Remote Compensation: What's the best model to use?
Updated: Jan 31, 2021
Should remote workers be paid by experience or location? We discuss how remote teams pay employees, and what to consider when designing your remote compensation model.
Here's the recap...On today's episode we discuss money 💰💰. Remote compensation is a hot topic that came to the forefront with the major shift to remote work due to CoVid. The onset of the debate began when Facebook announced they were going remote, but would reduce salaries for those employees leaving urban centers. We discuss the various remote compensation models being used by remote startups, and what we believe is the ideal option.
Full transcript below...
Just picture this story. You have two full stack developers with 10 years of experience. Both have worked for some of the biggest and hottest tech companies. Michael lives in SF and makes $100,000/yr (the avg for the role in SF). Sarah lives in Boise, Idaho and makes $50,000/yr (the avg for the role in Boise). Now each employee switches location.
A salary model that's all for one & one for all!
Companies like Basecamp & Helpscout use this model. Based around the idea you pay for the experience vs location. Both Tevi & I are fans of this option. In the story highlighted above, each employee would get paid the same global salary. Let's say that global salary is $75,000 for the experience. Yes, it may limit the ability (for the time being) to hire that role in SF. However, it opens up the rest of the country and world.
Each employee knowing they aren't being underpaid vs a colleague with the same experience elsewhere. So good for the employee and company.
This model simply uses the average salary of a role in a specific location. So in our story, $100,000 and $50,000 respectively. These salaries are based on the cost of living in that location. Rent and related costs are obviously quite a bit cheaper in Boise than SF. While this method may make sense so far, let's further develop the story above. Michael, now living in Boise, has his salary adjusted down to $50,000. Sarah, now living in SF, has her salary adjust up to $100,000. Both to meet the cost of living in their new home.
Now ponder this...Overnight, did Michael become half (1/2) as valuable to his company? Did Sarah become twice (2x) as valuable to her company? We don't think so, but that's what the new paycheck claims. This is what Facebook is telling their employees.
Location based pegged to SF salaries
A little bit of this, & a little bit of that
You've heard both extremes, or the black and white of the remote compensation scale options. With black and white, you'll always get gray when mixing them. Companies like Gitlab and Buffer favor this model. In short, rather than use the salary for location they beg the salary against what someone in that role would be making in SF. Then adjusting it, based on location.
While this option can be an improvement then simply relying on the employee's location, it still leaves that burning 'employee happiness' question. How would someone feel if they were making less/more than a colleague simply based on their postal code?
We'd love to hear your thoughts and feedback on the episode. If you're loving or hating the compensation model your team is using, let us know.
Hey, everybody. Welcome to today's episode with myself Scott and Tevi. Tevi, how are you doing?
Hey Scott. How's everybody doing?
Good, good, good. I've got an exciting and very hot topic today. It's going to be something that I think is going to bring up a lot of feedback, both positive and negative. Probably depending on what we're saying. We're going to talk about remote compensation today. How much you should get paid to work remotely. Yeah, I think a lot of this kicked off when, when Facebook finally agreed at the beginning of COVID to move to the remote model. Then said, oh yeah, by the way, we're going to slash people's salaries. If they move, we're going to penalize them for moving away. So I think it's, it's a hot button issue. I see it come up all the time in various remote communities and places like that. So it's something I think that we should share some thoughts on from our leadership perspective, and things that we've done. And then, hopefully, we can give some people some guidance.
I have lots of opinions about it.
So let's start off with your opinion first. What's your best approach?
Well, I love the idea of a standardized approach to salary. It's sometimes difficult because sometimes you have somebody who is working harder or performing better. But I think that in general, based on a person's level, the salary should be standardized. I know that it's been a hot button issue for many years for remote companies. It's only grown even more and brought to life with the whole COVID situation. I know that's something people simply say, "Hey why is it fair that I should live in San Francisco and you could live in Kentucky and we make the same amount of money." Your money in Kentucky will go a lot further. You'll be living a luxurious lifestyle, but I'll say it the other way around. You know why do you choose to live in San Francisco.
That's the choice you're making. You don't want your dollars to go as far. So why should that penalize me? I think that ultimately we're looking at it incorrectly. If you're looking at a company like Facebook or any startup global remote company, the company is providing a certain value to people. You as an employee are providing certain value to that company. Why should your compensation be tied to anything geographic that's not relevant anymore. If you're a remote company geography shouldn't play a role at all, and it should only be about your value. So therefore it should never be tied to geography. That's my thing.
