Let’s talk about compensation for distributed teams!
You’re in the right place if you’re asking yourself ANY of the following questions:
- Why is distributed compensation so complicated?
- How do other distributed teams solve this?
- What can I do to fix/update my policy?
Also, this article will NOT be covering:
- How to build a salary calculator. See out other article here
- How much you should pay employees. That’s on you to decide :)
- How to hire internationally. That’s another conversation...
Let's start by considering two scenarios here, just for fun:
Scenario 1 - Bob is a senior software developer who has worked with some of the best companies. He currently lives in SF making $150,000/yr. He decides he wants a change and moves to Prague. His company would like to adjust his salary to $75,000/yr like other senior software developers that have worked at top companies.
Scenario 2 - Michael is a senior software developer who has worked with some of the best companies. He currently lives in Prague making $75,000/yr. He decides he wants a change and moves to SF. His company understands they need to adjust his salary to $150,000 to match the cost of living.
- Is this fair? What’s fair? With either move:
- Does Bob become half as valuable to the company overnight?
- Alternatively, does Michael become twice as valuable to the company?
- Should a company pay someone according to local rates? Cost of living? Pay everyone the same?
In my experience, compensation policy is linked to company culture. And no company culture ever satisfies everyone, here's a quote from Tom Tunguz:
“No culture satisfies everyone. And that’s exactly the point: cultures are meant to find, keep, and reward the people who belong in a group.”
My point is this:
Setting your compensation policy will attract criticism no matter what you decide.
Some people will feel it’s too open/secretive, too stingy/generous, too complex… you get the point.
It’s impossible to simply hand-over a policy that you can copy-and-paste for your company. You have to find the policy that is right for you!
Why am I telling you about this?
I’ve been there. I worked at Buffer, a remote startup. I helped their remote team to grow from 15 to 90 employees. As Director of Operations, I worked on distributed compensation.
Today, I lead Remotive.io. Our mission is to help hire remotely. I chat about compensation with leadership and People Ops teams, and I enjoy teasing remote teams:
So, the one thing that matters is to have a compensation policy that reflects your values. Do send a clear message to employees and applicants. At the end of the day, we all want to make employees feel they are part of our company's success.
Why is setting compensation so hard?
How companies typically handle compensation: “We offer competitive pay”.
Most job descriptions mention competitive pay, which doesn’t mean much.
In reality, most small companies are winging compensation and pay ad-hoc. Large companies often rely on salary data purchased from third-party providers and negotiate for key roles. At Remotive, we enjoy crowd-sourcing salary information.
Applicant-facing compensation policies are rare. Ask other People Operations professionals. They’ll say “it’s complicated” and that’s the end of it mostly because current salaries were decided outside of any policy and it feels hard to re-examine those.
Also, compensation is an emotional topic. Check this out:
Note that I asked about fairness here, which is related to how people FEEL about a topic. That’s bound to be different for everyone, yet be sure that everybody has an opinion on compensation.
- How distributed teams typically handle compensation
Few remote teams are vocal about compensation. Most distributed companies pay people ad-hoc and enjoy paying less when they can. Others are going remote with the clear intent of cost-cutting.
Some companies - like Buffer - are transparent. Others aren’t. It’s up to each company, anything goes.
In fact, not all employees expect full transparency from employers, but nearly all expect clarity. Meaning, can the People Ops team explain why policies are the way they are? Rational matters.
Few more thoughts on how employees feel:
- Yes, employees know how much other employees are making.
- Yes, employees worry that a new compensation model will reduce their pay.
- No one likes hearing “you’re great at your job but you’re moving so we’ll pay you less”.
- No one wants to feel like a second class citizen/employee.
My sense is that compensation can’t be a taboo. If you’re not addressing it, employees are.
1) SF-Pay for everyone: Basecamp.
A few highlights:
- Basecamp hires employees from anywhere in the world.
- $400,000 life insurance/AD+D and 6% matching 401k.
- Pay is in the top 10% of the San Francisco market, based on skills and experience.
- 10% Profit sharing, learning budget… More over here.
Let’s add some colors here. Basecamp made $25m in 2017 and is growing like crazy. They employ around 50 people. To be extremely conservative, that’s $500,000 revenue per employee per year. Ah, I can hear VCs salivating as I type this..
Yes, Basecamp is generous. If your company is enjoying similar margins and growth, congratulations, feel free to do the same! Otherwise, please assume you’re not Basecamp.
Of course you can be generous, you’re just likely to be working with a lesser budget, and that’s okay too.
2) Formula-led compensation: Buffer, GitLab, HelpScout…
Most companies want compensation to be fair and equal. But fairness and equality aren’t always the same thing, as this great graphic shows:
So, what’s fair? Is paying top dollar according to the SF standard fair? Is paying top dollar according to the local market fair? You can argue it many different ways.
Buffer introduced its salary formula back in 2013. They kept evolving it each and every year, and it will probably always be work in progress.
Notable addition: Every time Buffer updates its formula, it “grandfathered” employees into the new formula. This meant employees wouldn’t start making less money because Buffer decided the formula had to change. This was a huge stress-relief among the team.
Many more teams came up with salary calculators. The best one out there is probably GitLab. They are extremely thorough and meticulous around compensation. Much more can be found on their site.
GitLab took the following stance: “We are paying local rates based on cost of market (also referred to as cost of labor). There is no cost of living input in our compensation philosophy.”
Notable exception: Executive Compensation (VP and above) is derived outside of the GitLab Compensation Calculator. This gives GitLab some wiggle room to negotiate top talent when needed.
