Should you localize remote workers' compensation?

Let's say you have a developper in your team based in London making $150k a year. You're hiring another developer at the same skill level and role, this time in the countryside in Bulgaria. Do you adjust the compensation?

If you have a remote team across multiple countries, the salary localization topic is bound to come up. Compensation is an essential question, and the idea that you could be paid less based only on where you live can be frustrating. Yet, why would a business pay more if they do not have to? Let's try to better understand how businesses should navigate this controversial terrain.

The gut instinct I hear is that for the same value created, it's wrong to pay people differently. But let's note that nobody used to care about that: IT workers in India or Western Europe have been employed for decades because of their lower cost, and I never heard any Western IT worker complain about it. Even within Western countries, businesses used to open offices in cheaper places for the explicit reason that they are cheaper. This is why Las Vegas saw an influx of companies looking to stay close to Silicon Valley while bringing down costs.

Of course, just because it was done doesn't make it right. However, I can't help but find it amusing that now that it applies to us, it becomes an ethics question.

This is the common refrain one will hear, but does it make sense? Employees do generate value for a business, but they can't be paid 100% of the value they generate (let's forget for now about the fact that those things are hard to measure); otherwise, it wouldn't make sense for the business to hire them. When a company hires a workforce, its goal is to have the employees generate more value than they cost. This will be the profit of the business.

Since employees can't be paid 100% of the value they generate, let's say for now we'll pay everyone 70%, regardless of the country they work in. Well, that can be incredibly unfair. If someone lives in Vietnam, their expenses will be a lot lower than an employee living in New York. Compensation is only part of the equation and having the same won't ensure perfect fairness. If you wish to equalize the quality of life for two employees, you need to account for where they live, which quickly becomes too complicated.

Every business exists in a competitive landscape. It needs to make smart decisions, including regarding its expenses, to stay competitive and create value for its customers and shareholders. Choosing to align all compensations with the highest one poses a long-term risk to the business, as it leads to unnecessary increases in expenses.

On the other hand, locations do matter, and businesses pay extra for them. For example, maybe you prefer to have developers in the US as it's closer to your customers, makes compliance easier, and helps with in-person meetings. You might even choose a very expensive city such as New York for some of your team. To get those benefits, it's rational for a business to pay a markup, but it would be financially reckless to base all compensations on the most expensive one. As we saw, it would also be unfair to the employees in New York, as their costs are a lot higher as well. Plus, they are providing value by accepting to be in a city where the business needs them and should be compensated for that.

I think it's now clear that there should be some adjustments based on the location. But how much?

Thankfully for us, the job market being a market, it will answer our questions: What is the percentage of the value created that should be used for compensation? How should we adapt compensation based on local expenses? How much extra should a business pay for expensive geographical locations? How can a business stay competitive while keeping compensations fair? The solution is negotiations, which allow for price discovery and optimization for the goals of everyone. As long as the negotiations are fair and nobody is forced to accept an offer, this will lead to the best outcome for the business and employees.

Although it is the business's responsibility to limit expenses, it can be strange to have significant variations in salaries within a team. It is also true that someone living in a low-cost location might be generating significant savings for a business. For this reason, it might be relevant to provide a compensation bonus to employees in low-cost-of-living countries. The company Buffer refers to this as the Good Life Curve (archive). It's the idea of increasing slightly the compensation for employees living in cheap locations as a way of sharing the reduced cost.

As we saw, it makes sense for compensations to be partially based on location. I would recommend being upfront about it with your team and explaining your thought process (this is why I've actually written this article). Even if there are disagreements, it is better for them to know that you have a precise framework in mind for making your decisions. Good luck!

This is a contentious topic, and I would love to hear some feedback.