Location-based Pay Raises Questions (Near and Far)
November 1, 2022 | Jason McRobbie
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With the pandemic proving the efficacy of remote work and hybrid options redefining the traditional office infrastructure, greater numbers of employers are looking to location-based pay, both to incentivize and of necessity. We sit down with Jafar Owainati, co-founder of the compensation management software company Barley to talk the pros, cons and things often unconsidered in the location-based pay realm.
- Location or geo-based pay varies from traditional pay structures insofar as salaries are adjusted to account for varying cost of living expenses.
- While there is no perfect approach, clarity of communications from the start is integral to any location-based pay structures.
- Some of the major challenges include tax residency, market data, administrative complexity and employee movement, but perceived fairness presides above all others.
As co-founder of Barley, a compensation management platform that helps companies structure, analyze, and manage their compensation, Jafar Owainati has helped clients large and small grapple with the complexities of location-based pay. Integrating with various HRIS platforms, including the likes of BambooHR, Bob and ADP, Barley makes it easy for companies to make compensation decisions that are equitable for employees, competitive with the market, and optimal from a budget perspective.
“In terms of where the craze around location-based pay came from, I would say that it was very much accelerated through the pandemic and a wider acceptance and shift towards remote work—specifically being open to having distributed teams,” said Jafar.
“I think the first thing to do is to step back and ask, ‘What does location-based pay even mean?’ In the context of this conversation, it really boils down to, ‘What is the strategy for how you pay your team based on where they’re located?’” said Jafar, before diving into a few examples. “It may well be that you have a global framework—that you pay everybody the same all around the world. You may decide to pay by a local market based on where employees are specifically living or working or what office they are commuting to. Then there are a bunch of models in between.”
Jafar shares openly that he does not believe there is a perfect approach.
“There is no right or wrong. I would say there are pros and cons for every one of the location-based strategies,” he said. “It really comes down to where you want to sit as an organization and what is the right balance.”
He notes that those remote opportunities have sunk home for many, employees and employers alike. Even businesses with one location that had to shut and go remote during the pandemic began to see the opportunities of hiring beyond their traditional backyard—and some having their talent poached from afar in return.
“Instead of hiring from just Toronto or Vancouver or wherever they were located, they began to look at hiring from across Canada, then across North America and ultimately, all over the world,” said Jafar. “And so that is what has sparked the question for many, many businesses around, “What do we do about pay when employees are distributed across different locations and how do we do it in a way that is in line with our business goals—but also to attract and retain the best talent for our company?”
The key to success in any pay structure scenario rests less on the dollars, Jafar explained, than it does on the due diligence of communicating the compensation philosophy.
“It doesn't matter if you're paying market rates if your employees don't believe they're being paid fairly. One of the ways we can provide that clarity is by empowering companies to be more transparent with things like their salary structure and explaining their compensation philosophy.” said Jafar. “You can be a company that decides to lag the market if you wanted to, as long as you are transparent about that and talk about the value proposition you provide to employees beyond compensation. Then what you are doing is paying them fairly because they’ve signed on for the philosophy that you’ve laid out.”
That said, Jafar cautioned, applying that fairness becomes more complicated in the realm of location-based pay.
“We have seen some companies try to take location-based pay down to the postal code level. Quite frankly, being that granular or location-based in pay in Canada, in terms of paying differently between Toronto and Waterloo and Toronto and Montreal, I actually don’t know if it’s the right answer,” said Jafar. “A big part of the dialogue right now around location-based pay is around the shift from how do you pay per city to a much broader dialogue that asks, ‘If you are globally distributed, do you pay the same for every country?’ I think that’s an even bigger macro-economic discussion.”
Conflicting philosophies of fairness lie at the heart of global pay’s bigger picture and possible future.
“When it comes down to fairness, it is the view of many employees that fair compensation is being paid exactly the same for your level of work and the value you provide. So, in that lens, through an employee perspective, if you lived in Bali or if you lived in Vancouver, you should be getting paid exactly the same,” said Jafar. “However, there is a counter perspective to this that has to do with maintaining internal equity. The person in a high cost of living area takes a very different net benefit from their salary and has a different standard of living versus the employee living in a lower cost of living area. In this case, equal pay for both individuals creates an inequitable benefit.
