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Location-Based Salaries vs. Value-Based Salaries

Jul 18, 2022| Reading time: 10min

BY ChartHop

Should an employees’ location factor into their salary? It’s a tough call.

On one hand, factoring locations into your salary calculator signals your values and impacts the type of people you’re able to attract and retain. Alternatively, your people may feel like they’re penalized for living in a more affordable location, which could lead to turnover or a fragmented workplace culture.

Read below to see how companies choose to determine their salaries and learn which is the best choice for your organization.

How Companies are Determining Their Salaries

Some companies pay remote employees using the same salary structure regardless of where the employee lives. Other organizations make adjustments based on a cost-of-living variable.

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. 

Many remote organizations follow a location-based 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.

Below are how some companies are determining their remote workers’ salaries:

  • Facebook: In May 2020, 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 five to ten years. As a part of this initiative, starting in 2021, Facebook adjusted salaries for remote employees based on their location for tax and accounting purposes.
  • Google: Google made headlines in 2021 for announcing that while employees can work from home permanently, their pay would be lowered if the new location had lower labor costs than their original office location.
  • Slack: Slack transitioned from two nationwide pay tiers to five in anticipation of hiring more employees outside of San Francisco and New York. Slack Chief People Officer Nadia Rawlinson explains, “We created these bands in order to provide transparency and fairness to our employees.”
  • GitLab: GitLab pays local rates based on cost of market, but not cost of living. In an attempt to be as transparent as possible, the company uses a compensation calculator that’s adjusted based on survey data, feedback, and candidate data.
  • Buffer: In 2022, Buffer chose to change their location-based salary bands to location-independent for simplicity and transparency.
  • ChartHop: Instead of location-based pay, ChartHop’s compensation strategy uses salary bands based on role level, which ensures fair and unbiased pay.

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.

Wondering how to set salaries for employees? Learn how companies calculate these pay models, mitigate potential challenges, and keep compensation fair and unbiased as possible.

Location-Based Salaries: How Companies Factor in Geography

Some companies use location-based salaries to keep pay equitable. In this strategy, employees in the same position receive similar take-home pay because their salary accounts for local tax rates and cost of living.

compensation by location

ChartHop’s compensation reporting capabilities enable you to analyze 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 attract 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 market rate is 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, skills, and the length of time they 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 cost of living index is a measure of an area’s core expenses, including housing, transportation, meals, and utilities. 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 US 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. Other organizations may consider only market rates and experience because they don’t have the time or resources to assess more variables.

Whatever your formula, use it consistently to ensure transparent and unbiased decisions.

Value-Based Salaries: How Companies Set Pay Based on Merit Alone

Instead of basing pay on location, some companies set remote salaries solely based on the value of the work, meaning people doing the same work get paid the exact same, regardless of where they live. This model gives employees more financial autonomy and makes it simpler to calculate salaries compared to location-based pay. However, value-based salaries 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.

More experience doesn’t mean more hours logged. In fact, those that identify as underrepresented talent don’t have years of qualification due to systemic discrimination. Learn more about fair and equitable hiring practices below. 

Read how to advance your DEIB efforts

Defining Your Remote Culture with Salaries

Salaries are more than accounting decisions. How you choose to pay your remote employees will have a lasting impact on your company culture.

Before you decide on your compensation strategy, take into account your own company values and needs.

Whatever you choose to do, it’s critical to communicate your remote-pay philosophy sooner rather than later to employees. This transparency about your plans will help both you and your people prepare for the future. 

Challenges are expected with any business, especially ones that have a global and remote workforce. Even Financial tackled building strategies and systems through the use of people analytics. Learn how their data-driven decisions yielded success at every level.

Read the case study here

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