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Talent, Compensation and Remote Work
The different approaches companies are taking to compensation in a remote world
With more startups and large companies becoming open to remote work in and after the pandemic, one of the key questions they face is their philosophy when it comes to compensation based on location.
Prompted by Airbnb’s recent announcement of their remote work program, in this piece I’ll discuss the different approaches to compensation I’ve come across.
I’ll preface this piece by saying that compensation is only one factor of a multitude when considering and developing a remote work program. However, given that many people leaving traditional hubs such as SF and moving to other places are doing so partly because of the lower cost of living in them, compensation and achievable quality of life obviously plays a role in driving their decision making.
Overall, I’ve seen 3 main approaches to remote work compensation and one can think about it as a spectrum based on what geographic entity determines compensation for a given role (city/region, country, globe).
The city/region location-based approach
The typical approach today is location-based compensation, where employees are paid different amounts for a given role/level depending on the specific location (at a city or metropolitan statistical area or state level) they are based in.
Typically, the philosophy underlying a location-based compensation approach is to pay somebody based on what the market will bear for their role in their region or what will provide them a close to equivalent take home compensation as other employees in other parts of the country factoring in cost of living.
Therefore, generally the two key elements which result in different wage rates by location are:
Different “market rates” for talent in given cities/states because of supply/demand and density
Different cost of living rates in different locations (including differences in take home pay given differences in taxes)
Most companies adopted a location-based compensation approach in the past prior to remote work, and still do, even if they allow remote work, including:
Even though some of them allow remote work now, compensation for an employee for a given role is based in part on where they live.
Typically, most companies use a location adjustment multiple, with SF/NYC set at 1, and other locations set below that to adjust their “SF” comp to a different geo.
To determine the multiple, many of them take a market-based approach . For example, LA may be more expensive to live than Seattle, but thye may have the same multiplier of 0.9 because the cost of labour (i.e., market rate) may be similar in both regions.
Similarly, some companies may also rely on or factor in cost of living into determining the multiple. Although they result in similar outcomes generally, sometimes they can result in quite different multiples.
A company paying strictly based on cost of living might have a location adjustment multiple of 0.9 for London given its high cost of living. However, a company doing so based on the cost of labor may estimate a multiple of ~0.7 given that the market rates there thus far have lagged those in the US.
Buffer, for example, adjusts strictly based on cost of living, and has a 4 tiered system for the location adjustment.
High cost of living = 1 (Examples: New York, San Francisco)
Intermediate cost of living = 0.9 (Singapore & Sydney, Australia)
Average cost of living = 0.85 (Examples: Boulder, CO & Madrid, Spain)
Low cost of living = 0.75 (Examples: Bangalore, India & Wroclaw, Poland)
The one payscale per country approach
Another approach is to maintain one payscale per country or geographical area, despite there being potential differences in cost of living and market rates within those areas.
This gives employees the freedom to move anywhere within their desired country without compensation changes, and for everyone working in the same role/level in a given country to be paid the same.
The philosophy underlying this approach is that people are paid based on the contribution expected of their work, and that their choice of where to live is a personal decision which doesn’t affect that. Given differences in cost of living, tax rates, market rates, it can lead to employees having vastly different take-home compensation rates or savings rates given quality of life.
While not a very common approach earlier, more and more remote-leaning companies have been adopting this approach to signal that all employees are equal no matter where they are.
Foe example, Airbnb recently adopted this one payscale approach at a country level, meaning that all employees in the US doing the same job get paid the same, whether they’re working in SF or Nashville or Kalamazoo.
Some other companies that take this approach include:
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Again, depending on what the compensation is indexed to, this type of approach could make it especially easy to hire in certain parts while making it more difficult to hire in other parts. If a company targets benchmarking compensation to the median for a role in LA, it may be a one of the top paying companies in many parts of America, but may not be as competitive compensation wise in NY and SF. For example, Wildbit is location agnostic when it comes to compensation but benchmarks its compensation to Philadelphia.
Some companies can go beyond the one-payscale per country to define geos within which the payscale stays the same. For example, North America may be considered one geo where pay is the same, or the EU region may be considered a geo where the pay is the same.
‘The world is flat’ location agnostic approach
The third approach to compensation is to be truly location agnostic pay the same for a given role at a certain level regardless of where in the world the candidate is located.
While this is quite defensible ideologically and the most idealized approach and basically gives people the freedom to be based wherever the world they want to be without penalizing them in any way. It also in some sense assumes one market for talent with complete mobility of talent, and that expected contribution is the determining factor of compensation, not location.
In practice, however, not too many companies have adopted this approach. There are a number of reasons why this idealized approach of one global market for talent doesn’t quite work:
Immigration and visas mean that there isn’t true mobility for labor, which means that people often don’t need to be paid assuming there is true mobility
Market rates in local regions vary quite widely for a given role
Cost of living rates also vary widely from location to location
Some examples of companies that have bucked the norm and adopted this location agnostic approach are:
DAOs which often have pseudonymous contributors and are paid in tokens based on their work and contribution regardless of geographic location.
Interestingly, if a company would adopt a singular global compensation approach, depending on where they set their compensation benchmark, they be become particularly attractive or unattractive to employees in certain regions.
For example, if a company targets all employees globally market rate for a role based on what the going rate for the role is in say London, from a compensation perspective, that job might be extremely attractive to those in other parts of Europe, Asia and Latin America, but perhaps not attractive to those in many parts of America, especially SF and NYC which tend to command higher market rates than London.
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The latter makes a lot of sense when considering that people have freedom of movement and the right to work anywhere without immigration problems within the EU region.