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?
There are a few ways to go about this: You pay everyone the same, independent of location; You pay people according to local rates; or you make up your own scheme.
TL;DR: Pay well to hire great people
What companies are doing today
Companies that do not hire remotely, tend to pay local rates. They are competing for talent directly with other local companies, and have to adjust rates to be able to hire great people.
Companies that hire remotely have an interesting challenge. On one hand, they are competing globally. They can hire anyone from anywhere, and will have to pay well enough to retain them. On the other hand, the amount of great remote jobs is still smaller than the amount of local jobs, and arguably the remote jobs are in higher demand - job seekers are very often willing to take a pay cut to work remotely.
Basecamp - same everywhere
Basecamp pays the same rate, independent of location, standardized on the San Francisco market. In fact, they pay top 10%.
This is an incredible way to go about paying people. It gives people the security that they can move anywhere, and still have the same income. Given the income is very high, it’ll allow their employees to truly live anywhere
Buffer - cost of living adjusted
Buffer pays people dependent on the cost of living in a particular location. They have three levels (low at 75, average at 85 and high cost of living at 100), which adjust a salary based on 50th percentile San Francisco market. They have a nice calculator to show this, plus a public page of every single salary in the company.
A salary calculator is often problematic. It shows transparency, but can also be a blunt instrument if there isn’t sufficient fidelity to it. There is a good chance that candidates will not apply to work at your organization if they aren’t confident they can get paid well.
I suspect that this is one of the reasons why Buffer has many levels for each particular function, it gives them greater flexibility to adjust individual compensation. Unfortunately, at cost of clarity. There are few employees at Buffer with the same function and level.
That said, Buffer is completely transparent about salaries, which is a great function to force a system that everyone agrees with - or that filters out people that wouldn’t agree with that system.
GitLab - salary calculator based on local market
GitLab has a very complex salary calculator. 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 SF benchmark, used by both Buffer and Basecamp. GitLab keeps this list public, find it here. That is modulated by location: a long list of many locations with an estimate of local rates, in comparison to SF rates. This list is also public, found here.
Similar to Buffer, GitLab further modulates by level and experience. They add a bonus for employees that are contractors as they have to cover more costs themselves and don’t get the standard benefits employees get.
Having a complex calculator with at least two variables that need constant maintenance (location factor and benchmark salary) is very time consuming. It has the same problems as a more simple calculator, like Buffers, with as advantage a higher fidelity.
In reality, having the other variables (level, experience) allows GitLab to compensate in a range and adjust where necessary. When writing this article, I figured GitLab would make very regular changes to its location factors. In actuality, they do this less than once a month, however role benchmarks are changed weekly.
The cost of relocating
I have not heard of an actual instance of compensation being reduced after relocating, but it’s something that has to happen if you use a salary calculator as an organization. GitLab has a clearly written policy on this. Among other things, it says:
you should first obtain written agreement (from your manager) when planning a relocation
GitLab says it will reduce your compensation when you move to a market with lower rates, and that you need written agreement of relocating.
I’ve seen several people at GitLab relocate, but haven’t heard of compensation being reduced in practice. It’s understandable that GitLab asks for a written agreement before you relocate, but it’s interesting to consider this for a remote position: you’d expect to be more location independent.
What is fair?
It is a job market. Supply and demand meet each other at the right price. As an organization looking to hire remotely, our suggestion is to pay competitively. That means you need to do as well, or better than both local companies and other remote organizations.
Today, as a distributed organization, you’re not competing with Basecamp yet (they have limited positions and get thousands of applications for each, understandably). But to hire the best people, paying just slightly above market rate in otherwise cheaper markets is no longer sufficient.
Location independent pay
Especially in intense online debates on paying remote employees, it’s often said that companies are paying for the value that a certain employee brings to the company. Therefore, everyone should be paid the same, independent of location.
Ubiquitous location independent pay is unrealistic as long as there are people willing to accept lower-than-highest rates. Most companies are for-profit, and will therefore optimize for spending less if they can (and do so without hurting retention).
Should you use a salary calculator?
I certainly wouldn’t create another one. Using the calculator of GitLab and Buffer as a baseline is a cheap way to get to a good starting point. Remember that these companies put significant resources in maintaining them and ultimately use these tools as much for marketing, as they are for actual use.
As a remote worker, how do I know what to accept?
Accept a salary that you believe is fair. 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 working in a local company, if that company is in San Francisco or New York. For almost all other locations, there is a good chance you’ll earn more.
Don’t tell the company you’re going to work for what you were previously earning. That puts you in a poor negotiation position. Your best bet is to get an idea of what your potential colleagues are earning, either through asking the company or the employees directly.
How to hire the best people
Pay them better than anyone else, and provide them with meaningful, challenging work. This is the same for remote, as it is for non-remote companies.
Remote work is an amazing benefit, but if you don’t pay people well, they’re not likely to stay for very long.
This is where I plug our own stuff:
We’re working on bringing salary information to jobs on remote.com. We make it easy to find great people, and are working on making it super easy to fully employ anyone, anywhere.