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Location-Based Compensation

Updated: Feb 19, 2023



As remote work becomes the new normal, more companies are discovering the benefits of hybrid or fully remote teams. However, this shift also presents a range of challenges that need to be addressed in terms of formalizing remote work policies and programs, including their approach to compensation.


Redefining Your Compensation Philosophy


Office-based work was historically structured with compensation tied to a company’s physical office location. Companies with multiple locations would typically pay local rates based on each office location. For example, an employee working out of the New York office would be paid rates appropriate for their local New York market. Another employee based out of the Pittsburgh office would be paid a lower, but still fair rate for their local market.


Companies providing remote work flexibility have the ability to reimagine their compensation philosophy to support their evolving workforce. However, offering the ability to "work from anywhere" also adds complexity, as employees are no longer limited to a specific office location. Before defining your compensation philosophy, you should make sure your hiring and employee move guidelines are set so you know where employees are based, now or in the future.


Some considerations:

  • What is your “future of work” plan? Will all employees be returning to the office? Will you allow remote work flexibility? Will you allow employees to relocate to new work locations?

  • How do you define “fair compensation”? Some companies believe that employees should receive the same compensation for the same work, regardless of location. Others believe employee compensation should vary by location or cost of labor. There’s no right answer here -- each approach has pros & cons -- companies should decide which approach aligns with their values and company goals.

  • If your company already pays employees differently based on location or when they relocate, you may have a head start in establishing location-based compensation.


Three Approaches to Location-Based Compensation


Various approaches exist when considering designing their compensation philosophy.


1. Pay everyone the same no matter where they are based


Some organizations use a single rate to determine everyone’s compensation. This rate may be based on the location of the company headquarters, where the majority of employees are based, or a comparison with other markets or a national average.


The argument for this approach is that jobs (especially hard-to-fill tech jobs) are no longer tied to a location so why should their compensation? With the increasing availability of remote work options, companies are reassessing their approach to compensating employees.


PROS: Easiest to explain, manage and administer. You only need to maintain one salary range for each job. Great for small teams, especially if you are based in high-wage markets such as San Francisco or New York. This approach is also the simplest when navigating new laws around pay transparency. With one rate of pay for each job, you only need one job posting and can more easily explain your compensation philosophy to candidates and employees.


CONS: For larger organizations, paying one rate of pay adds significant costs. For example, if you were to pay everyone San Francisco or New York rates of pay, you’d be paying ~15-20% more for every job across your organization which may impact your company’s finances. Additionally, this approach can create "golden handcuffs" for employees in low-wage markets, as they earn more working for you than they would with a company that localizes pay, potentially leading them to stay at the company even if they're disengaged and unhappy.


2. Pay employees based on tiered zones


Most companies group geographical areas with a similar cost of labor into zones. Each employee is mapped to a zone, based on their location. Although there is constant media buzz around companies moving more towards a single rate of pay, Carta reported that 84% of companies still take location into account when deciding on compensation packages.


The approach for how to set tiers is flexible, but most companies start by using national data as a baseline. Here’s an example of a 3-tiered structure in the United States:

  • 115%: Add a 15% premium for cities like San Francisco, Seattle, and New York City

  • 110%: Add a 10% premium for cities like Los Angeles, Austin, Boston, Miami & Boulder

  • 100%: Use the U.S. National average data for all other cities

PROS: Provides a simple, flexible, and scalable approach to location-based compensation. Takes into account the cost of labor, but is not overly complex to manage and explain. If your company already has different pay rates across your office locations, this is likely the easiest model to transition to. Remote employees can be quickly mapped to the closest zone.


CONS: This approach, although simple, may result in overpayment or underpayment for some roles. It’s not as exact as a fully location-based model and could result in compensation being over- or under-market value. However, creating a wider pay range can often account for these differences. There may be times when you have to make exceptions to your pay policy to close and retain hard-to-fill talent. To overcome this, different tiers can be created for different departments, such as higher premiums for tech roles versus non-tech roles. Just be mindful of pay parity issues so there is internal equity.


3. Use granular location-based compensation for each market


Companies that prioritize precision will use local market data to differentiate pay for employees across different locations. One of the most well-known fully distributed companies, GitLab, maintains its approach to paying local rates.


