Best Practices for Creating a Location-Based Compensation Strategy

Although many companies have already gone through the “remote work experiment,” some still face new challenges when introducing or rethinking distributed and remote work policies, especially when it comes to compensation.

Hire team members in a new geographic area, and you’ll have to comply with local labor laws and new salary requirements. But beyond compliance, should you structure your compensation package differently? And if so, how should compensation look across varying locations?

This article outlines some considerations to make as well as our recommended best practices regarding location-based compensation.

Align on a philosophy

If your organization has employees in multiple locations, the first question your leadership should align on is this: Is location a factor that should affect employees’ compensation?

For some organizations, the answer is yes; for others, it’s no, and neither approach is wrong. But whatever direction you decide to go in, everyone in your organization needs to commit.

To ensure everyone is on the same page as your company evolves, we recommend incorporating your viewpoint into your compensation philosophy as a consistent driver of compensation decisions.

Align on an approach

If your organization believes location shouldn’t affect someone’s compensation, your compensation strategy becomes as simple as operating with one set of compensation bands within your job architecture.

On the other hand, if your company decides that location should affect employee compensation, your strategy will start to get more complicated. Your organization must align on a secondary set of five other questions that will inform how you structure your fair compensation practice.

Let’s review these five questions and how they will influence your approach.

1. Should we address each city or metro area specifically or “group” them?

Suppose you’re employing people in a handful of cities. In that case, you may be willing and able to maintain specific compensation bands for each city or metro area. But if you’re a remote-first company, there may be too many cities to make this a viable strategy, and “grouping” based on location will be a better alternative.

When it comes to grouping, there are several approaches you can take:

• Creating regional “zones”: This method groups locations based on geographic location (e.g., Pacific Northwest, Southeast)
• Creating cost “tiers”: This method groups locations based on market competitiveness (e.g., Tier 1 = San Francisco, New York)
• Other: You can use another systematic way to group locations based on unique variables relevant to your organization

2. Should location affect all positions equally?

Most organizations want to optimize for fairness and consistency across positions. However, this decision introduces some costs and challenges, as it can lead to overpaying for some positions (thus, increasing financial costs to the organization) and underpaying for others (thus, making it more difficult to recruit and retain talent).

Because of these hurdles, some organizations optimize for competitiveness. This approach helps them attract and retain talent in high demand, which, in turn, helps them manage costs. While managing compensation separately can increase complexity, it ensures that the organization remains competitive in various locations.

Need an example of optimizing compensation bands for competitiveness? Some high-growth tech companies don’t consider location for engineering and sales roles. In these organizations, all employees in engineering and sales departments get paid the same as their colleagues in the same position, regardless of where they work.

3. Should location affect cash and equity compensation equally?

The answer to this question is more philosophical and varies from organization to organization.

Some companies believe location should only impact cash compensation because it drives employees’ day-to-day quality of life. They argue that long-term incentives such as equity should be unaffected by location.

Ideally, these organizations would have compensation bands to allow for cash compensation differences by location while keeping equity bands consistent regardless of location.

Of course, other companies interpret this question differently and take an all-encompassing total compensation view, reflecting the impact of location across all compensation types equally.

4. Should we derive location-based compensation bands from a source set or build individual compensation bands for each location?

Some organizations prefer to build compensation bands for each location, independent of one another. Doing so is more administratively burdensome and, depending on that data alone, can lead to compensation band inconsistencies across locations. As employees transfer locations, this decision increases pay inequities and the likelihood of managers or employees “gaming” the system.

At Deel, we recommend that organizations take a simpler approach where you build a source set of compensation bands first. Then, you apply adjustments for each location or location group as a secondary step. Not only is this technique more consistent and efficient, but it’s also easier to manage and explain.

For example, suppose your organization is based in San Francisco. In that case, you can create compensation bands for San Francisco and call that your source set. To build compensation bands for a less expensive location, you would adjust your San Francisco Bands lower via a percentage discount (our recommendation) or a dollar discount.

Real-world examples of companies using location-based pay

Let’s review some real compensation strategy examples that rely on geographic pay differentials.

Wise

Wise opted for a pay policy that relies on career maps for different roles and experience levels within a team. Here’s an example of what salary ranges look like in different currencies and for different locations for a Product Lead:

Source: Wise.jobs

GitLab

GitLab uses a “location factor” as part of its compensation calculator to set pay based on labor market evaluations rather than cost of living. The company examines compensation across the globe using sources such as ERI, Comptryx, and Radford to compare each location to San Francisco.

They also use a level factor, with the following definitions:

1. Junior: 0.8 x ic_ttc
2. Intermediate: 1.0 x ic_ttc
3. Senior: 1.2 x ic_ttc
4. Staff/Manager: 1.0 x manager_ttc
5. Senior Manager: 1.2 x manager_ttc
6. Director: 1.0 x director_ttc
7. Senior Director: 1.0 x seniordirector_ttc

Slite

Slite’s location-based compensation helps them pay employees fairly across nine countries. France-based employees (where most employees are from), independent contractors, and employer-of-record employees also have different structures to accommodate tax and social contributions. Slide averages currency over four years to avoid volatility and addresses executive pay separately.

