By Globalization Partners
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Hiring a strong remote team is a critical part of global expansion, as it lets you access diverse markets and attract leading talent for a given position, regardless of location. Though beneficial across industries, managing a distributed team requires significant planning. One of the most important choices your company has to make is how to pay remote workers what they’re worth and a fair wage for their cost of living.
Employee compensation is not one-size-fits-all, and some methods are better suited for a specific industry or company structure than others. A few common compensation plans for remote workers are global compensation, local compensation, and hybrid models that incorporate elements of each. Use this guide for a closer look at localized compensation for remote workers and to learn what to consider before implementing this strategy for your distributed workforce.
What is localized compensation, and how does it work?
Localized compensation is pay based on each employee’s location and cost of living to reasonably cover expenses like housing and utilities. Companies may choose to implement a localized approach for a single employee relocating to an international location or as a large-scale change to keep payroll costs low.
This type of compensation is common across all industries. However, it’s especially prevalent in the technology sector because it offers companies and employees a more affordable alternative to living in expensive “tech hub” cities. With their easy access to talent, research, investors, visibility, and entrepreneurship opportunities, tech hubs are a profitable region to establish your company, but they are not always feasible for employees.
For example, housing in Silicon Valley — a leading United States tech hub — costs an average of $2,341 per month, with very few homes available on the market. Hong Kong, an emerging tech hub, has consistently ranked as one of the world’s most expensive cities.
When companies base employee wage on location, it ensures that employees’ cost of living is on equal par with how much they bring home each month. For some employees, like those living in expensive tech hubs, this means a significantly larger paycheck than employees in the same position working in a mid-range income neighborhood or suburb. Some companies use localized pay to incentivize employees to leave these expensive regions, allowing the company to reap the rewards of doing business in an established area while saving on payroll and gaining access to more diverse talent without border restriction.
Localized pay isn’t always straightforward, and a more hybrid approach can help some companies bridge natural nuances that occur when staffing global employees. Reddit, a community-based social network and forum site, announced in 2020 that it would support remote employees and allow them to live where they want, with each employee getting the same range of localized pay that they’ve scaled to match the most high-cost areas, like New York. By creating a blended localized pay approach that did not lower wages, but rather raised or matched them, they were able to establish a single pay range for all of the United States, similar to their approach in other countries.
MURAL, an online collaboration company, uses a hybrid approach to establish different living “zones” that vary from country to country, and pay is scaled to each zone, rather than specific postal codes or cities. They monitor inflation and make changes as needed every six months.
Benefits of using localized pay for remote workers
Localized pay models can entice talented employees to work for your company, giving you a competitive edge without sacrificing controlled spending. It also ensures your employees receive at least the minimum amount of pay they require to cover essential costs.
1. Your company stays competitive in every market
Localized pay can help you offer an equally competitive wage for talent spanning cities, states, and countries. Of course, being competitive includes more than just salary — it also means providing efficient benefits, paid leave, bonuses, and fostering a healthy work-life balance among employees. But being able to offer a more enticing wage may be what sets your company apart from equally reputable companies in your industry. Attracting and retaining quality employees is the backbone of good business.
Establish a competitive baseline by:
- Reviewing your current pay rates for each role.
- Comparing your base pay for each role to industry standards via research, surveys, and market data.
- Setting a pay scale with a minimum and maximum rate that reflects role importance and competitor offerings.
- Accounting for future raises and benefits, and recognizing and compensating quality employees for their hard work.
This competitive appeal can also help create jobs or make more jobs available to people who live in areas without a large job market. For example, college graduates with a technology degree can seek work and competitive pay without leaving their small, rural community.
2. It ensures your employees are cared for
Localized pay models make sure your employees have the minimum amount of pay they need to cover basic living expenses. Because no situation is black and white, flexibility is key. What is acceptable for one employee in a specific region may not necessarily be enough for another employee living in the same postal code.
Different factors can have a significant impact on the cost of living, such as:
- Family size
- Employee health
- Debt or student loan expenses
- Which part of the city the employee lives in
- Specific housing requirements
Keep in mind that localized pay is an approach or a model — not a specific amount. It’s just the minimum established pay for an employee of a specific caliber living in a particular area. Employees can negotiate for higher pay as warranted, and employers can — and should — adjust pay, bonuses, and incentives to match individual needs.
3. You have more control over spending
By analyzing and specifying the appropriate base-level pay for each employee, you have more of a micro-level view of company spending to identify areas where you cut costs and where you could invest more. Tighter financial control can help you:
- Lower overall expenses
- Improve creditworthiness
- Invest in better training or equipment
- Allocate extra funds to other departments
- Set and meet business or investment goals
- Eliminate financial drains
- Increase employee pay or benefits
- Hire more qualified talent
Labor accounts for a large portion of company spending. As of 2019, the average hourly cost for an employee in Europe was 27.70 euros, reaching as much as €44.70 in Denmark. In the United States, employees cost employers an average of 26.53 U.S. dollars per hour in 2020, plus an additional $12.07 per hour in benefits. This expense adds up for each employee but is well worth the investment for dedicated, hard workers with special expertise or talents.
