location-based salary
HR Know-how

Breaking Down Geography-based Salary For Your Global Teams

Geography-based salary, or location-based salary is compensation adjusted based on the employee’s location and the cost of living of the area. The wage reflects the market rate which is promoted in each city, country, or region by other organizations with an adequate amount to cover living expenses of their employees (e.g., housing, utilities, transportation). For instance, employees who are located in a high cost-of-living (COL) area such as New York, San Francisco are paid a higher living wage compared to those who are located in an urban or suburban area such as Montana, Austin, or Boise. 

Location-based pay is known for a long time across all industries. In fact, this type of payment has long been the norm in the technology sector. GitHub for example, a software development platform with primarily remote teams, has been applying this type of payment for their employees. By implementing location-based pay, it offers companies and employees another affordable opportunity to live in a high COL area such as Silicon Valley- a leading U.S. tech hub, or Hong Kong-one of the world’s most expensive cities. In accordance with the Geographic Pay Policies Study from WorldatWork, up to 67% of employees from the United States expect their wage to be based on where they live. For most non-managerial positions, location is used as a primary factor in benchmarking pay rates and modifying salary ranges. 

Furthermore, the demand for remote work during the COVID-19 pandemic has made location-based pay more trendy. In a survey conducted by WorldatWork, 62% of companies have implemented geographic-based pay policies, while 44% are considering adjusting their policies to cope with the growth of remote work. According to Payscale, almost 43% of employees want the company to continue to work remotely, especially for job positions such as marketing and advertising (75%), information technology (71%), art and design (69%). Not few, especially younger and junior talents continue working remotely from their parent’s house in another city or even another state.

This situation raises an important question among talents and recruiters; will remote work change the salary calculations to comply with the geographic-based pay regulations?

How to calculate geography-based salary?

With the rising trend of remote work, many employees are considering relocating to an ideally better and less expensive neighborhood area to move in. Employees now don’t need to find accommodations close to their office anymore. In fact, employees are now more than ever to have the freedom to decide on where to work. However, geography-based pay comprises many complex factors. For this reason, it is crucial to acknowledge various approaches employers can take to implement these policies. 

The following factors are the most common that employers use to calculate the wage:

Employers may apply these factors together to determine the amount of location-based pay. Some employers prefer to apply market rate by city for assigning locations to diverse geographic-based pay. Minimum wage and salary are also regulated under the local labor law, which means depending on where your business is registered and where your talent is hired, it will determine the amount of the salary and compensation package. This also applies to inter-state and international employment. However, this approach is not always practical or feasible, especially organizations that practice cross-border hiring. Hence, as a substitute, many companies will choose a specific singular state, region, or grouping of similar market rate areas as a zone to calculate the compensation.

Pros and cons of geography-based pay on remote working scenario

There are advantages and disadvantages of location-based salary for both employees and employers which can be broken down into the following:

The employees

At the very least, employees will be paid fairly depending on where they reside. However, it’s not uncommon when a company chooses to pay the employee with a singular rate, the employee might receive a larger paycheck if the employee is currently residing in a low cost-of-living area while the hiring company that is currently based in some of the major cities is compensating the employee according to their standard wage.

For instance, Reddit supports their employees’ right to live and work wherever they choose. Instead of calculating employees’ payment based on their location separately, Reddit chooses to scale their pay range based on high-cost areas such as San Francisco and New York. By conducting a mixed localized pay approach that increased or kept up the wages rather than lower it, Reddit was able to settle a single pay range to every employee regardless of where their employees were located. 

The employers

On the employer’s side, employers now have wider options to adjust their employment budgets. Employers can now hire remote employees outside the higher cost region to allow the company to save on payroll, company operational expenses, and at the same time, be able to reap the rewards of doing business in an established area. 

Despite the range of benefits that the local-based salary has to offer to both employers and employees, many factors that contribute to the salary calculation are very complex and can be challenging for many companies. On the other hand, employers are required to comply with the local labor laws to ensure compliance. Typically, in order to do that, employers need to have a registered entity where their talents are based on and handle the payroll in-house. This situation might not be feasible especially for companies with limited resources, such as small-medium businesses and startups, who are looking for a more agile solution.  

what is employer of record (EOR)

A great way to ensure that your company has a competitive and fair offer to your employees is by working with an Employer of Record (EOR). An Employer of record also saves you some payroll headaches when managing employment from different states and countries. Through an employer of record (EOR), you can now be able to leverage the location-based salary to maximize your resources to grow your business without a risk. Employers can now also aim for global expansion where employers can explore new borderless labor markets, and approach a wider scope of talent pool regardless of geographic limitations. 

Slasify is a global employment HR service that can assist you on a global expansion journey by hiring and onboarding international talent, as well as maintaining legal compliance. If you are planning to expand your business overseas, connect with our labor experts to strategize a compliant global employment.

Slasify is designed for remote worker. We provide payroll calculation, social security payment and tax filing in more than 150 countries around the world, allowing business owners/talents to seamlessly connect with the world. We have practical experience in serving the world’s top 100 companies. If you have relevant needs, please feel free to contact us.
In addition, if you are a “remote worker” or are on the way to becoming a “remote worker”, and if you want to know more about it, you are welcome to visit Slasify’s website. If you have any questions, you are welcome to write an email to us!

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