Microsoft

Microsoft adjusts base salary ranges to an employee’s work location to help maintain competitive and consistent salaries. Base pay varies by primary work location, complexity of work, responsibilities, and experience level. Note they also review the ranges every year.

Lumen

Lumen maintains full transparency in their location-based salaries (US-based) by adding salary bands to every job description.

Source: Lumen jobs page

Luminovo

Some companies like Luminovo opt to primarily hire within a region, giving an exact salary band for that region and mentioning other places are subject to location-based pay.

Putting it all together: Selecting a compensation band framework

By now, you have most of the information needed to guide your location-based compensation strategy. But there is one more missing piece: your compensation band framework. Generally, we see organizations use one of the three frameworks. This table gives a high-level overview, but we’ll explore each method in detail below.

1. Cost of Living Adjustments (COLA)

In this approach, the difference in cost of living drives the difference in compensation for the same position in various locations. Organizations collect cost of living data from many sources. We recommend examining Expatistan, Numbeo, and Council for Community and Economic Research.

Using COLA as a foundation for your compensation bands is easy to manage and explain to people. However, using COLA puts you at a higher risk of overpaying (resulting in increased financial costs to your organization) or underpaying (resulting in increased difficulties in recruiting and retaining employees).

How to implement a COLA-based framework

1. Collect cost of living data for each location
2. Calculate the difference between each location and your core location (e.g., +10% premium, -15% discount)
3. Apply the differential to your source set to create compensation bands for each location

2. Cost of Labor Market Adjustments (COM)

In this approach, market data drives compensation across locations. Many survey providers generate salary benchmark datasets, though many are expensive, incomplete, or inaccurate, and very few are timely. To be as holistic as possible, organizations tend to procure and analyze multiple market datasets.

Even if you have fairly accurate data, COM can still be challenging, as data for each role and location must be inspected and set individually.

How to interpret COM data

If you create derivative compensation bands, you must decide how the data will influence your adjustments. Below are some of the many ways this can be done:

• Average, in aggregate: Look at data for all relevant roles to calculate the average difference in compensation across locations
• Average, by department: Look at data within a department to calculate the average difference in compensation across locations
• Average, by ladder: Look at data within a ladder (or job family) to calculate the average difference in compensation across locations
• Average, by position: Look at data for each specific position to calculate the average difference in compensation across locations

Of course, this isn’t a fully exhaustive list. Some organizations may use minimum, maximum, or median instead of average.

When interpreting COM data, remember that you won’t find the “perfect” framework. Instead, pick one that suits your needs best and is justifiable to your employees.

Jessica Pillow, Director of Total Rewards at Deal, warns against a uniform approach:

How to implement a COM-based framework:

1. Collect market compensation data (often from multiple sources) for each relevant role in each location
2. Use that data to build location-specific comp bands. Alternatively, calculate the difference between each location and your core location (e.g., +10% premium, -15% discount)
3. Apply the differential to your source set to create compensation bands for each location

3. A hybrid of cost of living adjustments and cost of labor market adjustments

A hybrid approach leverages both cost of living and market compensation data, accepting that both data are important, and neither alone paints the whole picture. Combining COLA and COM offers the greatest control of the three approaches but can become difficult to explain and manage.

How to implement a COLA + COM framework

1. Collect the cost of living for each location and market compensation data (often from multiple sources) for each relevant role in each location
2. Calculate the difference between each location and your core location (e.g., +10% premium, -15% discount)
3. Apply the differential to your source set to create compensation bands for each location

Getting buy-in and making a decision

Besides doing all the necessary pre-work and research, you’ll need to get buy-in from your organization’s leadership. We encourage you to incorporate these stakeholders early on in your decision-making process.

Start from a philosophical point of view, then move on to the mechanics. Consider what you’re optimizing for and your constraints and limitations. While we believe it’s important to use data in your decision-making, we recommend letting data inform but not dictate your decision.

In other words, let your compensation philosophy drive your decisions and build a process to support it. If your approach is consistent, explainable, and easy to implement and manage, you’ll likely have greater success getting buy-in from your organization.

On a similar note, Jessica Pillow, Director of Total Rewards at Deal, highlights the critical role managers have in ensuring pay transparency:

Manage global compensation with Deel

If you’ve made it this far, you know that location-based compensation can be very challenging. Handle global compensation and pay with Deel so you can:

• Streamline your global compensation strategy workflows with Deel Compensation—define and manage salary bands (location-based or location-agnostic), ensure pay transparency, streamline recurring compensation reviews
• Access global compensation benchmarking tools, Deel Salary Insights, and make data-driven salary decisions
• Link pay to performance with our add-on talent management solution, Deel Engage
• Stay compliant with location-based pay laws using Deel’s compliance tools
• Pay teams worldwide seamlessly with Deel’s global payroll solutions

Reduce the time spent creating location-based comp bands from months to hours with Deel. See end-to-end compensation management in action with a free demo.