Remote work compensation: What strategy for setting salaries for remote workers?

Remote workers vs. on-site employees: Who earns more?

A quick word before we dive straight into global remote work compensation: The data that is currently available on this topic is fairly limited. There aren’t many studies available yet and some of the results can’t be taken as absolutely valid. 

For example, a study conducted by Payscale found that U.S. employees working remotely earned more on average than their in-office colleagues: USD 48,500 compared to USD 44,800. However, looking at the data more carefully revealed that this had nothing to do with the nature of their work as such – i.e. being remote – but rather with the fact that they were high-performing workers in positions of trust. 

The 2019 Remote Work Report by Owl Labs presented similar results: After breaking down the collected data, it showed that remote workers were 2.2 times more likely to earn more than USD 100,000 per year than on-site workers. Meanwhile, FlexJobs and Global Workplace Analytics summarized in their 2017 State of Telecommuting in the U.S. Employee Workforce report that remote workers earned USD 4,000 more on average than non-remote workers.

And looking at average remote work salaries in countries other than the United States: Lano’s in-house data shows that their Europe-based employees who are hired via their EOR solution earn on average EUR 71,325 per year. Considering all of Lano’s EOR hires, including those located in non-European countries, annual salaries average EUR 54,134.

While available data leads to believe that remote workers are currently better paid than non-remote workers, international CFOs have expressed their intentions to change this in the future. In a survey carried out in March 2020 by research and advisory company Gartner, nearly 25 percent of CFOs questioned acknowledged they were planning on shifting at least 20 percent of their workforce to fully remote positions. Their intention? According to Alexander Bant, practice vice president, research for the Gartner Finance Practice, they “sense an opportunity to realize the cost benefits of a remote workforce.” So if remote work is perceived as a way to save money, this inevitably means that companies will have to start thinking about new ways to set salaries for remote workers.

Employee location, company location, national median – 3 strategies to set pay for remote workers

There are several factors that come into play when setting an employee’s salary, including skills, experience, industry and job level. When hiring new members for their global teams, companies have to keep in mind yet another aspect: the remote work factor. In order to do so, they can follow three different strategies. 

1. Set salaries for remote employees according to company location

One way to set pay for remote workers is to calculate compensation according to the location of your company’s headquarters. This basically means that you pay all your employees according to the standards which are valid in your geographical area, regardless of whether the employee lives there or not.

The pros:

• Pay equity: This strategy guarantees equal pay for equal work which may have a positive impact on employee performance as your workers will feel valued for the contribution they make to the company.
• Attracting talent: If your company is based in an area where salaries are generally higher than in other parts of the country – or continent if you hire in several countries throughout the European Union, for example – you may be able to attract the best talent in the market by offering a generous compensation package.

The cons:

• Expensive: If you are looking to save money by going remote, this is probably not your go-to option.

Example of companies which pursue this strategy: 

• Reddit promises employees: “Same pay for all, no matter where you live”.
• Basecamp bases the salaries for their remote employees on the average San Francisco area rates: “Everyone in the same role at the same level is paid the same. Equal work, equal pay.”

2. Calculate pay for remote workers based on employee location

Another strategy which has recently raised quite a bit of media attention is to set pay for remote employees in line with where they live. Employees located in less expensive parts of the country – or in countries with a lower cost of living when talking about globally distributed teams – thus receive a lower salary than their colleagues who have to deal with a higher cost of living.

For example, Glassdoor’s Map My Pay Calculator suggests that tech workers like software engineers and developers relocating from San Francisco or New York City to more affordable areas of the country could see their salaries drop by 10.4 to 24.8 percent.

Companies hiring in different countries around the globe equally need to give their new employee’s location some thought before setting their salary. For a remote developer’s salary, data provided by Arc suggests the following average rates per year (in USD):

• Germany: $72,900 
• France: $74,299 
• Italy: $60,238
• Spain: $68,216
• United Kingdom: $72,177
• United States: $96,999
• Hungary: $59,796
• India: $48,918

The pros: 

• Less expensive: Compared to paying all employees in line with the location of your headquarters, this approach to setting remote workers salaries may actually help you save some money on employment costs. 
• Favorable to employees living in more expensive areas – which might result in your company being able to attract high-performers although your headquarters are based in an area with a talent shortage.
• Promotes positive life changes: When offered location-based salaries, remote workers could decide to move to more rural and thus less expensive regions which, in the long run, could benefit their work-life balance and increase their productivity.

The cons:

• Fairness: As soon as there is a pay gap between employees with similar skills and experience, chances are there will be complaints about unfair treatment.
• Requires a lot of effort: Calculating each individual salary according to your remote worker’s location can be quite a lot of work, much more than just setting a standard based on company location – especially when building a global team with employees in different countries or even continents. It also means having to repeat the process each time one of your employees decides to relocate. 