Jafar runs us through some other unexpected questions and common challenges that even the biggest companies have stumbled over, chiefly tax residency, market data, administration and, most common of all these days, people moving.
“The reality is an employee's residency impacts how much they pay in taxes. As you look at a global pay approach, you then need to start thinking about net salary (after taxes) in addition to gross salary from an equity perspective. This adds a whole additional layer of complexity that highlights some of the challenges of a global pay approach.” said Jafar.
“The second big challenge is market data. If you want to go down to the city or postal code, you have to invest in the market data across all those areas and quite frankly, especially in Canada, we don’t necessarily have very robust data for every city around the country because we don’t have the concentration of talent we need to get that data,” Jafar said.
“What many do is rely on third party data sets, companies like Numbeo and ERI (the Economic Research Institute). There are a few that provide metrics on cost of living—ranging from housing cost to consumer indexes to other metrics you can use,” said Jafar. “It is important to note that you can also use market data. You can look at market data for Toronto and then conversely look at market data for a city like Ottawa or Vancouver. Then you can use that data to compare the percentage difference and use that to make an adjustment factor.”
“I think the big thing we are seeing with companies that have been doing remote or distributed work for a long time is that they are creating their own calculators that have many components to them. What we are seeing with many of them, Buffer being a great example, is that the location component is only a certain percentage of the formula. In terms of location of adjustment they actually have only three tiers of locations—a low, medium and high cost of living and the differential between those three tiers isn’t massive,” said Jafar.
Even in this instance though, he stresses the need for flexibility. “It’s important to note that these calculators or pay approaches shouldn’t create a rigid system or spot pay because over time your years of experience, your performance, your tenure and contributions within the company are all going to impact your pay. So having salary ranges is really important to take into account along with all these other factors.”
The third hurdle is the increased complexity of administration—not just from a payroll standpoint,but managing different salary ranges per region.
“Quite frankly, that is one of the things that Barley helps with. The way we built Barley’s platform—we’re not prescriptive of what location-based approach you take,” said Jafar. “If you decide to pay by country, by city, by postal or zip code, whatever it is, we can support that and help manage the complexity.”
The fourth quandary—remote workers moving—expanded exponentially during the pandemic and has forced many companies to grapple with the previously unconsidered aspects of location-based pay.
“What are the decisions you make when someone moves from Vancouver to Surrey as an example? Do you cut their pay? Maybe your answer is, ‘No. We don’t ever cut pay because we don’t want to impact or reduce morale.’ That’s great, but then what happens when you hire someone who lives in Surrey? Now, that person is going to start making less than the person who began in Vancouver then moved to Surrey. So now you have a pay disparity issue. How do you manage that?”
In pursuit of fairness, Jafar points to companies that have already grappled with the issue.
“We can look to companies that have been distributed forever like Gitlab or companies that have shifted to mostly remote like Reddit. They actually have geographic differentials per country, but what they have eliminated though are geographical differentials within each country. This makes it a lot easier to manage when people are moving within their home country and make the discussion of changing pay if an employee decides to move to a completely different country (where they could even be getting paid in a different currency) a lot easier,” said Jafar. “Specifically for Canada, what we are seeing is a trend towards paying to a national average for tech companies.”
“I think in terms of benchmarking, you always need to think about who you are competing with for talent in that market, specifically with tech talent that is able to work at any company across North America or even the world,” said Jafar. “So what are other companies paying for them? If they lifted their hand and said, hey I want another job, what kind of job and pay could they get if they wanted to go there.”
Without doubt, the future of location-based pay will be shaped by the global evolution of remote and distributed work over time, as companies continue to compete for talent.
Regardless of where you land on location-based pay, Jafar reiterates the importance of clear, consistent communication and ensuring that everyone is on board with your compensation approach - whatever it may be.