How does remote compensation work for distributed teams?

Introduction

With the changing dynamics between employer and employee, an emerging Gen Z workforce and post-pandemic adaptations the employment landscape looks drastically different. The change has been radical, and while many employees have welcomed it and businesses have started to see its benefits and potential, it hasn’t been without its challenges. While many employees are still working from home either full-time or on a hybrid model, a welcomed almost-post-pandemic hangover, many businesses are still scrambling to implement company policies and strategies to best accommodate this new normal.

So, if you see the potential in global employee distribution and are ready to take the next step in future-proofing your global human resource strategy, listen up. We’ve created a guide to help tackle the big, the sometimes complicated and often controversial topic of global compensation — what is the best payroll strategy, and how exactly do you determine global compensation for remote or distributed teams?

When determining the salary ranges for employees, typical compensation strategies factor in cost of living. This is, of course, as well as skills, knowledge and experience. Indeed, with many companies now moving to remote-first, some without a fixed office location at all, this can get very complicated. Or what if your company takes a hybrid approach, or some teams are remote-first while others are not? These are all the types of questions that make this topic tricky, and we’re sorry to say there isn’t exactly a straight answer. Instead, we’ve done our very best to give you all the information, along with tools and resources to empower you to make a decision that works best for your business and your employees. 

Here we discuss the risks and benefits of the various global compensation strategies while highlighting the reasons for maintaining a fair and equitable approach, despite distribution and the varying costs of living. By defining global payroll and highlighting the subsequent challenges in devising a strategy, companies can approach their own challenges with a comprehensive overview of what will or will not work for them. 

Lastly, we address points to keep in mind when devising your global payroll strategy and discuss the importance of a compensation philosophy to best inform your decision-making. 

What is global payroll or global compensation?

Payroll refers to the compensation a company pays to their employees for the work they do. Here, when we talk about global payroll, we’re referring to the strategy in place to compensate remote-first or distributed teams. It differs in that the typical ways that salaries are determined can be a little bit different when teams are working from home or spread across the globe than when they’re in a fixed location.

Global payroll challenges

Unlike multinational companies, where global subsidiaries are set up and entire financial and legal structures are in place to comply with local markets, remote-first or distributed teams are different. There is a lot to consider to ensure you’re not only paying people fairly but that you’re also playing by the rules;

Compliance

Every country or even regional jurisdiction has its own legal framework for handling everything to do with labour. From compensation and taxes to working conditions and healthcare, it’s your responsibility to make sure you and your employees are working within the laws of the country where they reside. Thankfully, that’s where tools like ours come into it and many of those headaches are taken care of. A nice little plug, right? But in all seriousness, we highly recommend employing the services of either a company specialising in global hiring or a local payroll service provider.  

Decentralisation

When managing payroll locally, things can quickly get confusing. While leveraging local payroll service providers will ensure you’re getting local expertise, things can get out of hand if you’re forever seeking the services of a new company every time you make a remote hire. As the number of providers grows with your team, you’ve got a lot of repeated work on your hands, as well as increasing costs and a potential loss of data of what you’re spending where. 

Accuracy 

Between languages, foreign bank accounts and currencies, there’s a lot of room for error when trying to pay people across the world. Without a local subsidiary, you’re not likely to have a local legal, tax or finance team. Inaccuracy has the potential to not only reflect poorly on the company brand and credibility as well as employee morale, but fines in some countries can be very costly. 

Confidentiality and data security

Like most things, technology has made global payroll easier and more powerful. This is especially true when you consider integration into centralised processes designed to streamline many of these challenges or the idea of data collection and processing. However, along with that comes security and confidentiality risks as well as a whole lot of regulation that changes from country to country.

Useful tools and information for global payroll challenges

We highly recommend taking a cutting edge approach when engaging a payroll service provider or global HR management tool. Cloud-based services allow secure access at any time and should be relatively easy to set up, with the same user-friendly dashboards for every new client or hire. A good one should be fully automated and offer integrated payroll and easy reporting. 

WorkMotion: a global HR operating system that enables talent onboarding globally

WorkDay Adaptive Planning: a comprehensive planning tool enabling smarter planning, data processing and modelling.

Personio, Europe’s leading online HR management platform

BambooHR, a HR management tool with powerful tracking capabilities for applications and employee benefits.