Example of companies which pursue this strategy: 

• Facebook and Twitter: The social networks announced that they will reduce salaries for remote employees who relocate to areas less expensive than San Francisco Bay.
• VMWare: The cloud computing and virtualization technology company is determined to reduce salaries for employees moving to cheaper living locations intending to guarantee fair payment standards across locations.
• Stripe: The payment processing platform offers employees wishing to relocate a USD 20,000 bonus – with a 10 percent pay cut afterwards.

3. Pay remote workers according to a national median

Last but not least, companies have the option of setting salaries for their remote employees in line with recent market trends. In this case, all your HR department has to do is to keep a constant eye on national developments.

The pros:

• Easy: All it takes is to check how compensation in a particular industry and for specific positions are evolving and what salary is offered on average.
• Modestly attractive: If your headquarters are based in a less expensive area, you can reach more talented workers with this compensation strategy than with a location-based one.

The cons:

• Average: The main problem with setting remote workers salaries according to the national average is the fact that, well, it’s just average. In order to attract top talent you will probably have to offer higher pay. 

How to find out which compensation strategy for remote work salaries works best for your company

In order to determine which of these strategies on how to set pay for remote employees works best for your company, you should have a thought about the different pros and cons and evaluate which one aligns best with your business goals and your company values. Do you value employee equity more than anything else or is your main objective to attract the best talent available on the market?

Taking a look at how other companies adjust salaries for their remote employees can of course also help. A survey conducted by PayScale suggests that, in between the three different strategies presented above, basing remote work compensation on company location currently is the most common approach chosen by organizations, followed by employee location and national market trends. However, even more businesses said that they had chosen a mixed strategy. 

Some companies have even opted for radical transparency when it comes to their remote work salaries. Buffer has published an overview of the salaries of each employee – including their work location – on their website. What’s more, they have put in place a remote salary calculator which suggests compensation based on the average cost of living in each area and the employee’s role. Gitlab has created a similar calculator which, despite not being publicly accessible, works with a pretty interesting formula considering usual compensation rates in the San Francisco area as well as other factors such as location, level and pay equity. 

Controversy: Does remote work justify pay cuts?

As mentioned above, several big companies (including Facebook. Twitter, Stripe and VMWare) have recently announced pay cuts for their remote workers, should they decide to move to less expensive cities. Whether this is to be considered a fair move or not leaves room for discussion. Given that companies save money by letting their employees work from sites other than the company premises, one might argue that this is far from being justified. On the other hand, following the logic of reducing salaries of remote employees who relocate and thus no longer have to pay for high rents, one might come to the conclusion that pay cuts are justifiable.

What’s much more interesting, however, is the reaction of the employees concerned by the prospective pay cuts. Are remote workers willing to accept lower pay in order to be allowed to work remotely? Surprisingly, they are. When questioned for the Owl Labs 2019 State of Remote Work Report, 34% of workers stated they would accept a pay cut of up to 5 percent if that meant they could work remotely. In a similar study conducted by the University of Chicago’s Becker Friedman Institute for Economics, the acceptance among employees even went as far as a 7 percent pay cut.

Why it’s important to know how to set salaries for remote workers

Remote work makes it possible for companies to access a global talent pool and go hunting for new recruits all over the world. While the fact of not being restricted to the local talent pool is generally considered a huge advantage for employers, remote hiring has also led to a fiercer competition on the employment market as companies looking for new hires now not only have to compete for the best employees with their local rivals but with global competitors too.

In order to attract the best talent in the market in today’s world of work, employers have to make sure to offer hugely attractive benefit packages. And while working remotely is in itself considered a popular benefit by many employees – in fact, 59 percent of the respondents in the 2020 Owl Labs Remote Work Report said they would choose an employer who offered remote work over one that didn’t – an attractive salary is equally important. For recruiters and employers, this means that setting salaries for their remote workforce is a crucial part in the process of building a strong global team.

How to set salaries for remote employees: key takeaways

• There are three strategies to calculate remote work salaries: based on employee location, based on company location and in line with national market trends
• Several big companies have announced pay cuts for remote employees relocating to less expensive areas, thus pursuing a location-dependent approach to remote work compensation.
• When deciding on a compensation strategy for your remote employees, it is important to consider the different pros and cons of every approach and align them with your business’ compensation philosophy and values.
• Current data suggests that remote workers earn more on average than their in-house colleagues.
• As geographical restrictions on available talent pools disappear more and more, the competition for the best talent in the market is becoming fiercer, making it more important than ever to know how to set compensation for remote workers.

Once the salaries for your remote employees are set: How to handle global payroll

So, now that you know how to set the salaries for your remote employees, it’s time to think about how to pay them. Especially for companies with an internationally distributed team, handling employee payment can be a challenge. Lano’s global payroll solution allows you to manage payments for your whole team from one single screen and quickly set up payroll in a new country where you have recently completed your first hire. Need help hiring a talented employee in a country where you don’t have a legal entity yet? Then an Employer of Record service might be just what you need. Get in touch to find out more about Lano’s global employment solutions.