Best Practices

Location-based salaries vs. value-based salaries

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by Maria Barrera

August 24th, 2020

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The ChartHop Team

In May 2020, Facebook CEO Mark Zuckerberg announced that the company would be actively hiring remote workers. He even said that he expected 50% of Facebook’s workforce to be remote in the next 5 to 10 years.

As a part of this initiative, starting in 2021, Facebook will adjust salaries for remote employees based on their location for tax and accounting purposes. “There’ll be severe ramifications for people who are not honest about [their location],” Zuckerberg said.

Facebook isn’t the first company to set salaries based on where remote employees live. According to aggregated ChartHop data, employees in the same roles experience location-based pay differences anywhere from 3% for entry-level associates to as high as 90% for software engineering roles. We found that location-based pay differences vary more widely for non-technical roles.

Many remote organizations follow this pay model to keep their salaries both competitive and cost-effective. However, location-based pay isn’t faultless. The execution is complicated and often leads to frustrating pay cuts for employees.

Paying remote workers based on geography may be the right approach for your company, but before you adopt the model, consider what a location-based salary (and its alternatives) looks like in practice for remote organizations.

We put together this guide to explain the logistics of offering location-based and value-based salaries by describing how companies calculate these pay models and the challenges that come with each one.

This guide also shares ideas and examples for creating objective pay criteria to ensure that you keep pay, whether it’s location-based or not, as fair and unbiased as possible.

In this post, we'll discuss the differences between location-based and value-based salaries.

Location-based salaries: How companies factor in geography

Companies use location-based salaries to keep pay equitable. Employees in the same position receive similar take-home pay (their pay after expenses) because their salary accounts for local tax rates and the cost of living.

ChartHop report of average compensation by location

The model also empowers companies to set competitive wages without paying the highest rates across all markets. Businesses pay employees an attractive rate, but not higher than it needs to be to draw in top talent.

Factors to consider

Determining location-based salaries is a complex process. Businesses must develop unique formulas that account for not only local expenses and market rates but also employees’ skills and experience.

To strike this balance, location-based calculations incorporate some combination (but not necessarily all) of the following elements:

  • Market rates: The range of pay for a specific position in a local area and/or in the country as a whole. Companies determine each role’s market rates by using salary research tools, like PayScale and Glassdoor.
  • Experience: Businesses evaluate employees’ education and skills and the length of time employees have spent in their positions (or similar positions) to determine whether they should be paid above, at, or below the market rate.
  • Cost of living index: A measure of an area’s core expenses—including housing, transportation, meals, utilities, and more. The tool Numbeo breaks down typical costs and index figures for cities all over the world, allowing companies to compare employees’ cost of living.
  • Income tax rates: Companies may consider giving international employees who live in countries with especially high tax rates a slight salary boost. However, calculating U.S. salaries based on income tax rates likely isn’t worth the effort. The calculations would be difficult and tedious because progressive structuring is different in each state.

How these four variables come together depends on each company’s values and capacity. Some remote businesses may choose to weigh market rates more than cost of living to avoid massive salary gaps within the company. Another organization may consider only market rates and experience because it doesn’t have the time or manpower to assess more variables.

Whatever the formula, use it consistently.

Remote organizations must use the same methods to calculate salary differences across the board. Otherwise, pay disparities that aren’t related to location at all may occur. Download the guide to see how companies overcome these challenges.

Value-based salaries: How companies set pay based on merit alone, not location

Instead of basing pay on location, many companies set remote salaries solely based on the value of the work. This model gives employees more financial autonomy, and it’s simpler to calculate salaries than with location-based pay. However, it can make it difficult for companies to compete in expensive job markets.

Factors to consider

There are just two variables to assess with value-based salaries: the national market rate for the position and the employee’s level of experience. The former factor keeps jobs competitive. If a company’s pay falls below the country’s average rates, the business may struggle to attract and retain top talent.

If you can, minimize this risk by keeping your salaries within the top 25% of salary rates across the United States. Check what these amounts are for different positions using PayScale and Glassdoor.

Once you’ve determined the average national rate for a role, adjust that amount based on employees’ experience. Pay higher than the market rate for employees who have more relevant skills and knowledge than the average person in their role.

With value-based salaries, experience is the only pay differentiator for employees in the same position. This emphasis makes it all the more important to have an objective system for evaluating team members’ skills and knowledge. Download the guide to see how companies create levels for each role type that have clear, concrete criteria, and set salary amounts for each of these stages. This defined system will help your organization minimize biases affecting salary raises.

Defining your remote culture with salaries

As companies plan to go remote in the long term, salaries will be more than an accounting issue. How you choose to pay remote employees will have lasting impacts on your company culture. Answer these questions to consider whether location-based salaries align with your organization’s values.

Whatever you choose to do, communicate your remote-pay philosophy sooner rather than later to employees. The decision to pay based on location (or not) affects team members’ livelihoods. Be transparent about your plans so they can prepare for the future alongside your company.


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Blog Author

Written by Maria Barrera

Head of Marketing

Best Practices

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