June 08, 2022
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✨ NEW: Have multiple entities? Manage payroll for every country in one place
Pay equity is a hot topic at the moment. Not only because progress on closing the gender pay gap is very slow, but also because the rise in remote work has sparked a totally new discussion about what equal pay for equal work really means.
Working with a global workforce has many merits, but it also comes with numerous challenges organizations need to solve. These challenges range from compliance hurdles to determining a compensation strategy for a globally distributed team which guarantees fairness to all employees.
If teammates are working from different locations all over the globe, can you offer them the same pay rates, knowing that they all face different costs of living? That’s up for debate. So what does equal pay for equal work mean in the era of remote work? And how can businesses with a globally distributed team make it a reality? Read on and find out.
Before jumping right in and developing a strategy to put equal pay for equal work into practice, you first need to define what “equal” means for you. The definition of equal in the dictionary reads “the same in amount, number, or size”. Unfortunately, “equal” can mean many different things when it comes to setting salaries for remote workers, especially when you’re working with a globally distributed team. Here are some pointers to help you.
One of the first things to consider is the difference between gross pay and net pay. One look at the mandatory tax and social security deductions that apply in each country makes it clear that paying team members with similar jobs and skills the same gross salary will result in very different net incomes. This means that despite your initially good intentions to provide equal pay for equal work, the bottom line will tell a different story.
On the other hand, aiming at providing the same net pay is a difficult task because it requires you to fully understand the tax system in each country so that you can effectively predict what percentage will be taken out of each employee’s salary.
Geographic pay differentials are highly disputed when it comes to remote work compensation. Having a globally distributed team means having teammates living in different countries across the globe, with every country having a different cost of living - and even within one single country, there might be regional differences. Working out where you stand in regard to location-based pay should therefore be your top priority when developing an “equal pay for equal work” strategy.
Think about it this way: If you offer a remote employee working for your business from a little village somewhere in rural Italy the same salary as a teammate based in the heart of London, the latter might accuse you of unfair treatment, since they have to pay much more for rent and food. Their point being that despite equal pay, they don’t get to enjoy the same lifestyle as their colleagues in less expensive areas.
If you’re hesitating to choose an approach which you consider to be fair because it may involve additional costs for your company, then you should keep in mind that employers can actually save money with remote work.
According to a comprehensive study conducted by Global Workplace Analytics, a typical U.S. employer can save $11,000 a year for each worker working remotely only 2 to 3 days a week. Now think about the savings if your global team works fully remotely and you don’t have to provide any office space at all. You can invest the money you save into employee compensation.
While some might argue that offering equal pay standards across locations attracts talented workers, others may find that globally standardized pay reduces their chances of gaining the best candidates in markets where the talent war is particularly strong. In such markets, you have no choice but to make a better offer than local companies and other international organizations hiring remotely. Yet that cannot mean having to raise the salary level across your organization.
An employee’s salary is only one part of their overall remuneration. When working out a compensation strategy for your globally distributed team, make sure to take the whole package into account. Offering the right benefits and generous bonuses can compensate for what might be perceived as “unfair” salary differences, as well as help ensure your compensation package is competitive in a certain market - even if you don’t offer local market rates.
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Whether you decide to take “equal pay for equal work” literally and pay employees in similar roles the exact same salary, or whether you opt for location-based pay to account for different costs of living, you need a compensation strategy for your remote team. There are three compensation models to choose from.
Paying local market rates - also known as geographic pay policies - is the only compensation strategy which takes into account the varying costs of living across different countries. Under this model, employees receive a salary that is measured against local salary bands.
However, as we’ve seen before during our discussion on the notion of fairness in employee compensation, offering localized pay isn’t everyone’s understanding of equal pay for equal work. What might be fair towards employees living in expensive countries such as Switzerland, will seem unfair to employees living in countries with lower costs of living such as Bulgaria.
Another problem with this strategy is the need to adjust salaries in case of employee relocation. If relocation results in pay cuts, employees might be inclined to look for a new employer.
Companies who want to offer location-independent pay have two options when it comes to calculating pay rates for their global team. One of them is to determine the median rate across all the locations where they have employees. To do this, they have to look at the different national average salaries for the specific job position and level of experience and calculate the global median salary.
While this approach towards equal pay for equal work eliminates geographic pay differentials from the equation and makes life a lot easier for HR and Finance teams, it may not be perceived as fair by every employee in your organization. Especially since some employees will be overpaid (compared to where they live), while others might struggle to live comfortably with the salary you offer.
Another drawback is the fact that this compensation strategy lacks competitiveness and probably won’t allow you to attract top talent. Not to forget that, if you keep expanding and hiring new teammates in new geographies, the calculated median will not work anymore.
This is the second way you can choose to create pay equity among employees with the same job and experience level. Check out the salary standards for a specific position in the area where your company headquarters are located, and set a standardized salary which will be offered to all employees working in this role, regardless of their location.
But keep in mind: What some people perceive as the ultimate way of achieving equal pay for equal work could mean losing out on one of the biggest competitive advantages of hiring talent abroad, i.e. cheaper labor costs. Plus, it may still not be fair to employees based in regions or countries where they would normally earn more than what you offer.
Choosing one of these strategies and following through with it is hard. But here are a few tips that can help you get a clearer view of what makes sense for your business and make an informed decision.
Think about how future plans may affect your compensation strategy. What are your plans for the next couple of years? What impact might further expansion have on pay equity in your organization? Also consider employee perspective: What will happen to employees who relocate? Will they have to accept a pay cut under your chosen strategy?
Rather than concentrating all your energy on finding a solution for pay equity across different locations, shift your focus towards experience, skills, productivity and other performance-related factors. This allows you to develop a different set of criteria for determining pay for your remote team that won’t be influenced by location.
Whichever strategy you choose to turn your vision of “equal pay for equal work” into reality, make sure to openly communicate it across channels. Your current employees should know how their salaries compare to those of their colleagues and possible recruits should know about your compensation strategy upfront.
Be clear about what your main intentions are at the moment. Are you actively trying to invest in talent management and retention? Or are you trying to cut costs in an attempt to facilitate economic recovery?
In your attempt to guarantee equal pay for equal work across your globally distributed team, you shouldn’t forget that pay equity is not the only leading principle to keep in mind. Many countries have minimum wage rates and other compensation restrictions you need to comply with. If you’re aiming for equal pay across geographies, this could mean that you’ll have to raise the global compensation rate you set for everyone.
Even as the dust settles down, many businesses are still adjusting to remote work. You may have had some employees working from home from time to time before, but going fully remote and working with a globally distributed team requires a totally different approach in many aspects, including salary and wages. So don’t try to desperately cling on to what you did before. If you feel like your old compensation strategy doesn’t work for you anymore, start over and adapt it to your new situation.
In a nutshell: There is no one-size-fits-all solution to equal pay for equal work. Some businesses will strive for pay equity by offering remote employees in similar roles and with similar skills the same salary, regardless of their location. Others will argue in favor of employees based in more expensive areas and decide that equal pay for equal work means paying employees in such a way that their earnings allow them to enjoy similar lifestyles and standards as their colleagues, measured against the respective country-standard.
The most important thing to keep in mind is that you communicate your strategy openly. Your global team should know how you set their salaries and that you do your best to ensure everyone in the organization is treated with fairness and receives a remuneration that values their work.
You decided to offer your globally distributed team location-based pay rates and benefits, but are unsure how to tackle it? Hire your employees through an Employer of Record and make sure they receive a benefits and compensation package in compliance with local laws. Book a demo with our sales team and find out more about how Lano can help you hire remote employees in over 150 countries.
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