What is a Remote Compensation Policy?
A Remote Compensation Policy is a set of guidelines and rules established by an organisation to define how employees who work from home or remotely abroad are compensated.
When it comes to remote compensation, there are no hard ‘rules’ and every company ultimately needs to decide for itself how it wants to handle cross-border pay. This is what makes creating a remote compensation policy so challenging. Competing priorities influence the ultimate decision – what makes economical sense for the company, what is the best for the employees and what is sustainable in the long run.
This stems partly from different views on what constitutes ‘equity’ and whether geographical and social context need to play a part in that equity, as well as how much complexity a company can realistically handle.
Once an organisation has gone through the complicated process of deciding what to do, many turn to creating a Remote Compensation Policy. This written policy details how the plan will be executed and helps ensure there’s full transparency for employees and that the business sticks to its compensation goals.
There are three general ways organisations approach how to pay their workers:
- OPTION 1: Everyone gets paid the same salary regardless of where they are located. This is known as ‘equal pay for equal work’ or ‘location agnostic pay’ (more on that below). It’s an attempt by a company, to the best of its abilities, to make sure everyone’s remuneration reflects their work, not their geography. Geography will, of course, ultimately play a part as take-home pay will differ due to different tax treatments. But the overall goal is to bring as much equality to paying employees as possible, hence the motto ‘equal pay for equal work’.
- OPTION 2: Employees are paid what is considered market value in the country or area where they live.
- OPTION 3: Employees are paid based on a (sometimes) complicated formula put in place to model out what they should be paid, taking multiple factors into consideration, not just local market rates, but also cost of living, tax, etc.
What do companies consider when creating a remote compensation policy?
Remote Compensation Policies exist so that there is visibility into how a company approaches compensation and what is behind its decisions. Depending on which approach it takes, it could include anything from the benchmarking of the city/location it uses for ‘equal pay for equal work’, how pay rises are tackled, as well as the ins and outs of market rates and formulas that are in place. It’s important to have these clearly documented and accessible by everyone at the company.
When it comes to remote compensation, as a company is deciding its ultimate philosophy and which approach to take, there are a number of elements to take into account:
Gross pay
Gross pay is the salary total before tax and deductions. This is generally what organisations discuss most openly when recruiting and interviewing new hires. The gross salary number does not reflect deductions such as taxes, insurances, or other government-mandated expenses for both employer and employee.
If a company decides to pay the same gross salary to people with the same role, what workers ultimately receive after tax will differ.
Net pay
Net pay refers to a salary total after tax and deductions are made. It's a step further than merely looking at gross pay and is a more accurate representation of what people are actually taking home. Calculating actual net pay requires a deep understanding of the tax systems where each employee is located and can get complicated quickly. Using a salary calculator can give a great idea of the net salary after all deductions are applied.
Basing a Remote Compensation Policy on net pay is one of the most equitable ways for businesses to ensure their employees are paid fairly and equally based on their local tax rates, meaning everyone enjoys the same amount of take-home pay despite a difference of numbers on a payslip.
While the post-tax amount may be (or very nearly) equal, the buying power of the earned salary may still vary significantly. That is why the market to which a given company uses to peg its pay rates is so important. While it may never be able to benchmark rates from the Bay area, it should choose a region that – even after tax – will provide its workers with good buying power in most places around the world.
Consider, for example, the buying power of the euro in a city like Paris or Dublin compared to a city like Vilnius, Lithuania, or Kraków, Poland. The former cities are both well known for having higher costs of living, whereas the latter cities are generally considered more affordable. A person making a salary of €50,000 a year living in Paris will not be able to experience the same quality of life as someone living in Vilnius.
Location-agnostic pay
Some companies take several factors into consideration and create a benchmark they can use to ensure employees in similar roles are paid the same amount for the work they do, regardless of their geographic location.
The salary rate is generally set based on averages from a single location – most likely where the organisation is based. When people hear the term 'equal pay for equal work', they are most often thinking of location agnostic pay. Location-agnostic pay may be based on either the gross or the net pay as explained above.
Local market rates
Many organisations opt to pay the 'local market rates' in whichever country they are hiring in and base their salary offers on the average salaries regularly reported from the country or region where they’re hiring. These averages also take variances in seniority and employee roles into account.
Though this may seem like a logical solution and can be helpful as a company considers its profits and losses, in this day and age, when so many companies are very geographically distributed, it can lead to frustration among employees who may feel they’re not being fairly compensated compared to employees living in other locations doing the same work in the same role or work level.
Median pay
Because there’s no one-size-fits-all solution when it comes to setting salary amounts, some businesses try to meet both sides somewhere in the middle. The organisation calculates the average of salaries paid for a given role from the locations where it operates.
As the business grows, however, this can be difficult to scale. Moreover, some employees may still feel they are not receiving full, fair compensation.
What else may come into play when developing a remote compensation policy?
Choosing how to set pay rates and salaries is only half the equation. Depending on the company and the goods or services it provides, other factors may be considered, too.
Cost of living adjustment
Some companies may consider the cost of living in the area where an employee is located and make adjustments to their salary to ensure they are appropriately compensated based on local economic conditions.
Remote work allowances
Sometimes companies give their workers some form of a work from home allowance. These payments are intended to help with both setting up a remote workspace –perhaps in terms of their ergonomic setup, such as purchasing a more comfortable chair or a standing desk – as well as covering monthly expenses they may be incurring by working outside the office.
Boundless and remote compensation policies
Managing compensation has its challenges, especially when your team is spread across the globe. If you’re unsure about how to build your own remote compensation plan, Boundless can share some of our experiences working with our customers who have developed comprehensive plans.
Reach out to our team to learn more about how to develop a remote compensation policy that’s fair to your team and employ them the right way.
