those offices are in an expensive city, because their purchasing power would be less than that of their colleagues who are lucky enough to be able to work from anywhere. Others, although they do not usually admit it, what they seek is to avoid global salaries that encourage their remote workers to move “too far” from the place where the company has its headquarters to gain purchasing power. In any case, the most frequent goal pursued by companies that apply different salaries to their remote workers depending on their place of residence is to save costs, since when a company establishes a global salary structure, the usual thing is to equalize upwards.
Option 2: Salaries based on what is actually paid by other employers in the country of residence
This practice is shared by companies like GitLab, which also pay different salaries depending on where their remote workers reside, although, instead of determining them based on the cost-of-living differential, they take market salaries in each country as a reference. Some companies that choose this alternative argue that, although there is a correlation between salaries and the cost of living in each country, this correlation is far from perfect. To begin with, salaries vary at a slower pace than the cost of living. In addition, the relative differences between what companies pay different profiles also vary between countries, because of the particularities of their economies and labor markets. To this must be added that the official figures of the cost of living of each country are calculated based on an average “shopping basket” that may not coincide with that of their remote workers, that may also vary a lot depending on their family situation, their lifestyle, their interests, and hobbies. Finally, and not least important, another advantage of using market salaries as a reference instead of differences in the cost of living is that instead of working with net salaries, we will work with gross salaries, saving us a few headaches.
Although determining what the market salaries are is not an easy task either. It is true that today we have different technological platforms that allow us to know almost in real time the evolution of market salaries, but before we need to decide in which segments of the market we are going to focus. In the whole market without making distinctions? In what companies in that country pay their remote workers? In what foreign companies pay their remote workers who reside in that country? And what about people who are already working remotely from that country for companies from other countries that pay the same to all their workers regardless of where they reside? Do we take them into account or not to determine what the market remuneration is? And we cannot forget that there will be countries where there is no market for certain profiles. What do we do in those cases?
Option 3: Global salaries regardless of where employees reside
Third, there are companies, such as Basecamp, that decide to apply the same compensation policy to all their remote workers regardless of where on the planet they decide to work from.
“Pay for people’s skills, not their address. If your salary is $100k at Basecamp, your salary is $100k no matter where you choose to live. Pick your continent, your country, your city, your town, village – that’s your pick. You’re still the same person we hired”; Basecamp CEO Jason Fried wrote on Twitter in May 2020.
Regarding the reasons that lead some employers to opt for this practice, there are companies that argue that the type of professionals they are looking for value the possibility to work from anywhere in the world. Whether to be able to follow their partner if they must move to another country, to be able to be close to their elderly parents who live in another city or country, or simply to be able to enjoy a nomadic life without having to give up their job. A phenomenon that is worth paying attention to in a context in which, according to a Manpower report, three out of four companies have difficulty finding the talent they need. Apart from that, if there are companies that have already adopted this practice, it will be more difficult to compete for the best professionals in the market if we do not do the same.
Those who opt for paying global salaries recognize that the salaries they pay are higher than if they were adjusted based on the cost of living in each city, or on market salaries in each country, and this has a cost. But that vacancies remain unfilled for longer, suboptimal hiring decisions, or voluntary turnover of employees also have a cost. As does the administrative work that requires regularly adjusting the salaries that the company pays in each country, or each time one of its employees changes their place of residence (and verifying that remote employees are residing in the city where they claim to live!).
Anyway, it should be noted that companies that follow this practice are generally companies in the digital products and services world. Those companies normally sell the same products and services at the same price worldwide, so the value contribution of people working in the same role with the same level of performance is the same regardless of where they work. It is a different story if the company is dedicated to products or services that are sold to local consumers with a certain purchasing power, or for export to other markets where production costs are higher. But when we talk about digital products and services that are sold at the same price in all markets, what is fairer? Paying remote workers based on the value they contribute or based on the place where they choose to live?
Yet, there are also companies that opt for intermediate solutions. Like Hubspot or Airbnb, which set salary scales for each country but then people are free to work from anywhere in that country and they will earn the same salary wherever they work, even if the cost of living is different. Or Buffer, which in February 2021 reduced its salary scales from three to two, so that most of its employees are paid according to what they call the “global” band, while those who reside in especially expensive cities such as San Francisco, London or Zurich are paid according to what they call the “high” band.
Global wages and social impact
Some companies take this debate on the salaries of their remote workers to the field of equity, inclusion, and social impact. Although there is also diversity of opinions here. Some companies believe that if they hire remote workers in developing economies and pay them global salaries, they can contribute more to improving the standard of living of the communities where those people live, but there are also those who think that a different salary policy in different countries can be an incentive for business units to hire more professionals in emerging economies where salary costs will be lower.
In any case, a question that will have to be closely followed is to what extent this trend can contribute to greater polarization of the labor market between professionals who will have the privilege of being able to work remotely for companies from any country in the world at global salaries, and those who are engaged in face-to-face occupations that will earn what local markets determine.
In summary, the debate is served. As we have seen, there are arguments for and against the different alternatives. However, there is one thing that, as always when we talk about people management practices, we need to keep in mind when deciding whether to apply global or local salaries to our remote workers: what culture do we want to build in our organization.
Image by Ingmar Zahorsky under a Creative Commons license