How to calculate compensation for remote employees
by Job on 2019-09-10
If you can employ anyone, from anywhere, what should you pay them? What is fair?
To calculate compensation for remote employees, you have a few options. You can pay everyone based only on their experience and role, regardless of location. You can also consider cost of living to adjust pay for your remote employees based on where they live. If neither option sounds appealing, you can make up your own formula to determine remote worker compensation.
No matter what you do or where you hire, one overarching principle remains the same: pay well to hire great people. With global employment solutions now allowing companies to hire top talent all over the world, you cannot offer poor pay and expect to attract the best workers. When making your calculations, be sure your strategy keeps your salaries competitive.
What is the state of remote employee compensation today?
Companies that do not hire remotely may believe they only have to compete with other local businesses for local talent, but they are mistaken. Local operations do compete for talent with other local companies and set salaries accordingly. As more industries begin to welcome global talent, however, fewer businesses depend solely on local workers to meet their needs. That not only means businesses of all sizes must learn how to pay remote workers fairly, but also that small businesses now find themselves competing against global employers for their own local talent.
Companies today must be open to hiring workers outside their own neighborhoods, but doing so presents its own set of challenges. Today's businesses, even small ones, can compete for the best employees in every country. A young design firm in London can hire remote workers in South Africa, while a SaaS company in Mexico City may employ remote workers in India. Any business can hire anyone from anywhere, provided the business compensates its remote teams appropriately.
The number of remote jobs remains lower than the number of local jobs, but after the COVID-19 pandemic, many companies that previously did not offer the flexibility of remote work began to do so. Over the last year, workers have become accustomed to the advantages of working remotely. As we found in our Global Workforce Revolution Report, many jobseekers are willing to take a pay cut to work remotely, and most workers would move to a new region or country if they could do so without negatively affecting their work prospects.
Different companies take different approaches to this challenge. Let's look at a few examples.
Basecamp: Pay the same salaries to everyone, everywhere.
Basecamp simplifies salary calculations by paying everyone the same amount based on seniority level. All junior programmers make the same amount, as do all senior customer service representatives, and so on. Basecamp sets its salaries to the 90th percentile of the San Francisco market, so people who work at Basecamp are compensated very well.
This strategy guarantees Basecamp the ability to handpick top talent from around the world. Standardization of Basecamp salaries across levels of seniority also allows the company to consider raises versus promotions in the same conversation. The obvious downside is the considerable expense. San Francisco is one of the world's priciest markets for talent, and paying remote employees on the high end of the San Francisco scale gets expensive quickly.
Buffer: Adjust remote employee pay based on cost of living.
Buffer famously publishes the salaries of every person who works at the company. This commitment to transparency allows people who would like to apply to the company to get a good idea of what their salary might be if they were to apply.
Unlike Basecamp, Buffer pays its people differently depending on where they live. Buffer's salary calculator provides a quick and easy way for companies and individuals to see what Buffer might pay a person in a certain position. The calculator uses a base salary for each role and multiplies by the person's cost of living. Base salaries are set at the 50th percentile of the San Francisco market.
Salary calculators like Buffer's are nice because of their transparency, but they are not always the best approach. Highly qualified candidates living in areas with low costs of living may use the calculator and decide not to apply because they could make more money elsewhere. Even if Buffer would be willing to pay someone more, the existence of the calculator could dissuade top talent from applying in the first place.
Buffer understands this challenge, of course, which may be why the company creates so many different levels for each type of position. On Buffer's salary publication chart, you can see a variety of different levels for engineers, customer advocates, and others. These levels make it difficult for outside candidates to assess exactly where they would fall in the hierarchy, limiting the utility of the calculator.
That said, Buffer's commitment to transparency is a value in its own right. By creating a system with which everyone agrees, Buffer automatically filters out people who may not share the company's values.
GitLab: Create an original salary calculator.
GitLab has a complex salary calculator for remote employees. They use the following formula:
SF benchmark x Location Factor x Level Factor x Experience Factor x Contract Factor x Exchange Rate
Notable in here is the San Francisco benchmark, which is also used by both Buffer and Basecamp. That benchmark is multiplied by location-specific data, which GitLab collects from a variety of sources to ensure accuracy. GitLab publishes the full strategy behind its remote employee compensation calculator online, so anyone can see and understand the process.
