How to Set Salaries for Remote Employees
Deciding salaries for remote employees can be a challenge. As an employer, you have a hard choice: set your remote pay by a global standard, according to local salary levels or using a compensation calculator that includes location.
The sad truth: There’s no right or wrong. Now, as remote work becomes the norm, it’s important to revisit your compensation strategy and determine the best method to establish a fair remote pay structure for your global workers. To help you with this tough choice, our experts at NoHQ have put together this guide to remote compensation structures and other key benefits beyond salaries.
When in doubt, check out even more resources on NoHQ that will help you ace salary setting and other remote work challenges.
Traditional Standards for Setting Salaries
Setting salaries has always been a tricky topic for employers. Traditionally, employers will look carefully first at their employees’ full suite of skills, experience and education.
However, external factors have always been a part of this process, too. Elements such as industry demand for this work, national salary benchmarks and location have played a role in salary standards:
- Skills and expertise
- Industry demand
- National benchmarks
These days, the areas above are still considered standard, save one: location. As more and more workers take on remote roles, employers are trying to figure out what to do about location. Should they include it in salary setting calculations, or not?
It’s important to remember that location, which we’ll look at in detail below, is just one potential factor in compensation.
Do Remote Workers Get Paid Less?
Many believe that remote workers get paid less because of the current trend of cutting pay for remote workers. Google is the most notable example, but other companies have given the same ultimatum: come back to the office, or we’ll dock your pay.
However, remote workers may actually make more than their in-office counterparts. According to analysis by PayScale, remote workers earn 8.3% more than non-remote workers doing the same job, with the same experience.
Of course, this statistic can be deceiving. It’s possible that remote work is a privilege that employers reserve for their highest performers.
In any case, you don’t need to worry that remote work automatically translates into a lower salary. It will depend on your role and the company you work for.
Three Strategies to Set Salaries for Remote Employees
Overall, there are three strategies that companies use to set salaries for their remote employees: global salaries, local salaries and a location modifier. Local salaries are currently the most popular method, though global salaries and location modifiers have been gaining popularity.
While there’s no right or wrong answer here, every compensation strategy has its pros and cons. Let’s go through some of the key points for each below.
1. A Global Standard
In one of our recent surveys, 32% of remote employees and founders said that their employer is paying them by a global standard, either based on a headquarter location or the salary levels of a specific city.
The most prominent example of this is Basecamp, where employees are paid at the top 10% of the market rate in San Francisco, even though none of the offices or employees are in San Francisco themselves. Whether someone decides to actually live in a more expensive place like San Francisco or takes their extra cash somewhere to the Midwest or Eastern Europe – these savings are theirs to keep.
As an employee, there's nothing to be mad about here. But even as an employer, this has its advantages. It gives your employees the possibility to work from anywhere and doesn't involve any of the pain of recalculating salaries on a monthly basis whenever somebody moves. There are no unbalanced dynamics arising from unfair salaries – everyone gets the same level of salary, only dependent on role and experience.
While more expensive (usually), this also gives companies a great competitive advantage in hiring markets. In industries where hiring is becoming exponentially more difficult – for example in software and tech – offering this location independence and higher salary levels are attractive to even the most experienced talent on the market.
According to our survey, the majority of companies still opt to pay whatever salary is local. This makes sense – you're paying people what they'd usually earn in their home country or region. This doesn't hold the same competitive advantage as paying everyone top prices, but remote hiring alone is often enough to convince really great talent to join you.
Often, companies are able to pay above market rates anyways. For example, if a company from a higher cost-of-living place hires someone in a lower cost-of-living place, they will typically pay 10%, 20% or even 30% above market rates. This can be an amazing salary perk but often depends on the circumstances.
The big downside? Payroll is about to get a lot more complicated! If you are paying local salaries, it's also up to you to take up new contract negotiations anytime someone moves. If someone doesn't agree to those changes, you really only have two choices: pay above-market or void the contract. Both are probably not in your best interest.
Plus: You need to have contacts and sources to reliably understand market rates in each country. If you don't, you run the risk of offering too little and losing talent, or offering too much and creating an unbalanced environment again.
Obviously, the great thing is that there's really nothing left to interpretation with this method. People are paid local rates at a fair level. It makes sense and there's no place for confusion.
3. A Location Modifier
Companies that have opted for location modifiers in the past have created a repeatable, public competitive advantage by being transparent about their salary formulas and sometimes even publishing it! But, what exactly is a location modifier?
If you are using a location modifier, salaries are not exactly up for negotiation. There's a formula (either public or private) that allows HR to plug in your info and get back a number. With a location modifier, location is just a part of that calculation.
A popular example of this is Buffer and their Transparent Salary Calculator. Based on the cost of living (in this case low, average and high), they apply a multiplier to the base salary. That means that people doing the same job with the same experience may get a different salary, but things are transparent and clear – and there's always the possibility to move and push the formula in your favour.
The big advantage of using a framework like this is that there's no room for imagination. People know how much their peers earn and what generates the salary calculation. This also helps bridge the pay gap – if people know how to earn more, they are able to optimize it for their situation, if they wish to do so.
Risks of Location-Based Salaries
Ultimately, your company must choose what’s best when it comes to setting salaries. However, it’s important to discuss the risks – both financial and otherwise – of location-based salaries.
As you analyze your compensation strategy, keep in mind that location-based salaries can produce unwelcome consequences, such as:
- Pay may feel unfair to your teams and backfire. You should think carefully about how your compensation structure will impact your teams. If perceived as unfair, you may lose key talent.
- There’s a tendency to widen the gender gap. Women are choosing remote work in higher numbers than men, which means remote pay drops could have a greater impact on them, leading to a wider gender gap.
- It could reduce the talent pool. Competitive pay is always a must for your top talent. Be sure you’re not unintentionally pushing out your best workers.
- Urban productivity may suffer. Experts have studied how cities have a productivity advantage (due to stable internet, access to resources, etc.). For this reason, it’s important that your remote workers have all the tools they need, regardless of location.
- You’ll need to renegotiate contracts within local law. If you decide to change your compensation structure, you may be legally obligated to renegotiate contracts. This can be a challenging and time-consuming task.
- It’s more complicated to calculate. Whenever you opt for location-based salaries, you’ll need to invest in accounting expertise and time, which can be costly.
You can avoid these pitfalls by intentionally choosing a compensation strategy. If you do opt for location-based salaries, try to support your remote employees to minimize these potential risks.
How to Handle the Compensation Conversation
Botching the compensation conversation can negatively shake up your talent pool. Regardless of the structure you choose, build a better relationship with your remote employees through these actions:
- Be transparent. Communicate with your remote workforce about how compensation will be calculated. Knowing what’s going on behind the scenes can help your remote employees trust you.
- Apply changes for future, not current, salaries. If you’re worried about ruffling up your current teams, you may consider applying changes for new hires. Ultimately, this could cause some internal conflicts when new workers understand they’re being paid differently, but it could be a short-term save.
- Listen to employees. Find out what you workers think about the compensation structure and ask to hear their opinions. Getting the pulse on their feelings can help you navigate the right choice for compensation.
- Conduct ongoing salary research. If you choose location-based salaries, it’s vital that you research local markets regularly. Otherwise you may err when calculating salaries and cause mistrust with your employees.
Half the battle in compensation conversations is clarity: if you’re transparent and open with your employees, you’ll likely get less backlash.
Beyond Salaries: Allowances and Benefits for Remote Employees
Setting salaries is just one aspect of your remote workers’ compensation. Don’t forget about other key areas that can make the difference in your workers’ daily lives. In particular, you can:
- Create a remote-friendly benefits package. Make it clear that you value your remote employees by offering remote-friendly benefits such as flex work and mental health stipends.
- Allow for performance-based bonuses. Bonuses based on great performance can focus your teams on their work and build loyalty through reward and recognition.
- Invest in your employee’s development through upskilling, education and travel stipends. Developing remote employees is vital to keep them motivated. Try offering stipends for upskilling, courses or conferences.
- Give allowance for remote-relevant items, such as home office equipment, internet, software, security, etc. Your remote teams need the right equipment. Investing in their internet connection and relevant computer programs can set them up for success.
While benefits packages can be expensive, they’re an important investment in your remote teams. As you think about compensation, be sure to revisit benefits too.
Building Employee Loyalty When Money’s Not on the Table
Finally, you can also build value on your remote teams in other ways, especially if there’s no money on the table. Employees everywhere care about how much they make, but their day-to-day work experience also matters. Try building intangible value by fostering:
- Work-life balance
- Work culture
- Career opportunities
Often these areas require little investment to get great pay-off. For example, encouraging work-life balance is a biggie: being flexible and human costs you nothing, yet your employees will feel grateful for it.
Fairly Compensate Your Remote Employees
Setting salaries for remote employees is no small feat. There’s no one right way to do it and your company should carefully analyze these three compensation structures, whether a global standard, local salaries or a location modifier.
Overall, we recommend using a holistic approach to salaries, benefits and company value to find out what compensation strategy will keep your top talent and facilitate great remote collaboration in the long run.
At NoHQ, we’re staunch advocates for fairly compensating remote employees. You can get more info and tips in our global hiring guide.