Remote work compensation
How should companies compensate team members for comparable work, done in different geographies?
Context:
There are two main arguments: the first one is: equal work, equal pay (known as EWEP). The second argument is to provide different pay to ensure a comparable standard of living. Formally that’s called cost of living adjustment compensation (known as COLA).
Proponents of equal pay for equal work argue that compensation should depend on output; if the quality and quantity are similar, so should be the payment. To do otherwise implies that one person is worth less than another, which is unfair.
And if someone dislikes their high cost of living, they can always move to somewhere cheaper.
Others prefer compensation to equalize standards of living, irrespective of location. If the company values a person based at a specific location, it should pay a competitive compensation. If this company works with people at different locations, it will offer different compensations for the same work to ensure a comparable standard of living.
Employee Incentives
The employee living at low-cost geographies will favor being compensated according to contribution,or to have the compensation anchored to the most expensive location possible.
The person living in an expensive location is happy being compensated according to each location’s needs. As to how they feel about compensation according to output or contribution, it will depend:
if the cost of living on cheaper places averages down the payment for everyone, then they will be against it because it will make it harder to live in an expensive location. But if the watermark is the compensation for their geography, they should be fine with it.
Defendants of COLA located in expensive locations could argue that if someone else wants the same pay, they should move to the more expensive location. But given the constraints on labor mobility and visas, that might not be realistic.
Proponents of EWEP would respond that people in expensive locations are there out of their own volition, and point out that it may be perfectly rational to choose a higher cost of living (and the smaller apartment and savings rates that comes with it) because there is something else of value they are getting at that location: culture, weather, more job options, etc.
EWEP people could make parallel arguments as COLA defendants: if you don’t like making the same and having a lower standard of living you could move to a cheaper location. But again, is that a strong enough argument? Sure, they could move, but once you have a family and lay roots, it is not always easy.
Employer Incentives
The employer wants to pay as much as needed to attract the best talent, but not more. Employees are critically important constituents for the employer, but so are customers who want good, affordable products and shareholders who want run-rate and profits.
Of course, people who run companies often do it for more than profit maximization, and sharing on the wealth created, doing the best you can for others are often strong motivators. Still, companies must set limits to salaries for the obvious reason that employees are not the only constituents.
There are several ways a company can decide to compensate the people they work with.
The company can decide to pay by the estimated value of an output (or the capacity to generate that output) and set up a price. People can apply and whoever passes the bar, will get that compensation.
Basecamp is a pioneer of remote work, and favors this model. According to its co-founder DHH: Everyone in the same role at the same level is paid the same. Equal work, equal pay(…) This means everyone has the freedom to pick where they want to live, and there’s no penalty for relocating to a cheaper cost-of-living area. We encourage remote and have many employees who’ve lived all over while continuing to work for Basecamp.
As we saw, this is clearly better for people in cheaper locations, and only works for people in more expensive locations if the compensation is competitive in their location (Basecamp says it anchors to SF, likely the most expensive location). For the company’s customers and its finance, it seems worse since it’s paying the most expensive possible rate. Even if a company can afford the most expensive rate, it is part of its mandate to limit the cost.
Another option is to look at market compensation for every location they are hiring in, and decide what compensation to offer. In theory, anything better than the best available rate for local talent should work well. Similarly, the company can let the applicant submit their desired compensation, negotiate if it is too high, and meet it if the person is accepted into the company.
COLA makes financial sense for companies. For an employer, comparable talent at cheaper locations allows them to maintain quality, and improve margins. If the business is materially richer than other companies competing in that location, it can slightly better than the best rate, and dominate the labor market there.
Gitlab and its CEO Sid Sijbrandij are also leaders of remote work, and big proponents of COLA.
The game
The pricing dynamics are fairly dependent on how important and prevalent remote work is, both within a company, and their ecosystem at large.
If a company wants people in a certain location, it needs to incentivize them to be there. If this place is costly, then it must pay more than in other locations the company might also hire.