The importance of an effective global compensation strategy

A good strategy is fair and equitable to employees, is aligned with your overall business objectives and isn’t a nightmare for your People and Development team to implement. Now, there are clear risks and benefits to the different strategies out there (more on those later), and there is no one-size-fits-all. However, we do think that if you can factor in these elements, you’re well on your way to designing a global compensation strategy that sets your business and your employees up for success.

Fairness and equity 

First and foremost, it’s important to pay your employees fairly. Why exactly? Well firstly, paying people fairly is just the right thing to do. However, it also makes good business sense;

Increased recruiting leverage

If you’re moving remote to cut fixed overheads or adding flexible work options as a benefit to your employees, that’s great. But you still need to offer competitive remote compensation. The truth is, with the ever-increasing demand for labour, skilled workers have the leverage and money is still the most effective way to attract the best talent. 

Reduced employee turnover

Increased turnover is a not-so-hidden cost of not paying your employees well. It should go without saying that if employees aren’t earning enough to compensate their value to the company or find out they’re not being paid fairly in comparison to their colleagues, they’ll probably look for another job. 

With the Society for Human Resource Management (SHRM) stating that it can cost anywhere between six to nine months of an employee’s salary to replace them, you might have just been better off paying them fairly to begin with, saving yourself the money and the hassle. 

Factoring lost productivity, recruiting, onboarding and training, team cohesion and project disruption, another more recent Global Workplace Analytics report puts the figure around USD10,000 and USD30,000 per employee.

Low team morale

Pay inequity creates an environment where people feel undervalued. With that, you’re likely to find that your employees have reduced productivity and low engagement, and your turnover rate will go up too (see above). And it seems low team morale comes with a high price tag. According to The Gallup Organization, there are an estimated 22 million disengaged employees across the US costing the economy USD350 billion per year in lost productivity, days off and sick days. That’s a huge number, and while statistics like that might a little difficult to pinpoint in your organisation, it goes without saying that reduced productivity, low team morale and increased employee turnover are simply bad for business. 

Fairness and equity wrap up

Sometimes the idea of developing a cost-effective compensation strategy can be alluring. Certainly, this is true with the opening up of global markets, which is made possible for companies with a remote-first approach. However, with these items in mind, it’s worth considering the risk versus reward metric and considering if the cheapest approach is indeed the most cost-effective long-term.

Cohesion with business objectives

Besides being fair and equitable to your employees, it’s important that your remote compensation strategy is well aligned with the overall objectives of your business. That is, does it align with your mission, your financial position and goals, and with your intended growth trajectory. To assist in aligning these, we cannot stress the importance of starting with a robust global compensation philosophy. 

Global compensation philosophy 

A compensation philosophy determines the why of your global payroll strategy. Like most things, it’s good to understand why you’re doing something before you figure out how. You need your strategy to support your overarching business objectives, growth trajectory and human resource strategy. Looking around at market leaders and competitors is also a good place to start. 

Things to consider when thinking about your global compensation philosophy:

• What is your financial position?
• What are your strategic objectives?
• What are your values and mission?
• What is your market position? Consider the strengths and weaknesses of your product or service and how that factors into whom you’re employing and what you’re willing or able to pay them. 
• What are the external market factors? You need to remain competitive when setting salaries if you want the best staff.

Indeed, this stage of the process will take a lot of input so make sure you’re talking to your various departments and existing teams to see how they feel. The best way to gauge what will (or will not) work is to ask your existing employees. 

Useful tools for establishing a compensation philosophy that works for you 

• Glassdoor for Employers: Glassdoor’s dedicated hiring platform offers employers an opportunity to promote their brand and gain market insights.
• SHRM: A US-based organisation promoting fair and effective human resource management through education, certification and networking.
• Gallup: A research and analysis consultancy focused on client and employee management strategies.

Human resource management 

When deliberating your global compensation strategy it’s important to consider the administrative requirements in implementing it. Distributed teams can get very complicated and we see two ways of looking at it — high upfront burden in devising a bespoke strategy fit-for-purpose; or a strategy that requires high ongoing management but reaps potential cost savings. 

For example, a remote compensation strategy relying heavily on a location-based metric will find themselves constantly re-inventing the wheel, so to speak, when hiring a new talent, Whereas if your basis is more market-based, you only need to factor in where they sit on your pay scale based on traditional salary setting methods such as their skills and experience

At the end of the day, your people are your business so putting time into compensating them accurately and fairly is crucial. However, pay is; 

1. Not the only responsibility of your human resource department; and 
2. Not the only component of a successful people and development strategy.

