The Toughest Puzzle in Remote Working: Global Compensation

This article is part of the "Dear Founders and CEOs" series—a collection tailored for Founders and CEOs of fast-scaling tech companies. Dive into HR strategies that fuel sustainable business growth and empower organizations to conquer the challenges of scaling head-on.

In today's increasingly interconnected world, the remote work revolution has dissolved geographical boundaries, making it possible for individuals to contribute their skills to companies thousands of miles away. This shift, spurred by technological advances and globalization, injects dynamism into the tech industry, particularly among SaaS companies. However, it also presents a complex dilemma for even the most forward-thinking organizations: How to fairly compensate a workforce spread across various geographical regions, each with drastically different costs of living?

This question goes beyond mere calculations; it is a strategic concern that directly influences talent acquisition, retention, and ultimately, a company's trajectory of success.

Unpacking the Problem: Local vs. Global Compensation

In the traditional office-bound work scenario, compensation models were largely contingent upon local living costs. This concept implies that a software engineer stationed in Mumbai would earn less than a counterpart in San Francisco due to the striking differences in living expenses between the two locations. However, as the landscape of work morphs into a global arena, the relevance of this local approach is fading.

Today, companies are competing for talent on an international stage, complicating compensation strategies. Offering salaries based on global benchmarks, leaning towards regions with higher compensation like the USA and Europe, seems like an obvious solution. However, this tactic has drawbacks. While it levels the playing field and helps attract and retain global talent, it can also lead to significant wage inflation and perceived inequities among employees living in less expensive areas.

This compensation paradox is currently one of the most significant challenges for businesses, especially tech and SaaS companies, operating with a remote, geographically diverse workforce. The current models are either too parochial (focused on local cost of living) or too broad-brushed (compensating everyone at par with top-paying regions), neither of which is sustainable or equitable in the long run. Therefore, the call of the hour is to devise a model that strikes a balance between local and global compensation strategies, and in doing so, redefine the compensation norms to fit the new age of work.

Rethinking Compensation

To navigate this challenge, it’s crucial to rethink compensation by considering two main factors:

1. From Local to Global Benchmarks

The geographically-based compensation model is evolving into one based on 'role value.' In this approach, pay isn't determined by an employee's location, but by the value their role adds to the organization. Whether a product manager at a SaaS company is based in Bangalore or Boston, they bring similar value in terms of product strategy and execution. Hence, their compensation could be comparable, albeit not exactly the same and adjusted for certain local factors.

This shift from local to global benchmarks places a premium on the inherent value of a role and its strategic importance to the organization, rather than its geographical location. It also aligns compensation more closely with global talent market trends, enabling companies to compete more effectively for top talent.

2. Skill Availability?

Compensation decisions in today's global marketplace are not just about geography; they also pivot on the dynamics of skill supply and demand. Certain skillsets, due to their rarity and high demand, invariably command a premium, often transcending geographical boundaries.

In the tech realm, specific roles such as data scientists and software engineers are perpetually in high demand. Their skills are not only valued but are also crucial for a company's growth and success. Given their global value, these roles are pursued intensely, making the competition for such talent fierce and unrestricted by geographical location. This high-stakes talent hunt has made companies become less tethered to their physical offices when scouting for these in-demand roles, instead, they've broadened their search to a global scale.

Take, for example, the case of a software engineer specialized in AI. Despite being located in a small town with a low cost of living, they may receive a salary that matches, if not surpasses, the compensation of their peers in tech hotspots like San Francisco or Berlin. The rarity and high demand of their skills on the global stage outweigh the geographical cost-of-living factors. Conversely, for roles where skills are more readily available and less in demand on the global stage, the geographical model of compensation often takes precedence.

The Controversy: Hybrid Compensation Model

A potential solution to the compensation puzzle lies in the hybrid compensation model, which ingeniously combines local and international compensation strategies. This model modulates compensation based on role value and the global demand-supply dynamics of specific skills. However, adopting this model is not without its controversies and challenges.

One of the main challenges is determining 'role value,' a concept that is both subjective and dynamic. Role value can fluctuate based on the company's strategic direction at any given time. During a product-centric phase, product management roles might be considered more valuable, with a greater chunk of the compensation budget allocated to them. In contrast, a market expansion phase might shift this focus, and consequently, the higher compensation, towards sales roles.