HelpScout took a cultural stance, which I like. Here’s what Nick Francis, HelpScout CEO, had to say:
“Our formula pays between the top 10-25% depending on the role. We align with the “second tier” markets such as Boston, New York, and Seattle.”
I like that HelpScout knows they can’t / won’t compete in SF-based crazy high salary competition,so they are aligning in some other way. Again, they bring clarity to employees and applicants by having a simple and open stance.
3) Geo-arbitrage compensation: Facebook, VMware…
In 2020, Mr. Zuckerberg said Facebook would be “the most forward-learning company on remote work at our scale”. Then Zuck also said “staff salaries could be adjusted to align with the cost of living in their chosen location.”
People hated that. Medium posts calling Facebook’s New Remote Salary Policy “Barbaric” received 11,000+ claps. Why? Because expectations were mismanaged.
Let’s recap: Facebook said they’ll be the best in remote, not knowing what the standard was, then fell short. Whoopsy!
Facebook isn’t alone. WMware announced a similar policy, and more large companies share their viewpoint.
F500 companies LOVE location-adjusted pay. It’s the only thing they have ever known.
At GAFAM, compensation (salary, benefits, perks) gets adjusted every time you move countries. It’s how they have been operating for the last 30+ years.
Most large companies will mirror what has worked for them in the past. One way to look at it is that it’s pretty hard to change your entire compensation policy at a 50,000+ employees publicly traded company. Merely thinking about it is enough to make your CFO sweat.
4) Honorable mentions: Stripe, Reddit, Zapier
A few companies are trying to bring more/different thoughts around compensation. I wanted to share some of those with you:
Stripe hands out relocation bonuses.
Stripe opened a dedicated remote engineering HUB in 2019. In 2020, they said office-based employees could go remote and leave the office through a framework: Salaries may get cut by as much as 10%. Those who relocate will get a $20,000 bonus. In this example, everyone can understand clear guidelines, so employees expectations were managed.
Reddit eliminated geography compensation zones in the US.
Reddit now allows 600+ employees to work from anywhere. They explained why and how in a thoughtful blog post. “To support employees to live where they want to and do their best work, we are eliminating geographic compensation zones in the US”. US employees will get SF/NY salaries, regardless of where they live. Reddit will be able to hire amazing talent from anywhere. Office spaces will be reimagined...
Zapier offers a delocation package
Zapier is a remote company that once decided to offer a $10,000 de-location package to anyone keen on moving away from San Francisco in order to work remotely. It was a great PR stunt that helped them share far and wide that ambitious startups can do great outside of the Bay Area!
Buffer monitors “Equal Pay”
Buffer, again, has an interesting initiative going on. They examine Equal Pay on a yearly basis. They compare earnings between all men and women made at a company, regardless of their position, experience level, or type of work.
How to set up your remote compensation policy
- Get founders involved.
Pay & company culture are intertwined. Start at the top, get founders involved. Your policy is merely a consequence of your culture, values, aspiration and bank balance.
- No “one-size fits all”.
Pick whichever model works best for you. Your legacy situation will probably help decide what works best for you. And yes, those projects take a very long time to roll out.
- Setting compensation is stressful.
As soon as the word gets out that “People Ops is looking at compensation”, employees will be stressed out. Fear of getting let go, not making mortgage payment… will surface. If you decide to “grandfather” employees by not reducing any salary, say it early and loud. Otherwise, you’ll be met by stressed out employees.
- Explain it once. Then, explain it again.
Create your compensation method & explain WHY you chose it. Get founders together, then leadership, then managers, then employees. Let everyone ask as many questions as they want. Have a thorough FAQ ready. Let people ask questions anonymously. You won’t satisfy everyone, yet you should be able to share your reasoning.
- Domestic vs international perks, benefits & equity...
Most hybrid teams have “Hubs”, meaning countries where they have a bunch of employees. For instance, a US office. Compensation goes beyond salaries, it covers perks, benefits and equity. You’ll have to decide whether you have different systems running in parallel, or use a one-size-fits-all approach.
- Contractors or full-time employees?
There’s a big difference, take a look at this guide for more information about this.
Over to you: Establishing your 10 Compensation Principles
Time to give more thoughts to your compensation policy. What will you do? Here are some cues on establishing your Compensation Principles. This is liberally inspired from the GitLab/Buffer approach. Check it out:
- Will you be transparent about our compensation principles? Will your model be open to data driven iterations? Who will be the owner of the model?
- Will you pay local rates, flat-rate for everyone, cost of living costs, or using any other approach?
- Will you use a compensation calculator? Why / Why not?
- Will you disclose individual compensation? Will compensation be public (internally/externally)?
- Will compensation be tied to performance? Will compensation ever be reduced? Will you “grandfather” employees salaries?
- Will you monitor pay equality to ensure underrepresented groups are paid at the same rate as other employees?
- Will you offer bonuses, stock-options and incentives? How about perks?
- Will you be location agnostic? Are timezone, location and the vicinity to users/customers factors? Will one applicant be favored over another because they live in a region with a lower location factor or because you need someone in that timezone?
- How will people on quota (account executives, account managers, and sales leadership) compensated? How does On Target Earnings (OTE)?
- How will decisions around compensation be made? How often will compensation be updated/reviewed? Will you adjust your calculator based on survey data, feedback…?
You don't have to get answer ALL those questions to get started. They are helpful to frame the discussion and start thinking about what matters for you and your team!
It’s quite a lot to juggle work with, I know! If you have questions, email me on rodolphe (at) remotive (dot) io or DM me on Twitter :)
Want to continue reading? I also wrote about how to employ remote workers internationally: