If you can employ anyone, from anywhere, what should you pay them? What is fair?
To calculate compensation for remote employees, you have a few options. You can pay everyone based only on their experience and role, regardless of location. You can also consider cost of living to adjust pay for your remote employees based on where they live. If neither option sounds appealing, you can make up your own formula to determine remote worker compensation.
Buffer, Basecamp & GitLab all take different approaches
How do other companies compensate their remote workers?
Remote is fully transparent about how we compensate our team. As a fully remote, globally distributed company with hundreds of employees in dozens of countries all around the world, we have faced every conceivable challenge related to remote worker compensation and have created a system that works. Different companies take different approaches. Here are a few different compensation philosophies practiced by other global companies:
Basecamp: Pay the same salaries to everyone, everywhere.
Basecamp simplifies salary calculations by paying everyone the same amount based on seniority level. All junior programmers make the same amount, as do all senior customer service representatives, and so on. Basecamp sets its salaries to the 90th percentile of the San Francisco market, so people who work at Basecamp are compensated very well.
This strategy guarantees Basecamp the ability to handpick top talent from around the world. Standardization of Basecamp salaries across levels of seniority also allows the company to consider raises versus promotions in the same conversation.
Buffer: Adjust remote employee pay based on cost of living.
Buffer famously publishes the salaries of every person who works at the company. This commitment to transparency allows people who would like to apply to the company to get a good idea of what their salary might be if they were to apply.
Buffer’s salary calculator provides a quick and easy way for companies and individuals to see what Buffer might pay a person in a certain position. The calculator uses a base salary for each role and multiplies by the person’s cost of living.
Salary calculators like Buffer’s are nice because of their transparency, but they are not always the best approach. Highly qualified candidates living in areas with low costs of living may use the calculator and decide not to apply because they could make more money elsewhere.
GitLab: Create an original salary calculator
GitLab has a complex salary calculator for remote employees. 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 San Francisco benchmark, which is also used by both Buffer and Basecamp. That benchmark is multiplied by location-specific data, which GitLab collects from a variety of sources to ensure accuracy. GitLab publishes the full strategy behind its remote employee compensation calculator online, so anyone can see and understand the process.
Like Buffer, GitLab further modifies salary calculations by level and experience. They add a bonus for employees who are contractors, as contractors have to cover more of their own costs and do not receive employee benefits.
GitLab’s formula guarantees accuracy and transparency in salary calculations, but maintaining a complex calculator with at least two variables that need constant maintenance (location factor and benchmark salary) is very time consuming.
Accounting for remote worker relocation costs
At companies with location-based compensation, a worker’s pay may change when the employee moves to an area with a different cost of living. GitLab’s policy on relocation, for example, is to require employees to receive written permission from a manager when planning to move.
Many companies claim they reduce compensation when employees relocate to areas with lower costs of living. In practice, however, such salary reductions are not always performed to the letter of the law. Forcing someone to take a pay cut to move home could sour the relationship between the worker and the company. This is an argument in favor of location-independent pay, or at least one in favor of unwritten leniency for employees who choose to move.
There is also the question of what happens when an employee moves from a place with a lower cost of living to a place with a higher one. Companies that enforce pay cuts must also provide pay raises if they want to stay true to their calculators. Employee movement can be a tricky thing in remote compensation, and practice does not always match policy.
Is location-independent pay for remote teams the answer?
In the debate over remote employee compensation, defenders of location-independent pay scales usually argue that companies pay for the value the employee brings to the company and therefore pay should be based on role and skill, not location. In truth, location-independent pay remains unrealistic for most companies. As long as people in the world are willing to accept lower-then-maximum rates in areas where salaries are below the top tier, companies will always have some leverage in setting salaries to local rates. Companies seek profits, and as such will optimize spending if they can do so without harming retention rates.
Should you use a salary calculator?
After years of experience with GitLab, I certainly wouldn’t create a new salary calculator. Companies looking to create their own pay scales should use the calculator of GitLab and Buffer as a baseline and work from there. Remember, these companies put significant resources in maintaining their calculators. For these companies, remote employee salary calculators are just as useful for thought leadership and marketing purposes as they are for determination of employee pay. Whether a calculator makes sense for your business depends on the level of experience you want to attract and the amount you can pay people without straining your financials.