Like Buffer, GitLab further modifies salary calculations by level and experience. They add a bonus for employees who are contractors, as contractors have to cover more of their own costs and do not receive employee benefits.
GitLab's formula guarantees accuracy and transparency in salary calculations, but maintaining a complex calculator with at least two variables that need constant maintenance (location factor and benchmark salary) is very time consuming. This public formula has the same problems as Buffer's simpler calculator but enjoys the advantage of higher fidelity in its calculations.
In practice, including other variables (level, experience) in the formula allows GitLab to compensate in a range and adjust where necessary. When writing this article, I originally thought GitLab would make regular changes to its location factors. In actuality, GitLab recalculates location factors annually with smaller iterative changes throughout the year.
Accounting for remote worker relocation costs
At companies with location-based compensation, a worker's pay may change when the employee moves to an area with a different cost of living. GitLab's policy on relocation, for example, is to require employees to receive written permission from a manager when planning to move.
Many companies claim they reduce compensation when employees relocate to areas with lower costs of loving. In practice, however, such salary reductions are not always performed to the letter of the law. Forcing someone to take a pay cut to move home could sour the relationship between the worker and the company. This is an argument in favor of location-independent pay, or at least one in favor of unwritten leniency for employees who choose to move.
There is also the question of what happens when an employee moves from a place with a lower cost of living to a place with a higher one. Companies that enforce pay cuts must also provide pay raises if they want to stay true to their calculators. Employee movement can be a tricky thing in remote compensation, and practice does not always match policy.
Is location-independent pay for remote teams the answer?
In the debate over remote employee compensation, defenders of location-independent pay scales usually argue that companies pay for the value the employee brings to the company and therefore pay should be based on role and skill, not location. In truth, location-independent pay remains unrealistic for most companies. As long as people in the world are willing to accept lower-then-maximum rates in areas where salaries are below the top tier, companies will always have some leverage in setting salaries to local rates. Companies seek profits, and as such will optimize spending if they can do so without harming retention rates.
Should you use a salary calculator?
After years of experience with GitLab, I certainly wouldn’t create a new salary calculator. Companies looking to create their own pay scales should use the calculator of GitLab and Buffer as a baseline and work from there. Remember, these companies put significant resources in maintaining their calculators. For these companies, remote employee salary calculators are just as useful for thought leadership and marketing purposes as they are for determination of employee pay. Whether a calculator makes sense for your business depends on the level of experience you want to attract and the amount you can pay people without straining your financials.
What salary should skilled remote workers accept?
Remote workers evaluating offers should live by a simple rule: accept the salary that seems fair to you. When you start negotiations, you should have a figure in your head that you’re happy with. If the offer you get is way off, and there is little room to move that, weigh your options. You’ll likely earn less working remotely than you would working for a local company if that company is in San Francisco or New York. For most other locations, there is a good chance you’ll earn more than local companies offer.
Do not tell the company where you are currently negotiating what you were previously earning. That puts you in a bad position. Your best bet is to get an idea of what your potential colleagues are earning through independent research. Consider asking the company directly what other employees in your position earn. Again, companies should be honest about potential compensation while offering salaries that are both competitive and fair.
What is fair for remote employee compensation?
Ultimately, the global talent pool is a job market. Supply and demand meet each other at the right price. As an organization with deep experience in employing remote workers, both for ourselves and on behalf of our customers, we encourage remote-first organizations to prioritize the competitiveness of their compensation packages. That means you need to do as well or better than both local companies and other remote organizations if you want the best of the best.
Companies like Basecamp are rare, which is why Basecamp gets thousands of applications for every open position. Remote work will continue to grow in popularity and necessity, however, which means companies will continue to push the upper limit to build better teams. To hire the best people, paying slightly above market rate in otherwise cheap markets is no longer enough.
How do companies hire the best remote talent?
Pay them better than anyone else and provide them with meaningful, challenging work. This is true for remote and co-located companies alike. Remote work provides incredible benefits and flexibility, so much so that many people are willing to take a pay cut for the privilege. However, if you do not pay people well, they're not likely to stay for long.
Need help making an offer to a new employee? We can help. Remote takes care of payroll, benefits, taxes, and compliance for your company for one low flat rate. No matter where you hire, we can help you pay and manage your international team. Contact us today to learn more about our global employment solutions.