The "Cost of Living" differentiator in remote work salaries is a huge discussion point when it comes to the hiring strategies of remote companies. While some companies pay a globally universal salary, others decide to apply a 'cost of living' differentiator. Same job, different pay. Is that fair?
The "cost of living" factor
The cost of living factor is a coefficient that is determined by – as the name suggests – the cost of living in a certain place. This factor is then applied to the base salary for a position, which is usually determined by a range of other factors such as experience, team, position and education.
Many companies are using this cost of living factor to provide fair salaries across the world. Buffer even goes as far as to publish this coefficient as part of their salary calculator. In practice that means that the Level 2 Engineer in Brooklyn earns 100% of the salary, the engineer with the same experience and position in Barcelona only receives 85% of that. Or: the freshly hired Software Engineer from NYC suddenly may make the same as the 'veteran' from a little town in Eastern Europe.
No surprise that this may lead to discussion and sometimes quite heated arguments.
The case for a universal global salary
Many folks share the opinion that in a remote company that is location independent, salary should be location independent too. That makes sense, after all you don't want to get penalized for living where you enjoy it the most.
A global salary level makes sense for a lot of businesses. It abstracts the location of workers away and saves you some time and effort with that: Even if folks move, are nomading or moving from place to place, they always earn the same. It also gets rid of the awkward situation mentioned before. You are getting paid based on your experience and output, and not based on where you live!
The issue with a cost of living factor is also to get it right. How do you measure cost of living? Solely based on rent prices? Cost of living isn't something universal, it's highly personal and individual. Furthermore, the cost of living often determines how and where we live, and vice versa. In some sense, it's a chicken-and-egg problem: If you didn't make much, you need to move to a cheaper place, your cost of living becomes lower, so companies pay you even less? That's not right.
Furthermore, it discriminates the folks that can't live anywhere else (and at this point a great thank you to Sam Ferree for bringing this point up). A zip code should not determine how much you make, unless you can change it easily. It also prevents discrimination from hiring managers. If hiring from the US or from Asia don't make a financial difference anymore, it can lead to more objective decisions and therefore more diversity and inclusion.
The case for a 'Cost of Living' factor
Most well-known remote companies are opting for a cost of living factor, and there is a good reason why. Simply said: global salaries may be unfair for one side of the spectrum or the other. Many companies opt for San Francisco salaries as their base salary. Without a Cost of Living factor, that means that folks in San Francisco receive their usual salaries that they would get anywhere else too, but for someone in Germany – a place where the average pay of a Software Engineer is about a third of the one in San Francisco – this is the offer of a lifetime.
Measured based on buying power, the person in Germany know has a significantly better position than the person in San Francisco. This might be fair based on the absolute value of the salary, not so much based on the buying power though.
There's another side of the coin as well. If a company is based in Germany and decides to hire based on those local level, it is not tempting to work there at all if you are based in San Francisco. That limits a company's potential of hiring and diversity.
Adjusting salary based on location can give remote companies the opportunity to provide higher buying power for everyone equally, meaning that thanks to these tradeoffs and savings for employees in 'lower cost' countries, they can pay everyone salaries e.g. 20% over the average pay. That seems fairer than giving one party a lot more local buying power than the other.
While it can come with some more effort to keep track of people's locations, it may be less accomodating to nomads and frequent movers, it does ensure that everyone on a team profits from the same amount of buying power and with that often quality of life, and that seems fair.
Seriously, we won't be able to give you the absolute answer to this issue, and it is largely something that depends on how you want to run your business and build your team, but here's a quick overview.
A globally universal salary allows you to:
- distribute a globally fair and universal salary to everyone
- minimize effort to keep track of nomads and frequent movers
- create a fair environment for folks that have or want to live in a low-cost location and way (for various reasons)
- hire from anywhere and not worry about the cost
- minimize awkwardness and envy between team members
Locally adjusted salaries allow you to:
- Enable the same amount of buying power anywhere
- Re-invest savings into higher overall salaries
- make it as tempting to work from you in high-cost areas, as well as low-cost areas
The final decision is up to you.
- Remote.com: "Compensation for remote employees"
- Sam Ferree via Dev.to: "Why I think "Cost of Living" pay for remote workers is BS"
- Flexjobs: "How Companies Set Salaries for Remote Jobs"