That's why you're a remote company, right? I'm glad we're in agreement. I'm the same believer. I think that the payment should be even. I like to use the analogy of Michael from San Francisco and Mikael or Michal from Prague. We'll say, Michal from Prague is working for some hot startup you know, it's doing very well with lots of funding and things like that. They're a full-stack engineer with 10 years of working and they decide it's time to move up in the world and move to San Francisco. They receive company approval and move to San Francisco. In Prague, they were getting paid $50,000 a year. Moving to San Francisco, the company understands, $50K is not going to pay for a closet in San Francisco.
So they need to bump up the salary to $100,000 for the cost of living. On the other hand, you have Michael who's in San Francisco and decides to go the opposite way now with COVID and all things happening now. He's got the same role, 10 years full-stack engineer, same company, same kind of everything across the board. He was making a $100K in San Francisco and now wants to move to Prague, where again, the average salary let's say for the same role is $50,000. So the case that I use asks, overnight, did Michael from San Francisco, have his value get cut in half? Is he half as valuable to the company tomorrow as he was today? The same question the opposite way. Is Michal now twice as valuable to, overnight? Obviously to me, the answer is no, but a geographic remote compensation model says yes. I believe you pay for the experience. You're paying for 10 years of a full-stack developer experience. It doesn't matter where they are. You're paying for that experience, and not for the location that person happens to be.
Totally. I totally agree. I can't even imagine being that employee who gets a salary cut in half because he moved to be closer to his mother or something like that. Could you imagine how you'd feel like, wow, I was making double this? Now I'm moving out to help care for my parents who are aging. My salary is cut in half. I'm doing the same work. Like that would just be an instant punch to the gut in my opinion.
Yep. So for your thought. Do you think if that scenario were to happen, should they grandfather in the person's salary? Let's say they're in San Francisco now they're moving to Idaho or Kentucky or Prague. Do you keep that person's salary grandfathered in because again, they've been dedicated to you? They've been doing a great job. You approved them to move. Do you grandfather them in and say, okay?
So if, if the company's policy is to, do it based on geography, I would absolutely not grandfather them in. Because then you could have two people who are providing the same value, at the same level, and whatever that role is, they could be next-door neighbors. One guy is making twice as much. That's a horrible policy.
I think the funny hit there, and thwhatat interests me is the kind of decision on how to cut somebody's salary. The company probably now pays less for that person in Kentucky, They're not paying, let's say an average hypothetical number out here of $5,000 for office-related costs for that person. The desk, the coffee, the snacks, or what the person eats. So there's a cost savings by that person now being remote. It could even be there's less tax the company has to pay. So how companies, aren't thinking about this and looking at that. They're just very simply saying, "well, I think it's probably the cost of living." San Francisco has the cost of living where you need to make a $100K. If you're now in Kentucky, you don't need the same. So we're not going to look at the company expenses. We're not going to look at how much we pay. We're just going to look at the index of what the cost of living in that specific city. Right or wrong approach, you think?
I don't like it because I still think that when you have two people at a company that is providing the same value,but being compensated differently, it's negative. It's bad for the culture. It's unfair. Ultimately that's what you're saying. It's the same issue with, with women being paid less at the same job, it's the same issue. People should be paid for the value they bring to the company. It doesn't matter their gender, the color of their skin, or where they're located. To me, it's just another form of bias.
I'm a big believer that the future is going to be moving towards the global remote compensation salary model. So, Michal and Michael are both going to be making $75 K as 10yr full-stack developers. With that potential of having a standardized amount in the middle, do you think that restricts or limits the access to talent the company can get? Because in theory, let's say it's $75K as we meet in the middle. You're certainly not finding a developer in San Francisco who's going to take $75,000. At least not today when rent is what it is. Do you think it's an issue for companies that may be restricted and limited in the available talent that they have access to, or does it open more? I mean, there are more opportunities elsewhere, versus a potential loss of access in San Francisco, New York, or wherever.
