Location-based pay model
Paying workers based on where the workers live, considering factors such as cost of living and local job market.
In a location-based pay model, also known as geographic or location-dependent, a company pays its workers based on where the workers live, taking into account factors such as local cost of living, local taxes, and how competitive the local job market is. The fully remote software development platform Gitlab is well-known for their location-based pay strategy. They state in their team handbook that they “are paying local rates based on cost of market (also referred to as cost of labor).” They pay based on the local job market rate, with “no cost of living input.” Another widely known remote company, Buffer, also uses a location-based compensation model. They state, “Our formula is:
For companies that use a location-based pay model, the value of the worker’s work does not affect their pay range. This means that, if you hired two Senior Accountants, one in São Paulo and one in San Francisco, you’d be paying your Senior Accountant in São Paulo a salary of $16,886 to $29,702 and your Senior Accountant in San Francisco a salary of $87,803 to $129,260. At the outset, this large pay discrepancy between two workers in the same role may seem unfair – how can you pay them so differently, when they’re both doing the same work?However, the cost of living in San Francisco is much higher than that in São Paulo; according to Mercer’s 2022 Cost of Living City Ranking, San Francisco is the 19th most expensive city in the world, while São Paulo ranks 168th. The San Francisco pay range may seem very high, especially compared to the São Paulo one, but it is not as high when you consider the day-to-day costs of living in SF. Still, if the Senior Accountant in São Paulo knew that their colleague in SF was making five times their salary, they could understandably be upset. Why might you go with this model then?
The pros & cons of location-based payTo help you determine if a location-based pay model is right for your company, we’ll discuss its advantages and disadvantages in the sections below.
Pros of location-based payThe two main advantages of location-based pay are:
- It enables workers doing the same work to afford similar lifestyles
- It gives companies affordable access to a larger talent pool
Workers doing the same work can afford similar lifestyles regardless of locationBecause companies that use a location-based pay strategy often consider cost of living in their calculations, this means that the pay ranges for their workers will give the workers similar lifestyles, regardless of where they live. Going back to our example of Senior Accountants in São Paulo and San Francisco, though the San Francisco one is earning more than the one in São Paulo, because their cities have significantly different costs of living, their lifestyles would likely be comparable in terms of what they can each afford in their cities. In this sense, one could argue that it is “fair” to pay them based on their costs of living.
Affordable access to a larger talent poolAnother advantage of using a location-based pay strategy is that it can enable a company to hire in markets that are more affordable to them. For a new business or small startup with a limited budget, the ability to hire in locations with lower costs of living can greatly expand their talent pool. Instead of hiring a software developer in Silicon Valley, they can look to markets with strong engineering talent and lower costs of living, such as Brazil or Poland. This can be especially helpful when hiring for more senior roles. For example, the median pay for a Senior Software Engineer in Mountain View, CA, is $148,400, while median pay for the same role in Warsaw, Poland, is $30,494.Virtual school Prisma considered using a location-agnostic pay model, but decided to use a location-based strategy to better attract talent. Their CEO Kristen Shroff says, “We considered a location-agnostic model, but we wanted to attract the best possible teachers, which meant we’d have to pay everyone the same, and we wouldn’t have been able to attract some people in higher-cost-of-living areas. Our financial model has a certain average we needed for teacher salaries, so this helps us stay within the model and attract high quality talent.”
Software Engineer Salary
Cons of location-based payWhile location-based pay clearly offers some advantages, it also has potential downsides:
- Because they’re paid based on their location rather than the value of their work, workers may feel undervalued and underpaid
- If a worker moves to another location, you may need to adjust their pay
- It might not work for companies operating in countries with strict DEI laws
Paying workers based on location rather than the value of their workBecause a geographic pay model determines pay rates based on location, it can seem to reward or penalize a person based on where they are instead of what they actually do. Let’s go back to our example of hiring two Senior Accountants, one in São Paulo and one in San Francisco. In a location-based pay model, though they are both doing the same work and providing the same value to the company, the accountant in San Francisco earns five times as much as their São Paulo counterpart. How would it make the accountant in São Paulo feel to know that they make so much less than their colleague, though they have the same job? Such large pay discrepancies can be demoralizing to employees, making them feel undervalued and underpaid, and leading to increased attrition. While a company may think that they can save money by paying location-based salaries, dealing with decreased employee engagement and increased attrition from unhappy employees can also be costly in the long term.
Having to decrease or increase pay when a worker movesAnother potential downside to using a location-based pay strategy is that, if a worker moves to a new location with a different cost of living or job market rate, you may need to adjust their pay. Imagine having to tell your Marketing Manager in Canada that, after they move to Costa Rica, you’ll be decreasing their pay from $56,960 to $48,854. As Plane’s co-founder Staszek Kolarowski puts it:
“If someone wants to move to a different country, you really don’t want to decrease their salary. It’s the same person. Just because they move, you want to pay them half as much? That’s a very hard conversation.”Staszek Kolarzowski, CRO at PlaneSimilarly, consider a case where you have a Software Engineer I in Salt Lake City, Utah, earning $72,000, the median salary for that role and location. She decides to move to Seattle, where the median salary for the same role is $89,000. Do you give her a raise, and did you budget for the cost of the raise?
DEI non-complianceA location-based strategy could see you run afoul of Diversity, Equity, and Inclusion (DEI) best practices. For example,
Black and Hispanic remote workers in the US tend to live in lower-cost-of-living areas, which means that they may systematically command lower pay than their white, centrally located counterparts
In the global job market, workers from emerging markets like the Philippines can tend to receive low offers on the basis of the lower cost of living and minimum wage. Remote talents from the Philippines report that they receive offers as low as $1 an hour and sometimes feel that they must accept such offers because they don’t have much of a choice. $1 an hour is still higher than the Philippine minimum wage, which is currently set at ₱292.70 to ₱500.44 per day ($5.37 to $9.19 per day at the time of writing) for non-agricultural sectors. If you are consistently paying employees in one location more than their counterparts in other locations, this can create a sense of inequity and a perception that people in locations with lower costs of living are second-class citizens.Finally, location-based pay strategies are sometimes predicated on the assumption that relocating to a more expensive or inexpensive area is an easy decision to make. That’s not always the case. Somebody based in Russia, for example, may not be able to relocate (and, therefore, command a higher rate) quite so easily.
Expert insights on remote pay strategies
Learn how virtual school Prisma decided to use a location-based compensation strategy to pay their remote team members.Read more