Compensating a Remote Team

Why Remote Pay Differentials Matter

If you have a workforce distributed across multiple locations, you’re in competition for talent in different geographic markets. A compensation plan based on remote pay differentials helps you pay competitively in local markets to increase offer acceptance, keep high performers longer, and build cultures of trust and transparency.

Remote pay differentials help you determine:

• Your budget
• How to optimize your spend
• How to build a hiring plan that supports company objectives
• How to apply compensation practices fairly across your team

While the simple administration of a single pay strategy for all employees may tempt you, it comes with the risk of overpaying for talent. And there’s no guarantee that a higher than average salary equals high performance.

A well-defined pay program for a distributed workforce can increase offer acceptance and retention. It also supports a culture of trust and transparency because it shows that pay isn’t random, but is based on data and strategy. For employees, it’s not just about the value of the package, it’s about trusting that an employer compensates fairly, consistently and equitably.

The 3 Types of Distributed Work Models

Companies with employees based in different locations often have one of the following work arrangements.

In-Office

• Employees work primarily or entirely from a company’s physical location.
• Investments and programs encourage work from the office. For example, meeting times, training, and culture-building opportunities prioritize in-office workers. 
  
  

Remote First

• Employees work primarily or entirely from home. 
• Investments, such as communication and productivity tools, and programs support work from anywhere. 
• Remote-first companies design physical office locations as coworking spaces.
  
  

Hybrid

• Employees have the option to work where they choose, whether from home, the office, or a combination of both. 
• Investments, such as communication and productivity tools, and programs support work from anywhere. 
• Hybrid companies still invest in physical office locations, but consider themselves remote-friendly.

Plan: Questions to Kickstart Your Remote Compensation Program Design

Ready to design a compensation program for your distributed workforce? The following are questions to consider as you begin. Your answers will inform how you update your organization’s compensation philosophy, the formal document that explains how your company pays and rewards its employees. Learn more about compensation philosophy at the end of this section.

1. Who does a remote pay strategy affect within your organization?

• Employees work primarily or entirely from a company’s physical location. 
• Investments and programs encourage work from the office. For example, meeting times, training, and culture-building opportunities prioritize in-office workers. 

Tip: Keep in mind that your remote compensation strategy will also affect current employees who move or transfer to different locations.

2. What do you need to do to be competitive in the market?

• What are your top competitors for talent doing? 
• Are your competitors removing remote pay differentials for roles that are essential to your company’s growth? For example, is there a company you’re competing with for engineers who’s paying San Francisco rates regardless of the employee’s location? 
• Do you need to do the same thing as your competition to attract talent?
  
  

3. What other costs are associated with a remote workforce?

• Salary isn’t the only driver of cost and burn. 
• Is there recurring overhead from setting up entities in different locations or state-specific business costs? 
• Will you bring everyone together for occasional events like annual meetings?
  
  

4. Where will you hire?

• Often, where you hire depends on the location of talent pools. 
• Are there certain cities where there are strong university engineering programs whose graduates you’d like to attract? 
• Do you want to attract people who work for certain companies in a specific city? 
• Where do you already have a cluster of employees? 
• Are there hubs for top talent, such as San Francisco or New York? 
• Where are you most likely to find the talent to support growth objectives? For instance, if you’re focused on ad sales for auto companies, you may focus on hiring in Detroit or Chicago 
• Another consideration for some companies is where to find qualified low-cost talent. This could mean outsourcing engineering or customer service to countries like India or the Philippines. 
  
  

5. How do you need to adjust your compensation philosophy?

• Once you’ve nailed down the details of your remote compensation strategy, document everything in your compensation philosophy. 
• Your compensation philosophy is the “why” behind your compensation practices. Your managers and people teams turn to this document for answers to all pay-related questions, so don’t skimp on the details. 
  
  

In the following sections, we’ll review your data options and implementation strategies for regional differentiation. Include your decisions in those areas in your compensation philosophy as well.

Research: Data Options for Regional Differentiation

Effective salary and equity ranges are built on solid market data. Below are strategies for data segmentation — including pros, cons, and our recommended option.