Useful tools and information for managing your global human resources

As your one-stop global HR management tool, WorkMotion has done our very best to take some of this burden away. After all, we see the importance of letting your People and Development teams get on with the important strategic elements of growing your business the right way, with the right people. See our API integrations below which only strengthen these capabilities so you’re not getting too bogged down in the admin.

Europe and the United Kingdom: Personio, Europes leading HR software company. 

The United States and North America: BambooHR

If you’re already a WorkMotion customer, here is some more specific information on our API integrations:

WorkMotion API integration with BambooHR.

WorkMotions API integration with Personio.

CTA: Link here to WorkMotion’s joint webinar with Personio — Putting Europe on the Map: How to Hire and Manage Global Talent. 

Things to consider when determining your global compensation strategy

Standard metrics for setting salary scales

The idea of a compensation strategy shouldn’t be new. It’s part of any overall business strategy – remote or not – as it determines what and how you pay your staff. 

There are many factors in determining salaries and they can be contentious. Understandably, people want (and should) be paid fairly, but what exactly goes into a standard salary calculation?

When setting standard pay scales, HR departments determine bands based on the specific role, its responsibilities and the following main areas:

• Education or level of skill
• Amount of experience
• Candidate expectation
• Demand for skill (externally and internally)
• Company budget
• Market average
• Benefits schemes or bonuses
• Location, cost of living

Useful resources on the standard metrics for setting salaries

Career Builder (for employees)

(Not so) hidden costs besides basic salary

Hiring remotely can get very complicated, especially once you move outside of your country or, in the case of Europe, outside of your continent. Different rules apply just about everywhere. Getting local expertise is crucial to successfully navigating labour laws, taxation and social security — and that’s before we even look at Permanent Establishment risk. Even Europe lacks a consistent regulatory framework across borders that simplifies cross-border hiring. So this is where we say — don’t forget to factor in all the other hidden costs to hiring globally when considering global payroll. 

A snapshot of some sneaky hidden costs:

• Social security: These will obviously change from country to country, so it’s good to know what you’re up for before making any concrete decisions.
• Federal tax: This mostly applies to how you should distribute taxes to local governments. Although, it’s also good to double-check if you, as an employer, will owe taxes in other jurisdictions than where you’re based.
• Holiday bonuses: A quick Google search can let you know where this payment is mandatory versus customary. 
• Regional tax: Yes, even within some countries, employment laws may change between states and regions.

Useful advice for local expertise

Engaging a locally-based Payroll service provider is the best way to eliminate any ambiguity around these hidden costs and remove any room for error.

Useful articles on social security

Mobility exchange: A site designed to help employers access guides, events and resources relevant to global hiring such as social security, compensation and cost of living.

PWC: A Big4 accounting firm offers insights into social security implications for remote teams.

Contracts, labour laws and taxation

While not so specific to global compensation strategies, it’s still good to remember that you and your remote employee will be subject to the labour laws and tax obligations of the country where the person resides, not where your company is based. So it’s good to be aware of the rules and regulations of where your remote hire is and have an expert on the ground so nothing is missed.

How distributed is your team? 

Do you work globally or is your team across a region or country? It’s good to consider the question in terms of your projected growth as well as what the current status is. The question is relevant because it will help form the basis of the type of strategy that might work for you and what tools you should use. 

For example, using local Payroll providers makes sense if you’re hiring within your country or continent only. However, for a truly distributed team, using one central HR management tool which covers most if not all of your locations may end up more cost-effective and easier to manage.

Global compensation considerations — wrap-up 

Indeed, when considering the salaries of remote workers, many of the same rules apply, all bar one — location. But it’s a big one. In the context of in-office or traditional employment structures, things are easier because staff are presumably living in the same location and subject to the same rules, market factors and cost of living. Should the same rules apply then to remote workers? It’s a contentious question.

Should remote workers be paid less simply because they’re remote?

As a rule no, but this can really depend on who you ask. Corporate heavy hitters like Google and Facebook would disagree. In some companies, and certainly, you’ll see this in older, larger corporations, remote work is seen as an added benefit rather than the new norm. This benefit is factored into employees’ overall compensation package and can impact their entitlement to higher pay. While for other companies, certainly tech-focussed start-ups, it’s simply the way business is done now.  