Setting up a localized pay structure can either be done by:

  • Creating custom pay ranges per market, using local market data from a credible source

  • Using an algorithm to determine an individual’s compensation

  • Numbeo is a free site that can help inform your client's cost of living adjustments. It's not perfect as it's crowd-sourced data but helpful if you don't have the time or resources to do a detailed study with a compensation expert

  • You can also purchase a geo-differential report from a reputable source such as Willis Towers Watson for North America or other regions

PROS: Best for companies trying to maximize cost savings. More precise compensation means you’re less likely to under or over-pay employees in their local market, leading to a more consistent standard of living across regions. Team members across numerous regions will have a similar amount of discretionary income since their rate of pay takes into account specific cost of labor differences. This approach also allows the company to attract top talent from both high-wage and low-wage regions, resulting in a larger pool of candidates to choose from.


CONS: Most difficult approach to support and manage, since you’re establishing individual rates of pay per city. This gets complex fast and requires dedicated team members to manage the program to ensure your pay data is accurate and consistent. If you’re purchasing data for every location, this can get costly fast. Consider this when/if purchasing market data. As you get more granular with market data, the quality of the data in each local labor market can be limited, inaccurate, or lag behind what’s actually happening in that market. Be prepared that candidates may push back or negotiate their local rate of pay. Compliance with recent pay transparency laws can also be more challenging using this approach.


Tools


There are many tools to help you standardize and automate location-based compensation and provide high-quality market data. Here are a few of my favorites:

  • ChartHop - single source of truth for your people data and operations, including headcount and compensation planning, requisition approval and ATS integration, people analytics and insights, performance management, org chart, employee profiles and directory

  • Kamsa — software and consulting firm providing job leveling and real-time market compensation data across 60+ countries and 2,000+ jobs

  • Pando — the first competency-based performance platform designed for iterative, continuous, and on-demand employee progression. Brings transparency and accountability to career development so every employee has a clear and achievable path. Structured and scalable platform for career frameworks to structure, measure and accelerate employee growth

  • Pave — compensation planning, band building and management tools with easily accessible market data so companies can plan, communicate, and benchmark in real time

  • Radford — most widely used global database for private and public company data; requires considerable time and resources to participate and interpret data; data is often lagging in-the-moment market trends versus more modern solutions


Executing Your Plan


Once you’ve evaluated each approach and selected which approach is right for you, it’s time to execute your plan.


Some considerations include:

  • Hiring strategy - what locations can you hire new talent? Make sure Hiring Managers and Recruiters are aware of where they can and cannot hire.

  • Employee moves - where are current employees allowed to relocate to? Will compensation be adjusted up/down when employees move or will they be “grandfathered” into their current compensation?

  • The financial impact - what impact with this new compensation strategy have on your compensation budget? How will it impact the company financially?

  • Consider total compensation - remember that salary is not the only consideration. Total compensation consists of salary/wages, bonus programs, stock grants, benefits & perks. Remember to take all factors into consideration when revising your compensation philosophy.

Some companies may choose to make more gradual changes over time if adjusting compensation as employees relocate to areas with a lower cost of labor. This helps to reduce the financial impact on employees and helps with retention.


Communication


When making changes to compensation policies, you should communicate early, often, and clearly.


Some best practices are:

  • Document your compensation philosophy and location-based compensation approach. Once you’ve aligned on your approach, you should document your Compensation Philosophy and share it transparently with managers, employees, recruiters, and candidates. No matter what approach you take, be clear on how individual compensation is determined. Share what data sources you use to inform your market ranges. The more transparent you are, the better.

  • Provide advance notice of any changes. Give employees as much notice as possible (at least 60+ days) regarding your compensation policy and how it may impact them. Employees need to have time to plan accordingly as changes to their compensation could have big impacts on their personal finances and future plans.

  • Over-communication is key in a remote company. Often people need to hear things five times for them to sink in. Repetition is key. Use various communication channels to update employees on your compensation approaches, such as HR systems, company intranet documentation, All Hands meetings, email, and messenger.

Compensation is often a company’s largest operational expense. It can also be a very emotional topic for employees. Be proactive in setting your future compensation approach, and remember to listen every step of the way!


_______________________


Want to dive deeper into your compensation philosophy?


Here are three ways I can help, whenever you’re ready:

  1. Schedule an "Ask Me Anything" micro consulting session to get 1:1 advice

  2. Buy a Remote Work Playbook to leapfrog your progress

  3. Advisor to your leadership and people team to build a strong people operations foundation and best-in-class employee experiences

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