If it pays the same compensation to someone at another cheaper location, it will encourage people to leave for the cheaper location, and reduce its margin.
If the same company also hires at a cheaper place, and in that place, there are not many remote jobs available, then offering marginally better than local market rates should give them the right candidates. Now, if many remote companies are competing, and if there are big savings on the local rates, then prices for remote work in that location will naturally go up.
If this hypothetical company needs to compete for talent against fully remote companies, then the dynamic changes.
If these fully remote companies don’t care about expensive locations, then the rate can be lower than needed for such location, but much higher than other, cheaper locations. That way, they can win against companies that need to take expensive locations into consideration.
As an employee in a relatively cheap place, the best possible employer would be a company hiring at an expensive geography and at yours, but setting a flat rate that works for everyone. But as we have seen, that is financially suboptimal for the company, and, as long as the fully remote market is not deep enough, they likely don’t need to do that.
The second-best option for such a person is to work for a fully remote company that pays everyone the same, somewhere between local rates and expensive rates. Some of these exist, but still, there are plenty of remote-only companies that see adjusted cost of living as the right fairness metric, and do so accordingly.
It is very hard to predict how important certain locations will be in the future, and how much they will anchor top rates for certain jobs.
In a world where locations do not matter, compensation will tend towards the local rate at cheaper places with a large pool of talent. If in the future certain expensive locations continue to matter, then for those companies there will likely always be an adjustment for the standard of living.
Fairness, and markets
Let’s assume it is equally possible to move from an expensive place to a cheaper one, and vice versa. For the person making less, assume they can move to the place that pays more. For the person living in a more expensive place, assume they can move to a cheaper location.
Is it fair for a person doing the same job as someone else to get paid less because of its location?
Is it fair for a person to do the same job as someone else but to enjoy a lower standard of living because of its location, even if there are other benefits to living in an expensive location?
These are difficult questions to answer. Think about this hypothetical scenario:
Assume there is a company that adjusts for cost of living. It pays you less than someone living somewhere more expensive, but it also pays you more than a fully remote company paying EWEP. Which job should you take? Is the company paying you more than any other option, but less than other co-workers, being unfair to you?
I don’t personally think one set up is inherently more just than another. Different companies respond to different world views and incentives, and benefit different people.
There are many reasons why companies are exploring remote work: some have specialized needs which are scattered across the globe, others can’t make their business work with say Silicon Valley or London salaries. Plenty want to explore if remote will work, but are not convinced yet what to make of it, and yet others believe that remote work setups yield better outputs and are fully committed to working that way.
These and many other reasons are mixed in different degrees and different combinations, yielding different ideal strategies for each company. And within these companies, there are leaders who feel COLA is fair, and some that believe EWEP is the right ethical decision.
The same applies to people: some think EWEP is the fair setup, because location is a decision that includes cost of living as one of many variables, while others think COLA is fair because salary should secure a certain standard of living, regardless of where you are.
I believe better labor markets are a net positive to society.
The marvel and beauty of remote work is that it makes labor markets more efficient. It opens job opportunities that would not be available otherwise. It allows companies to hire talent that otherwise it could not get. It makes it easier for labor to be allocated in the optimal positions.
Each person and each company has a myriad of values to optimize for, at different degrees, yielding a likely unique and different setup from everyone else. Different compensation schemes, geographical weights, and even conceptions of fairness create a marketplace of companies and people that makes it easier for each one to find their best match.
Remote work makes the labor market more liquid and efficient. With a more functioning labor market, opportunities are better distributed, and companies and employees get better matches.
It becomes easier to know what the right price for a product or service is. The more people join the remote workforce, the easier it will be for the next person to find the right job, at the right compensation.
In my opinion, the number one reason labor is at a great disadvantage with respect to capital is because capital markets are deep, liquid and efficient. A more efficient labor market gives more power to those who own competitive labor, improving economic justice.