Certainly here at WorkMotion, we believe in paying people fairly wherever they’re located. However, it’s equally important to stay competitive within the markets you’re working. At the end of the day, it’s important to ensure fair pay for everyone that accounts for responsibilities, location and experience. At the same time, direct labour costs contribute up to 50% of your operating costs — so paying a San Francisco salary band when your major market is in Europe just doesn’t stack-up. 

A note on remote work and productivity

One of the many myths that some corporations love to throw around is that remote work isn’t productive. However, the statistics overwhelmingly show that productivity actually increases overall with remote-first or flexible work options. With this in mind, reducing people’s pay on the basis that they get to work from home or simply because they don’t have a fixed schedule or office presence starts to become a hard argument. 

Two major strategies for establishing global compensation

To help answer some of these outstanding questions, let’s explore the two major strategies to see which one suits you. 

1. Location-based compensation (cost of living)

Evaluating employee cost of living is a common strategy for salary calculation. It evaluates the basic expenses of a particular country or city and determines a fair livable salary. The approach considers major costs such as rent, utilities, groceries and transportation. So, it goes without saying that companies and employees based in expensive cities are likely to receive higher salaries than those in cheaper cities or countries. 

In the case of globally distributed teams, you can see how this can get complicated. It’s no surprise the topic has received a lot of attention in recent months and years. As major corporations look to revamp their remote pay strategies, issues of fairness and transparency have been raised. 

Notable employee example

In 2020, Facebook declared that they would be moving to a location-based compensation strategy for their remote teams, to the point where their long-commute staff are at risk of taking a pay cut. While Buffer famously published their employee’s salaries online and even provide their location-based salary calculator on their website. The key to their location-based compensation strategy? Transparency. They argue that by being up-front about remote compensation, people can decide whether or not to apply for a job. The risk to this is they may lose out on the best talent before they even get a chance to have a conversation.

Gitlab also leverages a location-based strategy and also values transparency. They have even published a handbook on their all-remote compensation strategy which makes for an insightful read.

Ways to implement it

Some companies will research the salaries of local competitors in the areas where their remote staff are based. Another approach is to do your own cost of living calculations and determine a fair pay scale that way. 

Benefits

Cost savings: If you’re already broadening your talent horizons by implementing a remote hiring strategy then there’s a strong likelihood you’ll be able to save on salaries too.

Attract the best talent: If you set out to offer above-average pay in a lower cost of living location, you’re well-positioned to secure the best person for the job. There is, however, the risk that these employees will find out they’re not being paid the same as their, say, US-based colleagues which could start to get awkward.

Improve local economy: Your international business is likely to improve the living conditions of the people you’re employing. In turn, this can achieve positive knock-on effects for the local or regional economy.

Risks

Increased administration: Depending on the size of your remote team, HR departments now have to determine salaries not only on market banding based on skills, education and experience but also on individual-level local, regional or country-based cost of living. Theoretically, you would need to do this not only with new employees but every time an employee decides to move.

Complicated payroll: If everyone’s pay is based on different calculations, this can start to get very complicated for your human resource and finance departments. It would be advisable to engage local Payroll experts to streamline this, however, if your team is rapidly growing, that can come with its own set of headaches. 

Fairness and equality: There is a reason this approach is controversial. If you’re paying your New York-based developers up to 25% more than in your lower cost of living cities, despite similar skills and experience, it doesn’t exactly create feelings of fairness and appreciation in the workplace. Be sure to remember the hidden cost of reduced productivity and increased employee turnover — each can be an outcome of low team morale and a lack of company loyalty (see above for more information on fairness and equity).

Discrimination: There is also the potential risk of increasing gender pay gaps or even trashing your very own diversity and inclusion policy. Don’t forget that under-represented groups in the workplace tend to live in lower-income areas.  

Useful cost of living calculators

Numbeo: Numbeo is the world’s largest cost of living database.

Citii: An app for comparing and analysing cost of living data.

AirInc: A relocation specialist who has a powerful cost of living calculator.

On Your Own Time: Focused on fair but not necessarily equal compensation, this company shares their compensation calculator. 

2. Salary standardisation: Compensation based on a single market factor

Alternatively, there is the employer-based, market-based or a standardised approach to salary banding. Despite how it sounds, it’s actually a much simpler way of handling your remote compensation strategy. 

Basically, staff, no matter where they live, are paid according to other market factors, not where they live. The bit that is a little more complicated is determining what those market factors are. You could say that setting up this type of strategy has more upfront time investment, however, it’s sure to simplify things down the road. 