Keep in mind: Fresh market data that’s relevant to your industry and stage of growth will set a sound foundation for your entire compensation program. Don’t rely on surveys or websites that compile user-submitted information, your peers’ opinions, or even your own experience. Get your data from a reputable, real-time source. 

1. Individual employee locations

When companies are very small and hire in only a few locations, they can get granular and use data specific to employees’ individual locations. But as companies grow, this option becomes difficult to implement and manage.

2. Universal rate of pay

With a universal rate of pay, you’ll base salaries on a single location or talent market, usually HQ. So, if you’re mapping salaries to San Francisco rates, those rates would apply to all employees, even those in Little Rock, Arkansas.

While this method is easier to administer than the previous and is great for attracting talent, you’ll likely spend more money than you need to. It can also be unfair to employees who live in locations with a high cost of living.

3. Nearest office location

This approach ties an employee’s salary to the location of the nearest physical office. While this strategy reflects the nearest cost of labor, it’s difficult to scale as you grow and add physical locations.

4. Major metropolitan area

In this approach, you’ll map salaries to a major metropolitan area. An example: A company decides to tie salaries to a major metro area that’s within 50 commutable miles of an employee’s location. An employee within 50 commutable miles from San Francisco would get that city’s rates.

This approach is about being competitive because an ability to commute to hubs and major cities gives employees more opportunities for job selection.

5. Major metropolitan areas grouped by tiers (OpenComp’s recommended approach)

Take the previous approach to the next level and create tiers based on metropolitan areas where current employees are located or where you plan to hire. 

Areas with a similar cost of labor would fall into the same tier. Here’s an example of how this works:

100% - TIER 1: SAN FRANCISCO
Pays at 100% of the San Francisco labor market.

90% - TIER 2: LOS ANGELES & SEATTLE
Pays at 90% of the San Francisco labor market

85% - TIER 3: AUSTIN & DENVER
Pays at 85% of the San Francisco labor market.

As you add locations, you’d add them to the tier with a similar cost of labor.

Implement: Strategies for Applying Remote Pay Differentials to Your Compensation Program

Once you’ve developed an overall strategy and analyzed the relevant data, it’s time to apply remote pay differentials to your pay program. Here’s a rundown of the three most common approaches:

1. No change + salary cap

This approach is typically implemented to support employees who move from a high-cost location to a lower-cost location. The company wouldn’t decrease an employee’s pay because of their move. But because they’re at the high end of their salary range, that employee won’t get an increase until the market catches up or they move to a higher position and are back in range.

2. Consistent compa-ratio

A compa-ratio, short for comparative ratio, compares an employee’s salary to the midpoint of the salary range for their role. When a company applies a consistent comp-ratio, an employee who moves to a new location with a new salary range maintains the same compa-ratio. 

Take an employee with a 103% compa-ratio. This employee is paid 3% above the midpoint of her salary range. If she moves to a different location, the company would adjust her to a 103% compa-ratio for the new range so that a decrease in pay would be proportional.

3. Percent of maximum range

This strategy prevents significant decreases in pay related to changes in location. Instead of reducing an employee’s salary consistent with their previous compa-ratio, you’d bring the salary to a certain percentage within the new salary range. 

For example, if you bring the employee’s salary within 5% of the new range, they’d have room for an increase before hitting the top of the range.

Communicate: Best Practices for Sharing Your Remote Pay Program with Employees

Once your remote pay program is approved by leadership, begin sharing it with your employees. 

Include information about the plan in your compensation philosophy and compensation philosophy statement, a one- to two-paragraph summary of your compensation philosophy. 

Share your compensation philosophy statement on your company’s intranet, FAQs, or HR materials. No matter the method, build your communication around the following three pillars:

How it Works in OpenComp’s Compensation Intelligence Platform

Dial in your remote compensation strategy with our Geographic Strategy Tool to:

• Create regional hubs
• Organize locations into tiers
• Set different compensation policies for each department, location, or level

If you’re ready to start implementing remote pay strategies with the right data and tools for your business, get in touch with us.