Yeah. I think it makes a lot more sense to have a global salary that might be lower than in San Francisco. Because there is plenty of talent everywhere in the world. And I don't think that a company needs to compete with San Francisco. So, someone who's choosing to live in San Francisco and work for San Francisco startups, they'll get the San Francisco pay. That's fine. I think it makes a lot of sense for a company to say, we want to hire everywhere else. They don't have to necessarily be competitive with the highest end of the market. I think that's a benefit to the company where they can say I'd rather have the best talent in Montana. Cause there's tons of talent. There are tons of great people all over the world. You don't have to compete with San Francisco or New York City. So I think that makes a lot more sense. I think it's also nice to say you want to compete also with San Francisco and New York and Tel Aviv and London. Like all the expensive cities, but I don't think a company has to.
So you think there's a good way of kind of finding that global range? I know companies like Buffer, I believe originally used kind of the San Francisco model. Everyone started against the San Francisco model, and then it adjusted up or down depending on where they were. Gitlab purposely doesn't use that San Francisco model, to not to pay everyone the top dollar.
Gitlab has a global salary?
Gitlab doesn't do a global salary. I think they do by a specific location. Which obviously we're personally against that option. They should definitely change that as soon as possible. If today we're launching our remote company and we want to start hiring people, do you have a thought in mind of what's the best remote compensation model? What's the best salary that we should be offering to a full-stack developer with 10 years of experience?
Right. I mean, you want to be competitive with where they are. For sure. Maybe that's where it's tricky because we're saying you should not be dependent on where they are. It shouldn't matter, but it should also be competitive. So it's kind of the same thing. You've got to balance it.
In theory, $75,000 let's say would probably be a fantastic salary for 95% of locations on the globe. And for 95% of the people that you'd potentially hire. Just know there's 5% of the people who live in major urban areas that are super expensive to live in. I agree with you actually, it has to be something that's kind of found in the middle. That you don't pay a San Francisco salary, but you definitely pay more than the local salary. So you're not paying, $55K in Prague when the average is $50k. You're doing something that fits in the middle of the two.
I think there's a huge benefit to the world. If you want to talk about doing good for the planet and doing good for people, I think that you have an opportunity as a business owner. If you're running a company, if somebody lives in a country where they'd be making three times the average salary, you're putting more money into a poor community. That's a good thing. So for the people that say it's not fair for somebody who lives in Eastern Europe to make a San Francisco salary, I say that it's not a matter of fairness. I think you're helping pull up those other communities. You're being competitive on a global scale. And to me, that's a good thing. They're still providing the same value to the company.
I completely agree. That's probably one aspect that I assume most leaders don't think of. By giving that global salary not only are you supporting that person with a better salary than they would get locally. You're in theory potentially building their community as well. If someone, again let's say in Prague, where the average salary was 50 and you're paying them 75, they have more spendable cash. People would make more cash, usually end up spending that cash. Whether they're going to eat out more. Maybe they're going to do more outdoor activities. They're able to support more local businesses. If that that's true, it has the potential of uplifting and creating more small businesses around those communities. Again, now people have more money available to them to be able to spend. It uplifts the entire community and expands local economies. Obviously beyond the single employee that you're paying.
For sure. So, unfortunately, I guess we both agree. So this conversation to me is not as interesting as it could be. Can you play devil's advocate? Why do you think some people want to do, or why is it better for employees and for companies to have a geographically based salary?
I'll take that opportunity of being the bad guy here. I think from one side, I can say that it's related to a negative culture because. Gitlab has that kind of gold standard of company culture, especially for the remote companies. I'm thinking maybe it's expenses focused. I'm looking only at the dollars and cents. If I'm paying $100,000 to every developer, that's just a lot of money for me to be spending on those expenses. A lot more than I need to be. I think the same thing on the employee side. If I'm a full-stack developer over here making $50K, and you're on the other side of the country and making 20, 30, $40,000 more, and I'm able to find that out, it's going to piss me off quite a bit, you know? Yes, the neighborhood is a lot cheaper where I live, but we both have the same experience. We're both doing the same exact job. Why are you being compensated more than I am? I think I'm moving in the wrong direction. From the employee side, I can't really see the need for it unless you're living with a higher cost of living.
I guess I'll play devil's advocate. I'm thinking, your salary is competitive to where you are. If you want to go get another job with another company, you couldn't get more than you're making now. So why should you get even more than that? If you're already getting paid at your level where you are, then isn't that fair?
One of the opportunities that lend to this is hitting a glass ceiling. In your region, this job makes this amount of money or this is kind of salary range. So unless you're again changing titles and moving up, how are you going to be compensated more money? In your region, you're getting paid top dollar. Though you may be fantastic, the best person on the team, and the superstar MVP in the company. We're using fixed salaries for location and you've hit the ceiling there. There's nothing more to be done. Should the company be removing the ceiling? If you're the best of the best and the MVP, we're going to continue compensating. Or on the local compensation side, it's sorry, this is the top dollar for your role in your location. You make that, or you make that and a little bit plus. We value you up to a certain amount, and beyond that, we don't value you any longer. If you want to be valued more, then you need to go somewhere else.
So I guess I'm done playing devil's advocate. I really don't like it at all.
I don't think we can agree on this or be on the devil's side. Maybe one thought I'll try to mix in which is kind of the devil's advocate. Maybe it's the stage of the company. With the localized option again, let's say you're an early-stage company with a certain amount of funding. I can pay $100,000 to one developer in San Francisco or I can go hire two in Prague. Isn't it more valuable for me to have two people working for the same amount of money versus one person?
Exactly. So I think that's where it comes down to. The only real benefit is on the financial side, the money side. That to me, when a company is approaching its business model and its competitiveness, culture, professional development and career trajectory from the perspective of the balance sheet; then that that's toxic. So I think that when you start a new company and you're using consultants and outsourcers, that's a totally different scenario. If you're hiring employees and you have global employees, it makes no sense to dock people based on where they live. And I'll tell you, by the way, that for many, many decades it's been very common to adjust a person's quality of life and living expenses based on location even before remote culture.
I'll tell you there's one word, suburbs. If somebody wanted to make a big city salary, all they have to do is live in the suburbs. They'll jump on a train. They'll commute an hour and a half each way, but then they get the yard, their picket fence, and their house with their many, many rooms. They're living way better than the people in the city, and they're getting the same salary. It's a big city company and it's operating on a big city scale. The value you're providing is the same. It doesn't matter where you live. So to me, that's the biggest argument against docking somebody's pay based on their geographic location.
Yeah. So to tail off of that. We've been talking about this even before COVID. The conversation has always been if you move locations. If you move from San Francisco to Idaho or you move from San Francisco to Kentucky. What happens now in the post COVID world where the rent in San Francisco or New York has gone down 30% - 50%. Now the cost of living has decreased. If you stay in San Francisco where the cost of living is now cheaper, do you dock someone's pay? Well, now San Francisco is 30% cheaper to live in. So we're going to decrease your salary by X. You didn't move to Idaho or Kentucky like some of your colleagues that may have gotten a pay decrease. But hey, it's now cheaper for you to live in San Francisco. So why do we need to pay you as much money as we did before?
Yeah, it's totally crazy. I can't even. It doesn't make any sense. It's all from a negative and toxic perspective. To me the salary should be judged by the value they bring to the company. That's it.
Yeah. I completely agree. I think the biggest takeaway here, is to pay your people for the experience and for the value that they're giving your company. Not where they live, the cost of living of where they live, if they move from A to B, or if the cost of living changes. You pay them what they deserve to be paid for what value you're getting from them.
Exactly. And if they're bringing that value, then you have the money for it. There are only positives that can come out of it. You could be lifting up poor communities. You could be pulling people out of the urban areas, which are over-concentrated and are too expensive. So this could actually lower the cost of living in those areas. You allow people to live a life that they want to live, and in a location, they want to live in. I think that's only a good thing.
I'm super happy that we've been able to resolve this major issue globally of what people should get paid. Maybe we should take on world peace next and see if we can potentially solve that in an upcoming podcast episode.
I think maybe next time we should start finding people that disagree with us and inviting them to the show so we can have a proper debate about it. We all agree. This is a short episode.
I hear it. I hear it. All right. Excellent. Any last thoughts?
No. I'm curious to know if there's anybody out there who maybe moved somewhere else due to COVID or for some other reason. If they're being paid the same. If they think about how they would feel if their salary was reduced because their expenses reduced. I'm just curious to know if anybody's moved out of the cities and how they would feel if their salary was docked because of it.
Yeah. Please say if you've been in that scenario, please be in touch. Tevi, thank you so much again for another great conversation, and life-changing conversations here that we're able to solve within 20 minutes.
Thank you, Scott. All right, everybody have a great day.