So what market factors are we talking about exactly? 

Cost of living in the location of the company headquarters: Given that company headquarters tend to be in bigger cities, this approach can work out quite an employee-friendly approach to remote compensation. This is particularly true in tech-focussed companies with headquarters in places like Silicon Valley, or those in financial services with headquarters in New York.

A global, national or regional average: Rather than honing in on the location of a company specifically, the market average could be based on a broader region. A national average can work well depending on the size and breadth of your remote-first team. 

Niche industry averages: Some remote-first friendly industries are less defined by geography. So instead, you could look at other remote-first or even traditional company structures and see what they’re paying in order to stay competitive. Compensation services providers like Payscale can help you find these numbers.  

Notable employee example

Reddit is a notable company that took this approach. They encouraged all of their employees to work remotely while offering to pay them a Bay Area salary no matter where they choose to go. This can work out a costly strategy however they’re likely to keep good talent on the basis of a competitive salary.

Basecamp took a different approach altogether. They decided to pay their staff based on the Bay Area average despite being based in Chicago. In doing so, they remain competitive in both their remote and in-office compensation strategies, attracting talent from right across the United States and abroad due to their above-average salary scheme. 

Benefits

Pay equity: It’s simple — paying people based on their skills, experience and contributions to the company rather than where they choose to live is fairer. This creates an alternative environment where people feel valued and fairly treated resulting in better company culture and improved performance outcomes. 

Simpler: While the upfront admin of determining what your specific market average is, by selecting one location and sticking to it, it reduces the administrative burden on HR departments.

Risks

Expensive: If you’re going remote to cut costs, this method may not work for you because you’re not likely to reap any financial benefits from employing in Asia or Latin America. This is certainly true if you’re taking a global approach to your remote compensation. Indeed, if you’re paying global employees a US-based salary this is likely to cost you more. However, if you’re motivated by other remote-first benefits, the less tangible value of employing globally might still be worth it. 

Not competitive: At the end of the day, it is just an average and average salaries don’t necessarily attract or keep the best talent. A strategy like this can be fairly inflexible meaning you may not have the ability to individualise contributions for that stand-out candidate.

Useful information

Market-based compensation strategies — SHRM

Salary statistics

• Destatis – Germany
• Statista – Worldwide
• Office of National Statistics — United Kingdom
• US Bureau of Labor Statistics — United States of America
• Eurostat — Europe

So how should your company do it?

As you can probably already see, the short answer is, it’s complicated. There is no one-size-fits-all approach to global payroll, nor does the perfect compensation strategy for every remote or distributed team exist.

Our advice is to revert back to your company philosophy. By defining your why, it’s easier to take from everything we’ve discussed here your best way to implement how. 

Useful tools

WorkMotion Salary Estimation

WorkMotion Salary Recommendation tool

Glass Door: My Map My Pay

Conclusion

We know nobody really likes talking about pay. However, it’s a crucial topic that has the potential to make or break your human resource strategy and upset the very thing that runs your company in the first place — its people. While the mechanics of pay seems logical, albeit a little complicated, in reality, how much you pay people is an emotional topic. People will base not only the perceived value of their work on how much they’re paid but they will also internalise their value to you as a company and also in comparison to their colleagues. This is why it’s so important to get it right.

As remote work moved from a sometimes questionable employee benefit to a new pandemic-related necessity, we quickly understood that, well, it works! It not only makes employees happy and contributes to increased social outcomes, it’s actually a smart, innovative and genuinely good way to do business. Now we’re at the point where we need to figure out just exactly how it should look based on your business needs. 

Like anything, as we find new ways of doing things, formalising the details or how and what is the best strategy for implementation becomes necessary. This is where companies can leverage their internal expertise as well as the knowledge and expertise of services companies who have dedicated their businesses to answer these questions. 

Thankfully, here at WorkMotion, we love this stuff. So much so, that our whole business is dedicated to finding the answer to these questions and supporting businesses through their transition to a remote strategy. As a fully remote business, we understand the unique challenges tied to remote hiring and distributed teams. If you found this guide useful, share it with a colleague! Better still, get in touch with one of our experts who will gladly advise you on the best way to approach your remote first compensation strategy and how best WorkMotion can assist you. Otherwise, visit our help centre, or we have plenty of more remote-focused content under Resources.