Things to consider before using localized pay
Before you localize pay for remote employees, consider these factors.
1. Establish a benchmark first
Don’t start transitioning roles or teams to localized pay until you’ve established a strong benchmark or baseline to act as a starting point. Without a fair benchmark, you risk underpaying employees — prompting them to take their skills elsewhere — or overpaying them, which hurts your bottom line.
Establish a base pay amount for each department, team, and employee type by researching:
- The average amount of money a person with the same skill set and education makes with your competitors.
- The percentile they fall into compared to others in your field or industry.
- The additional value they bring to your company, like special experience, training, or skills.
- Their existing pay and production value.
One option is to use your base payment level as your core offering, then expand the package with flexible benefits that employees can adapt to their situation.
2. Flexibility and communication are critical
Localized pay does not work without mutual trust. One way to foster a sense of loyalty and trust among employees is to be open and honest with them about the process. Communicate upcoming changes to all affected employees before implementing them. Give them time to understand how it will or will not impact their pay and explain the formula or reasoning behind the calculations.
Localized pay means that some employees with the same caliber of skills and experience will receive different pay for completing the same job. This could harm company morale or foster a negative work environment if mishandled. It’s important to remember that employees are not tools of the trade but assets and people with their own needs and goals. Any change to the pay structure will cause a reasonable level of questions or concerns — be prepared to engage in those conversations and take the necessary steps to ensure every employee’s unique needs are considered.
3. Relative buying power vs. cost of living
The cost of living is different from the relative buying power (RBP) of an employee’s wages. In this context, RDP refers to how much of an employee’s paycheck actually covers necessary expenses, like utility usage, home office equipment, and rent or mortgage payment. It also refers to how inflation affects certain expenses, like those listed, and how the cost of these necessities compares to an employee’s overall income and the value of each paycheck.
What is “enough” or “fair” for one employee may not be for another, even if they live in the same affordable neighborhood. This is especially important to remember if you’re new to distributed teams and hiring remote teams for the first time.
4. Consider offsetting pay cuts
If switching to localized pay means some employees may experience a pay cut, consider offsetting that loss to make the transition easier and retain valuable employees. When Stripe, a financial company, switched to localized pay, they offered employees a $20,000 bonus if they chose to relocate from areas with a higher cost of living, but at a 10 percent cut to their base pay.
Other options you might consider include covering the cost of housing, student loan payments, or similar expenses during the transition period or offering a lump sum or periodic bonus to offset the cut and incentivize participation.
Localized pay for international workers
Localized pay for international workers can help make global expansion easier because you gain access to the best workers, regardless of where they live, and seek out those with specific cultural experience or insight. International teams also let you conduct operations in multiple time zones for maximum output.
To foster this sort of highly collaborative environment, you need a pay model that considers each country’s tax rates and laws, pension and social security policies, cost of living, and unique local considerations. Additionally, the wage must be competitive compared to others in the industry. Most countries have varying rates and standards across states or regions.
So many contributing factors make comprehensive localized pay challenging for many companies, especially those with few staff and resources to handle the intricacies. Working with an Employer of Record (EOR) is the best way to ensure you’ve considered all relevant information for each region of expansion and that you’re paying employees fairly and competitively.
Tips for determining the cost of localized pay
As you consider your company’s approach to localized compensation, remember to:
- Be consistent: Consider your company’s employee philosophy. Do you want to be known as an employer that offers the most comprehensive benefits package? A high-value home office stipend? The most competitive pay in your industry? Once you have a path that aligns with your values, be consistent in your methods and communication.
- Stay up to date: Cost of living changes frequently, based on world events, advancements, and inflation. From 1981 to 2021, the global inflation rate alone has risen and fallen multiple times, with highs as much as 12.48 percent and lows under 2 percent. Part of your localized payment model should incorporate regular adjustments to match changing global costs.
- Take it slow:Localized pay does not have to be all or nothing, and you might consider gradual changes or trial runs before implementing a wide-scale policy. Start small with a group of global remote workers, and apply your strategy for a short period to determine what you need to change and gain valuable employee feedback.
Reach global markets with help from Globalization Partners
As an experienced EOR, Globalization Partners can help you achieve global expansion by hiring and onboarding talent and maintaining legal compliance. Our human resources team offers 24/7 support for complex employee payroll and benefits management so you can focus on your daily operations.
Download our eBook, “The Complete Guide to Building a Remote Global Team,” to learn more about successfully employing remote workers and request your proposal today.