Should Location Decide Salary? Why Decentralized Pay Scales Are the Future of Wages
Historically speaking, where an employee is based has almost always been a prevailing factor in their remuneration. Be it individuals working for the same multinational company, or workers from the same industry operating in different geographies, conventionally, pay has very much been dictated by the local economic climate. Going forwards, however, this practice may soon be consigned to the past.
Though the way we work has changed drastically over the years, this has undoubtedly been most evident in the last decade or so. Of the key trends we’ve seen, remote work has not only been the most common, but also the fastest-growing. Before the pandemic imposed remote models on the vast majority of companies, according to Flexjobs’ State of Remote Work 2019 survey, there had already been a 159% increase in remote work in the US between 2005 and 2017.
Does it matter where an employee is based?
Why then should location be a barrier for sourcing the best talent? Why should it matter if a potential recruit lives in Prague, New Delhi, Auckland, or Seattle? Granted, operating across disparate time zones presents a litany of challenges, but ultimately it shouldn’t be a barrier to hiring those individuals who are the best fit for the role. Should it be a factor in their pay, however?
Job van der Voort, Founder and CEO of HR technology start-up Remote has a particularly interesting story to tell in this respect. His company enables businesses to build their team anywhere in the world digitally, allowing organizations to dispense with the bureaucratic challenges associated with setting up shop in a new jurisdiction. Remote takes care of global payroll, corporate benefits, compliance processes and tax-related matters in each location for an annual subscription fee.
Before founding Remote in January last year, van der Voort had been one of the founding members of the global DevOps firm GitLab. Talking about his experience, van der Voort says: “There were five of us working in four different countries at the beginning. Every time we hired someone new though, we wouldn’t say, ‘well, you have to live in this region’, because it didn’t make sense to us.”
Though today the company has 1,200 employees and is valued at over $3billion, from its inception, its hiring policy was very much at odds with the status quo at the time, namely hiring locally. He continues: “We didn’t adopt said approach because we were super principled at the beginning by saying, ‘oh, we’re going to be remote only’. It was just very practical not to have an office and to be able to find people all over the world.”
A truly globalized workforce
The dramatic shift in remote working that we’ve seen worldwide, most notably in the last five years, has given companies access to (quite literally) a whole new world of talent.
Location is no longer an obstacle for employing the most gifted staff and globalization has thrown the rule book out of the window when it comes to recruitment.
Although, does the quality of talent vary depending on the going rate where individuals are based? Van der Voort doesn’t think so: “There are talented people everywhere. I think the only thing that will change is that we’ll see more of a flattening of salaries [across regions].” This flattening of salaries means that talent pools in regions that have not been explored are reaping the rewards of a decentralized recruitment process, while also providing highly skilled and enthusiastic labor for industries that need it.
Van der Voort continues: “ I live in Portugal where salaries are relatively low. What we’re seeing however is that more and more people — especially in high demand professions like engineering, for example — are increasingly getting paid better rates comparable to large cities in Europe and even in the US.”
Notably, looking at Portugal’s tech scene, 2019 saw an average growth in salaries of 10%, with some roles even indicating growth as high as 15%. This is considered especially disruptive for the Portgueuse market’s averages. According to van der Voort: “I think that’s the direction we’re heading in and deservedly so.”
Secure collaboration platform Wire operates a distributed team across Europe and the US. Wire’s CEO Morten Brøgger, a Dane who splits his time 50–50 between Europe and the US, believes that as leaders become comfortable with the fact that they can securely and productively build teams remotely, it will naturally follow that talent will become rewarded based upon merit rather than location. “Covid-19 has driven this shift in mindset and turned remote work skeptics into advocates. Having been unleashed from a fixed location mindset, there’s going to be a much more open and viable market for talent.”
Is decentralizing salaries the answer?
Does this mean the future could lie in the decentralization of pay scales? And if so, how can companies implement this fairly, so as not to go too far the other way and put workers with a high cost of living at a disadvantage? The overall cost of living in San Francisco vs. Belgrade, for example, is stark. Yet, should that necessarily mean that workers with the same skill-set living in the former should get paid significantly more than those living in the latter?
When asked whether Remote were decentralizing pay scales around the world, van der Voort said: “It’s our customers who ultimately decide how much they want to compensate people, but I do think that is where we’re heading. If you work as an engineer for a company like ours, given we have lots of employees in Portugal, you’re likely to get paid substantially more than the average engineering salary here. So yes, I think this will happen over time.”
As companies become increasingly global, salaries will surely flatten to reflect accessibility to talent rather than inconsistency of time zones.
Recruiting from ‘cheap’ destinations has always been a false economy, so the issue of whether to pay local or global rates is really set to rise up recruiters’ agendas in the near future.