Location in compensation strategies

Comp Philosophy
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As workforce is increasingly distributed and remote, the question of location-based policies is something that can be challenging for international companies. If your company is recruiting in different cities and countries, some questions arise regarding the structure of your compensation policies and ranges, and how changing they can be.

In this article, we will explore some considerations regarding location-based compensation.

Aligning on a philosophy

The first question to tackle is whether location is a factor that impacts compensation in your company.

  • Global Pay leads to a simpler compensation strategy as you will only have one set of compensation ranges across the company for every location/country.
  • Local Pay means you will have a more structured strategy with more sets of compensation ranges to manage.

There is no right or wrong answer to this, as it depends on your company’s context, your geography and activities. However, this is something that should be defined within your compensation philosophy.

Why companies take into account location?

While global pay can be convenient when you have a small team remote-first model or when you want to attract talents that value remote flexibility, it can be costly and you may not attract talents depending on your market anchor for your ranges. In addition if you are in different countries within different regions, exchange rates and employer cost can significantly vary which may not be sustainable in the long run.

Thus, a majority of companies tend to choose local pay and set specific compensation ranges for each country based on the country’s market, linked to the company’s compensation strategy.

This approach makes compensation practices consistent from your compensation philosophy, while considering the options talents have within their country.

In GitLab’s article on paying local rates, the CEO explains the reasons that drove this choice:

If everyone is paid the same role-based salary, the company would not be able to hire as many team members, and those that are brought on would not be as widely distributed. [...] If we pay everyone the San Francisco wage for their respective roles, our compensation costs would increase greatly, and we would be forced to hire a lot fewer people. And if we started paying everyone the lowest rate possible, we would not be able to retain the people we want to keep.
If everyone is paid a standard salary, those who live in high-income areas would have less discretionary income when compared to their counterparts in lower-income communities.

Again, taking your own company’s context and culture into the analysis will help determine the right philosophy.

Structuring the approach

If your compensation philosophy includes location as a factor for compensation decisions, several considerations can be taken into account.

Choose a framework

As you are considering multiple locations, your ranges can be established based on cost of living, cost of labor market or a combinaison of both.

  • The cost of living is the cost associated with providing a standard of living within a location. It takes into account items such as rent and housing costs.
  • On the other side, the cost of labor is determined by supply and demand of labor in a location. It takes into account the cost of hiring and retaining in this specific geography.

Cost of Living

Using cost of living can be easier to manage and explain to your employees, although it puts a higher risk of underpaying or overpaying as the market dynamics are not taken into consideration.

Cost of Labor

This approach puts market data at the center of your compensation framework. You will need to analyze different market data sets in order to build your ranges for each role / level.

Hybrid model

While taking more time to administer and maintain, a hybrid approach can provide more control by leveraging both cost of living and cost of labor to determine your framework.

To illustrate one approach, GitLab explains the rationale behind including the rent index alongside market data and other factors to determine compensation:

"If there’s a place where people pay high wages, it tends to attract people. And then the rents, almost by force of nature, start rising. It’s not that we want to pay you based on your rent or compensate your cost of living. We want to make sure that we pay at or above market. We found that the rent was a great way to calculate that, and it’s why there’s a rent index as part of our global compensation formula.”

Define multiple sets of compensation ranges

Depending on your company’s footprint, you may want to create different sets of ranges on a country-to-country basis first, and have the flexibility to take into account specificities.

Within the country, you can group multiple locations into tiers if your compensation philosophy focuses on market competitiveness, or use another grouping method relevant to your business.

Consider context based on roles and levels

You can decide to apply a different strategy or positioning depending on the type of role or level across locations or countries. Some of your countries may have tiered locations for some sets of roles, while others are harmonized within a same country. You can also consider harmonized rules for senior management if it makes sense for your typology of company.

Based on your company’s strategy, what’s important is that you are relevant and consistent in your approach for your business.

Refining along the way

Your location-based strategy is not set in stone, and as you gather feedbacks from the mechanics you established, some things are going to evolve. You will consider what to optimize for, the constraints and specific limitations you will be facing.

Your compensation framework should help build a cohesive process to support data-driven decisions in your context. This consistency will help foster a philosophy that is clear, explainable and structured.