Geography-based salary or location-based salary is compensation adjusted based on the employee’s location and the cost of living in the area. The wage reflects the market rate which is promoted in each city, country, or region by other organisations with an adequate amount to cover the living expenses of their employees (e.g., housing, utilities, transportation).

For instance, employees who are located in a high cost-of-living (COL) area such as New York or San Francisco are paid a higher living wage compared to those who are located in an urban or suburban area such as Montana, Austin, or Boise.

Location-based pay has been known for a long time across all industries. In fact, this type of payment has long been the norm in the technology sector. GitHub, for example, a software development platform with primarily remote teams, has been applying this type of payment for their employees.

Implementing location-based pay offers companies and employees another affordable opportunity to live in a high COL area such as Silicon Valley, a leading US tech hub, or Hong Kong-one of the world’s most expensive cities.

In accordance with the Geographic Pay Policies Study from WorldatWork, up to 67 per cent of employees from the United States expect their wages to be based on where they live. For most non-managerial positions, location is used as a primary factor in benchmarking pay rates and modifying salary ranges.

Furthermore, the demand for remote work during the COVID-19 pandemic has made location-based pay more trendy. In a survey conducted by WorldatWork, 62 per cent of companies have implemented geographic-based pay policies, while 44 per cent are considering adjusting their policies to cope with the growth of remote work.

According to Payscale, almost 43 per cent of employees want the company to continue to work remotely, especially for job positions such as marketing and advertising (75 per cent), information technology (71 per cent), art and design (69 per cent). Not few, especially younger and junior talents, continue working remotely from their parent’s house in another city or even another state.

This situation raises an important question among talents and recruiters; will remote work change the salary calculations to comply with the geographic-based pay regulations?

How to calculate geography-based salary?

With the rising trend of remote work, many employees are considering relocating to an ideally better and less expensive neighbourhood area to move in. Employees now don’t need to find accommodations close to their office anymore. In fact, employees are now more than ever to have the freedom to decide on where to work.

Also Read: How remote work has changed the salary scale in Taiwan

However, geography-based pay comprises many complex factors. For this reason, it is crucial to acknowledge various approaches employers can take to implement these policies.

The following factors are the most common that employers use to calculate the wage:

Cost of living index: A general expense of a location (e.g., cost of goods, services, transportation, housing, etc.) that a person can expect.
Income tax rates: A tax on individual income or entities’ profit. The rate may differ based on the type or the characteristic of the taxpayer and the type of income.
Market rate: Refer to the amount of salary that one employee receives for a specific job position which is offered by the employer based on the current market of an area or a country.

Employers may apply these factors together to determine the amount of location-based pay. Some employers prefer to apply market rate by city for assigning locations to diverse geographic-based pay.

Minimum wage and salary are also regulated under the local labour law, which means depending on where your business is registered and where your talent is hired, it will determine the amount of the salary and compensation package. This also applies to inter-state and international employment.

However, this approach is not always practical or feasible, especially in organisations that practice cross-border hiring. Hence, as a substitute, many companies will choose a specific singular state, region, or grouping of similar market rate areas as a zone to calculate the compensation.

Pros and cons of geography-based pay in a remote working scenario

There are advantages and disadvantages of location-based salary for both employees and employers, which can be broken down into the following:

The employees

At the very least, employees will be paid fairly depending on where they reside. However, it’s not uncommon when a company chooses to pay the employee with a singular rate, the employee might receive a larger paycheck if the employee is currently residing in a low-cost-of-living area while the hiring company that is currently based in some of the major cities is compensating the employee according to their standard wage.

For instance, Reddit supports its employees’ right to live and work wherever they choose. Instead of calculating employees’ payments based on their location separately, Reddit chooses to scale its pay range based on high-cost areas such as San Francisco and New York.

Also Read: Is the remote working trend “swallowing” office employees’ vacation time?

By conducting a mixed localised pay approach that increased or kept up the wages rather than lowering them, Reddit could settle a single pay range for every employee regardless of where their employees were located.

The employers

On the employer’s side, employers now have wider options to adjust their employment budgets. Employers can now hire remote employees outside the higher-cost region to allow the company to save on payroll, and company operational expenses and, at the same time, be able to reap the rewards of doing business in an established area.

Despite the range of benefits that the local-based salary has to offer to both employers and employees, many factors that contribute to the salary calculation are very complex and can be challenging for many companies.

On the other hand, employers are required to comply with the local labour laws to ensure compliance. Typically, to do that, employers need to have a registered entity where their talents are based and handle the payroll in-house. This situation might not be feasible, especially for companies with limited resources, such as small-medium businesses and startups, who are looking for a more agile solution.

A great way to ensure that your company has a competitive and fair offer to your employees is by working with an Employer of Record (EOR). An Employer of record also saves you some payroll headaches when managing employees from different states and countries.

Through an employer of record (EOR), you can now be able to leverage the location-based salary to maximise your resources to grow your business without risk. Employers can now also aim for global expansion where employers can explore new borderless labour markets and approach a wider scope of talent pool regardless of geographic limitations.

Slasify is a global employment HR service that can assist you on a global expansion journey by hiring and onboarding international talent, as well as maintaining legal compliance. If you plan to expand your business overseas, connect with our labour experts to strategise for compliant global employment.

–

Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic

Join our e27 Telegram group, FB community, or like the e27 Facebook page

Image credit: Canva Pro

The post Breaking down geography-based salary for your global teams appeared first on e27.