This dynamism, while reflective of business needs, could lead to perceived unfairness among the workforce. Employees may feel their role is undervalued compared to others, causing dissatisfaction and even leading to attrition. This is especially true when employees' perception of their role's value doesn't align with the company's assessment. It's common for employees to overestimate the value of their role due to a lack of a broad business perspective, which can fuel feelings of discontentment when they discover the company doesn't hold the same high view.

Moreover, internal compensation comparisons among employees can add an extra layer of complexity to this issue. Such comparisons, inevitable in any workplace, can lead to disappointment and possibly resignations if individuals feel that their compensation does not accurately reflect their role's value. Once again, this dilemma is often exacerbated by a widespread lack of business acumen among employees, who may struggle to understand the relative importance of their role within the specific business context.

Therefore, while the hybrid model offers a balanced and nuanced approach to compensation, implementing it successfully requires careful consideration of these challenges. It demands a commitment to transparency, ongoing communication, and education to ensure that all employees understand the rationale behind their compensation.

Testing a Hybrid Compensation Model

Despite inherent complexities, a hybrid compensation model is a compelling venture for forward-thinking companies. It ensures fairness, aligns with global talent competition reality, adheres to labor laws, and provides a robust foundation for retention programs and career growth opportunities.

Here's a (very) streamlined approach to kickstart the process:

1. Identify the various roles within your organization and map them onto the local and global salary scales. This gives a broad range of compensation for each role.
2. Assign a role value score to each role, ranging from 1 to 5. This score should reflect its strategic importance to the company and the rarity of the skills it demands. This step will require thoughtful consideration and might involve discussions with various stakeholders within the company.
3. The role value score will then guide the placement of compensation along the spectrum between local and global scales. Roles with a lower score (indicating more readily available skills and less strategic impact) might lean towards the local end of the scale. Conversely, roles with a higher score (representing rarer skills and high strategic impact) would command compensation closer to the global end.

Consider the following template matrix as an illustrative example:

In the table above, the Marketing Manager with a role value score of 2 leans towards the local scale in the proposed compensation, given the relatively widespread availability of this skill set. On the other hand, the Senior AI Specialist, a role demanding rare skills and carrying high strategic impact, is compensated closer to the global scale.

However, please consider this model only as a simplification and a starting point. Factors like compensation philosophy, individual performance, experience, potential, or anomalies in specific markets must be taken into account to design compensation bands. The goal is to create a model that is flexible, fair, and directly linked to the value that each role brings to the organization's strategic objectives.

Conclusion

Those companies who recognize the advantage of cultivating globally dispersed teams, face the increased complexity of developing fair and competitive compensation strategies. This challenge presents an exciting opportunity for innovation and redefinition of existing norms. The topic at hand extends beyond payroll logistics; it's an urgent strategic initiative that directly impacts talent acquisition, retention, and a company's success.

Experimenting with models like the hybrid approach to compensation offers a more dynamic and nuanced framework, allowing companies to adapt to the realities of a global talent market. However, it's essential to note that the hybrid model isn’t a one-size-fits-all solution and might not be the ultimate answer in this journey towards reinventing compensation. Instead, it should serve as a catalyst for thought, discussion, and further innovation within your organization.

The true winners in this new era of work won’t be those who merely react and adapt to change, but those who anticipate it, steer it, and carve their own paths. The reshaping of compensation provides a profound and compelling starting point for this journey. Remember, fair compensation is more than just figures on a paycheck – it's a powerful message that articulates how a company values its most critical asset: its people.

We urge you to consider these insights within the context of your organization and initiate discussions with your team. Whether you’re a CEO pondering strategic direction, a CHRO trying to attract and retain the best talent, or a founder eager to build a competitive and future-proof organization, your thoughts and actions on this matter are crucial.

If you found this newsletter insightful, we invite you to share it with your colleagues, peers, and network. If you haven't already, subscribe to our newsletter for more thought-provoking insights delivered directly to your inbox. Let's continue to challenge norms, ask tough questions, and together, shape the future of work.