How to develop a global compensation strategy

Global compensation strategies help businesses determine how much to pay the different members of their global teams. There are two different approaches for handling international compensation and benefits, location-independent pay and localized pay.

But what sounds pretty straightforward in theory can be quite tricky to put into practice, and organizations with employees in different countries often struggle to decide which approach they want to pursue.

How do the different approaches to international compensation work? And what is the best compensation strategy for global teams? 

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, which is the remote work factor. 

“[When] you are hiring on a global scale, you have to deal with a lot of different payment systems and structures because you are not hiring a person from [...] one country alone,” Paul Arnesen recently explained on The State of Work, the podcast by Lano. “You have to organize your way of compensating people depending on where they're living.”

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#37 - Global compensation strategies: How much should I pay my global employees?

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Global compensation strategies provide the general framework that determines how an organization’s international employees get compensated for their work. In the early stages of global expansion, businesses often don’t have to worry about creating a specific employee compensation strategy for their global teams, since they will often work with local freelancers and independent contractors. 

As soon as a business moves on to hiring full-time staff in different locations, however, it becomes necessary to establish some rules and principles with regard to international pay structures in order to:

• Guarantee compliance with minimum wage and compensation laws across all geographies

• Remain competitive enough to attract the best talent (both compared to local and global competitors)

• Make sure the chosen pay structures are cost-effective

• Ensure fairness among employees based in different geographies but working in similar roles with a similar level of experience, which has a direct impact on employee morale and job satisfaction

Fairness and equality are two very important concepts when working with a global workforce. But opinions on what counts as fair and equal in the context of global compensation differ, which is why it can be difficult for a business to decide which global compensation and benefits strategy to go for.

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One way to manage international compensation and benefits is to calculate compensation based on the location of the company’s headquarters. This means that employees in similar positions receive the same pay, regardless of where they live and work from.

Advantages of location-independent pay

• Pay equity: This strategy guarantees equal pay for equal work, which may have a positive impact on employee performance as workers will feel valued for the contribution they make to the company.

• Talent acquisition: If the organization is based in a high-wage country, offering remote employees in different countries a pay rate that matches headquarters standards will be great for attracting the best talent in the market.

• Simplicity: Universal pay rates for the entire global team makes processing global payroll a lot easier.

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Downsides of location-independent pay

• High costs: Offering headquarters-based pay rates to employees all over the globe means losing out on the opportunity to save money by hiring talent in countries where labor costs are typically low. Plus, employer costs vary greatly from one country to the next so that the total cost for employing someone in a certain geography might turn out to be a lot higher than initially planned.

• Different net earnings: Payroll taxes differ from one country to the next, which means that the net outcome for employees based in different countries can vary significantly.

• Negative impact on local economy: If big multinationals start large-scale hiring campaigns in certain geographies, offering high salaries and competitive benefits packages, this will put local businesses in a position where they won’t be able to compete.

• Risk of non-compliance with in-country compensation laws: Minimum wages differ around the globe, and multinationals must make sure to meet the legal minimum compensation requirements in every country where they have employees. Defining position-specific pay rates based on headquarters standards could mean that minimum wage standards in certain geographies are not met.

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Companies that offer location-independent pay

• 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.

Another global compensation strategy which has raised quite a bit of media attention is to pay remote employees based on their location. Employees located in countries with a lower cost of living thus receive a lower salary than their colleagues in comparable positions who live in countries where the cost of living is higher.

Advantages of localized pay

• Lower costs: In contrast to paying all employees according to headquarters standards, this approach to global compensation actually helps businesses save some money on employment costs.

• Favorable to employees living in high-wage countries: Choosing this approach to international compensation can help businesses based in countries with talent shortage attract talent abroad.

Downsides of localized pay

• Lack of fairness: As soon as there is a pay gap between employees with similar skills and experience, chances are that there will be complaints about unfair treatment. After all, the work that is linked to a certain position in an organization should have the same value, no matter from where it is carried out.

• Requires a lot of effort: Calculating the individual salary according to the employee’s location can be a lot of work—much more than just setting a universal pay rate for similar roles that is used across geographies. It also means having to recalculate compensation every time an employee decides to relocate.

Companies that have chosen localized pay

• 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.

Put simply, there is no one-size-fits-all solution when it comes to international compensation strategies. Every business needs to weigh the pros and cons of both approaches to decide which global compensation model works best for them—or even come up with a hybrid or modified approach such as defining standardized pay structures and compensation packages for different geographic regions. 

Questions to ask in this process include: 

• Which global compensation strategy aligns best with the company values?

• What is the main objective pursued with the compensation strategy? Attracting the best talent in every location or ensuring financial equality between employees regardless of where they are based?

• What is considered fair when it comes to global compensation? Paying employees in similar positions the exact same amounts? Or paying them a good salary which enables them to live comfortably measured against local standards?

Taking a look at how other companies handle global compensation can, of course, also help. Some organizations have even opted for radical transparency when it comes to their global compensation strategy. 

For instance, Buffer has published a detailed overview showing each employee’s individual salary—including their work location—and has also developed a remote salary calculator which suggests compensation based on the average cost of living in each area and the employee’s role.